Question 1. When there is unsustainable rapidly rising prices of some type of financial asset, such as stock, we refer to this a(n):
A) liquidity trap.
B) bubble.
C) bad-precedent problem.
D) moral-hazard problem.
Question 2. The two main causes of a bubble are:
A) herding and leverage.
B) herding and budget deficits.
C) budget surpluses and leverage.
D) herding and budget surpluses.
Question 3. Credit default insurance:
A) only covered half of the losses made by investors on the mortgage backed securities.
B) was created by the government after the Great Depression in order to regulate the banking system.
C) led investors in the derivatives market to believe that they were covered no matter what.
D) describes insurance that people can take out when they have to foreclose on their homes.
Question 4. A mortgage backed security is:
A) a home alarm system.
B) any mortgage which is owed by someone other than the mortgage originator.
C) any financial asset whose value depends on the value of some other asset.
D) a derivative that provides income based on the revenue from an underlying bundle of mortgages.
Question 5. The process of a credit default swap involves:
A) swapping one asset for another in order to increase diversification in a portfolio.
B) encouraging consumers to switch one form of credit for another in order to achieve financial stability.
C) selling insurance that protects investors from the default of the company they had brought securities from.
D) taking the debt from a number of mortgages and combining them to make a financial product which can then be traded.
Question 6. Which of the following was not a significant reason why the economy was expanding in the early 2000s?
A) The fiscal stimulus implemented after 9-11.
B) Homeowners who took out home equity loans due to rising house prices.
C) Insurance providers were making huge profits on selling insurance on securities.
D) Financial institutions were creating new securities and creating more leverage for themselves.
Question 7. According to the textbook, why have we found ourselves in the worst financial crisis since the Great Depression?
A) The government stimulus packages have created an inflationary bias since 2001.
B) The stock market suffered a meltdown and this led to a lot of deleverage.
C) Risk models did not anticipate that when asset markets tied to the fluctuations in the housing market collapsed, it caused some financial institutions to fail and others to nearly fail.
D) The government in an attempt to borrow funds for deficit spending weakened the dollar.
Question 8. Fiscal policy during the Great Depression:
A) was highly contractionary.
B) was highly expansionary.
C) alternated rapidly between being highly contractionary and highly expansionary.
D) was quite limited, because the government mainly focused on balancing the budget.
Question 9. Which of the following best describes how the economy recovered from the Great Depression?
A) The Fed finally started using expansionary monetary policy and the economy quickly recovered.
B) The expansionary monetary policy that the Fed had been engaging in throughout the crisis finally started to work.
C) The economy eventually recovered on its own without any government interventions.
D) Fiscal policy became extremely expansionary as the US geared up for WWII.
Question 10. Monetary policy during the Great Depression was:
A) deliberately contractionary and helped the economy recover quickly.
B) reasonably expansionary, but not very effective.
C) quite limited, because the government mainly focused on balancing the budget.
D) highly expansionary and helped the economy recover quickly.
Question 11. Which of the following describes the attitude of most economists towards the U.S. based automobile sector?
A) It needed to receive subsidies from the government in order to produce hybrid cards.
B) It should be taken over by the Federal Government.
C) If their industry failed, it would not take the rest of the economy down with it.
D) It needed to be bailed out, just like the financial sector was bailed out.
Question 12. When the government bails out one sector, other sectors go to Congress and ask for bailout money. This is referred as:
A) the law of diminishing control.
B) a moral hazard problem.
C) quantitative easing.
D) a bad precedent problem.
Question 13. The government has bailed out homeowners who are in danger of foreclosure. However, future homeowners may deduce that the government will again bail them out in the case of future economic turmoil. The government inadvertently has created what is known as:
A) deleveraging.
B) the law of diminishing control.
C) moral hazard.
D) herding.
Question 14. Which of the following best describes most economists' approach to economic stabilization until the 1930s?
A) Maintain a balanced budget at all times, under the principle of sound finance.
B) Use a sound finance approach during normal economic times, and a functional finance approach during a recession or a boom.
C) Run larger deficits during recessions and smaller deficits during economic booms, counting on economic growth to be high enough to keep the debt-to-GDP ratio low.
D) Economists were wholly concerned with microeconomics and had ignored problems of government deficits, debt, recessions, and economic growth.
Question 15. A key difference between functional finance and sound finance is that in the functional finance approach the government has the potential for:
A) a more active role in spending and taxing decisions.
B) a less active role in spending and taxing decisions.
C) no role since functional finance holds that on moral principle the budget should be balanced.
D) more active role in spending and taxing but only during depressions.
Question 16. In the early 2000s, car sales in China slowed because the government had been restricting credit growth. This action is consistent with the effects of:
A) contractionary fiscal or monetary policy.
B) contractionary monetary policy but not contractionary fiscal policy.
C) contractionary fiscal policy but not contractionary monetary policy.
D) expansionary fiscal policy.
Question 17. Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time?
A) Americans increased their willingness to save at the same time that the budget deficits appeared.
B) The government spent the borrowed money in such a way that productivity and therefore the availability of savings dramatically increased.
C) The Federal Reserve decreased the money supply.
D) Foreigners were willing to finance the U.S. deficit with their abundant supply of savings.
Question 18. Fiscal policy would be more effective if:
A) potential income was unknown.
B) the government could change taxes and expenditures rapidly.
C) the size of the government debt didn't matter.
D) crowding out occurred more often.
Question 19. Fine tuning the economy with fiscal policy is:
A) relatively simple because the government has access to the best information available.
B) difficult because the government lacks important information about the economy.
C) relatively simple because the political process usually works smoothly and without significant lags.
D) difficult because economists have not developed any theoretical models of the macroeconomy.
Question 20. Reducing the budget deficit by cutting government spending could conceivably:
A) increase income if interest rates fall enough and private investment is more productive than government spending.
B) increase income if interest rates rise enough and government spending is more productive than private investment.
C) decrease income if interest rates fall too much and private investment is more productive than government investment.
D) decrease income if interest rates rise enough and private investment is more productive than government investment.
Question 21. If private investment is relatively sensitive to interest rates, then a fiscal expansion financed by government bond sales will:
A) have no effect on output.
B) raise output by a relatively small amount.
C) raise output by a relatively large amount.
D) have an ambiguous effect on output.
Question 22. Which of the following issues will economists likely agree about?
A) The long-run achievable target rate of unemployment.
B) Estimates of potential income.
C) The relationship between the level of economic activity and inflation.
D) Outside of some range, too much spending causes inflation and too little causes a recession.
Question 23. Most of the government budget is mandatory spending through programs like Medicare and Social Security, and much of the rest is politically difficult to alter. Because of this:
A) fiscal policy is always undertaken only when there is a national crisis that motivates voters to seek change.
B) fiscal policy that involves raising taxes is more likely to be implemented than fiscal policy that involves borrowing money.
C) the amount of spending is unlikely to be implemented as economists suggest.
D) most spending is geared to perform as an automatic stabilizer, so that Congress is in fact largely irrelevant when it comes to providing a fiscal response to a recession.
Question 24. Because reducing both unemployment and inflation simultaneously are conflicting goals:
A) there is a policy that will allow policymakers to achieve either objective.
B) aggregate demand policy will allow policymakers to achieve one of these objectives, but not both.
C) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is expansionary.
D) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is contractionary.
Question 25. The crowding out effect would be lower if:
A) consumption is sensitive to changes in prices.
B) the government always ran budget deficits.
C) the interest rate is greatly affected by shifts in the demand of loanable funds.
D) investment is not sensitive to changes in the interest rates.
Question 26. If the economy falls into a recession, automatic stabilizers will cause:
A) tax receipts to fall and government spending to rise.
B) tax receipts to rise and government spending to fall.
C) both tax receipts and government spending to rise.
D) both tax receipts and government spending to fall.
Question 27. As the economy expands, tax revenues:
A) fall and transfer payments rise, causing the economy to expand by less than it would in the absence of automatic stabilizers.
B) rise and transfer payments rise, causing the economy to expand by more than it would in the absence of automatic stabilizers.
C) fall and transfer payments fall, causing the economy to expand by more than it would in the absence of automatic stabilizers.
D) rise and transfer payments fall, causing the economy to expand by less than it would in the absence of automatic stabilizers.
Question 28. Pro-cyclical fiscal policies:
A) reduce cyclical fluctuations in the economy, but not as effectively as countercyclical fiscal policies.
B) reduce cyclical fluctuations in the economy more effectively than countercyclical fiscal policies.
C) reduce cyclical fluctuations in the economy about as effectively as countercyclical fiscal policies.
D) increase cyclical fluctuations in the economy.
Question 29. The introduction of "rainy-day funds" by states would:
A) decrease the pro-cyclical nature of current state budgeting procedures.
B) increase the pro-cyclical nature of current state budgeting procedures.
C) decrease the counter-cyclical nature of current state budgeting procedures.
D) increase the counter-cyclical nature of current state budgeting procedures.
Question 30. U.S. exports involve an:
A) outflow of dollars from the U.S. to foreigners.
B) inflow of dollars from foreigners to the U.S. economy.
C) outflow of foreign currency from the U.S. to foreigners.
D) inflow of foreign currency from foreigners to the U.S. economy.
Question 31. The government of Crossland wants to influence its exchange rate. It will do so by buying and selling:
A) currencies in its official reserves.
B) commodities.
C) goods and services from the current account.
D) transfers.
Question 32. In your last vacation trip to Cancun, Mexico, you spent $1,000. This amount is recorded in the:
A) balance of merchandise trade as an export.
B) balance of merchandise trade as an import.
C) balance of trade as an export.
D) balance of trade as an import.
Question 33. If one Canadian dollar costs 0.60 U.S. dollars, then one U.S. dollar costs:
A) 1.67 Canadian dollars.
B) 0.60 Canadian dollars.
C) 1.40 Canadian dollars.
D) 0.40 Canadian dollars.
Question 34. In the late 1980s the Chinese currency, the renminbi, which is counted in yuan, was fixed by the Chinese government at 3.7 yuan to the dollar but had a black market rate of 10 yuan to the dollar. Based on this information, in the late 1980s most Chinese likely believed that dollars were:
A) a poor way to hold wealth compared to the yuan because the official and black market rates were so different.
B) a poor way to hold wealth because of the social disapproval of the black market.
C) a good way to hold wealth because the black market rate for the dollar was higher than the official rate.
D) no better or worse than the yuan as a way of holding wealth because the exchange rates equalized values.
Question 35. Which of the following would cause the supply curve for euros to shift right?
A) Americans want to buy more European goods.
B) Americans want to buy fewer European goods.
C) Europeans want to buy more American goods.
D) Europeans want to buy fewer American goods.
Question 36. Which of the following would cause the demand curve for euros to shift right?
A) Americans want to buy more European goods.
B) Americans want to buy fewer European goods.
C) Europeans want to buy more American goods.
D) Europeans want to buy fewer American goods.
Question 37. Since the mid 1980s, the dollar's value has fallen from over 300 yen per dollar to about 120 yen per dollar. This trend might be explained by:
A) higher economic growth in Japan.
B) lower interest rates in Japan.
C) lower inflation in Japan.
D) Japanese purchases of U.S. dollars.
Question 38. If interest rates in the United States fall relative to interest rates in foreign nations, U.S. capital inflows will:
A) increase and U.S. capital outflows will decrease, causing the demand for dollars to rise and the supply of dollars fall.
B) decrease and U.S. capital outflows will increase, causing the demand for dollars to fall and the supply of dollars to rise.
C) decrease and U.S. capital outflows will decrease, causing the demand for dollars to rise and the supply of dollars to rise.
D) increase and U.S. capital outflows will decrease, causing the demand for dollars to fall and the supply of dollars to rise.
Question 39. Exchange rate fundamentals, such as the income level, interest rates, and the price levels:
A) do not affect exchange rates in the short run or the long run.
B) affect exchange rates but are not as important as expectations in the long run.
C) affect exchanges rates and are more important than expectations in the long run.
D) affect exchange rates, but only in the short run.
Question 40. A country that wants to increase its exchange rate to a higher level than the market exchange rate would most likely adopt:
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.