Basic Macroeconomics Chapter 9 Review Questions Solutions

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1 Basic Macroeconomics Chapter 9 Review Questions Solutions Multiple Choice Questions 1. By 2006, about of all U.S mortgages were subprimes. A. 10% B. 20% C. 30% D. 25% 2. The mortgage is said to be underwater when A. the value of the house exceeds the value of the mortgage. B. the house is flooded. C. the value of the mortgage exceeds the value of the house. 3. In mid-2008, estimated losses on mortgages were estimated to be about of U.S. GDP. A. 2% B. 5% C. 7% D. 9% 4. Which of the followings is NOT a bank's assets? A. reserves B. loans C. government bonds D. checkable deposits 5. Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its capital ratio is A. 20%. B. 25%. C. 11%. D. 10%. 6. Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its leverage ratio is A. 4. B. 5. C. 10. D Suppose bank A has assets of 100, liabilities of 60, and capital of 40. Its capital ratio is A. 40%. B. 66%. C. 25%. D. 60%.

2 8. Suppose bank A has assets of 100, liabilities of 60, and capital of 40. Its leverage ratio is A B C D The first structured investment vehicle (SIV) was set up by in A. J.P. Morgan B. Chase C. Citigroup D. Goldman Sachs 10. AIG provide CDS against A. insolvency. B. default risk. C. illiquidity. 11. Securitization can NOT help financial intermediaries A. diversify their portfolios. B. avoid bankruptcy. C. attract more investors to buy and hold their securities. D. decrease the cost of borrowing. 12. Collaterailzed debt obligations (CDOs) were first issued in A. 1980s. B. 1990s. C D Ted spread is A. the difference between the riskless rate and the rate at which banks are willing to lend to each other. B. the difference between the riskless rate and the yield on corporate bonds. C. the difference between the riskless rate and return on stocks. 14. FDIC deposit insurance is per account. A. $100,000 B. $150,000 C. $200,000 D. $250, was introduced in October 2008 to clean up banks. A. liquidity facilities B. wholesale funding C. TARP D. fire sale

3 16. American Recovery and Reinvestment Act 2009 calls for A. both tax reductions and government spending reductions. B. both tax reductions and government spending increases. C. both tax increases and government spending increases. D. both tax increases and government spending reductions. 17. Firms with ratings are considered the safest. A. AAA B. BBB C. CCC D. BB 18. LIBOR rate is A. interbank loan rate. B. the riskless rate. C. TED spread. D. discount rate. 19. Which of the following conditions will most likely coincide with the existence of a liquidity trap? A. inflation is rising B. inflation is constant C. inflation is zero D. individuals prefer to hold only money and not bonds E. the real interest rate is negative 20. When a liquidity trap situation exists, we know that A. an open market operation will have no effect on the supply of money. B. an open market operation will have no effect on the monetary base. C. fiscal policy will have no effect on the demand for goods. D. expansionary monetary policy will be deflationary. 21. Suppose a liquidity trap situation exists. Which of the following is most likely to occur if taxes are cut? A. no change in output and no change in the interest rate B. an increase in output and an increase in the interest rate C. an increase in output and little change in the interest rate D. an increase in output and a reduction in the interest rate 22. An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists? A. the interest rate will decrease. B. the interest rate will not change. C. output will increase. D. the money supply, M, will not change.

4 23. An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists? A. the interest rate will increase B. the interest rate will not change C. output will decrease D. the money supply, M, will not change 24. Which of the following will occur when an economy is faced with a liquidity trap situation? A. a reduction in the price level will cause a rightward shift in the aggregate demand curve B. a reduction in the price level will cause a leftward shift in the aggregate demand curve C. the aggregate demand curve is now vertical D. the aggregate demand curve is now upward sloping 25. The primary cause of the reduction in the nominal money supply during the early years of the Great Depression was A. the Fed's sale of bonds B. the Fed's purchase of bonds C. a reduction in the money multiplier 26. When a liquidity trap situation exists, the most appropriate policy to increase output would be A. a central bank sale of bonds. B. an increase in government spending. C. a central bank purchase of bonds. 27. The reduction in Japanese stock prices in the 1990s was most likely the result of which of the following? A. contractionary monetary policy B. contractionary fiscal policy C. the end of a speculative bubble D. an increase in inflation 28. One of the possible solutions for the Japanese slump is to A. implement macroeconomic policies to create inflation. B. maintain a constant aggregate price level. C. maintain the real interest rate at its original level. 29. The Nikkei, a Japanese stock price index, reached its peak in which of the following years? A B C D E Which of the following has been suggested as a possible solution to the Japanese slump?

5 A. disinflationary macroeconomic policy B. budget deficit reduction packages C. banking reform D. all of the above Multiple Choice Answers