Macro Chapter 12

How did the fall in housing prices cause the entire financial system in the United States to freeze up? The fall in housing prices resulted in ___________, leading to enormous ___________, disrupting the bank's ability and willingness to make loans to ________.

1. Increased defaults 2. Bank losses 3. Consumers and Firms

The _____ in employment during a recession is smaller if wages are ________. a. Decline;Flexible b. Decline;Rigid c. Increase; Flexible d. Increase; Rigid

a. Decline;Flexible

Some economists stress the role of monetary policy in the period leading up to the recession of 2007dash-2009. Between 2001 and​ 2003, the Federal Reserve lowered the target federal funds rate from​ 6.5% to​ 1%, and kept it there through much of 2004. This resulted in a substantial decline in real interest rates throughout the​ economy, including mortgage rates. Based on the​ chapter's discussion of monetary and financial​ factors, how could the Federal​ Reserve's policies have contributed to the economic​ "bubble" of the​ pre-recession years of 2000dash-​2006? a. The low federal funds rate also lowered mortgage​ rates, driving an increase in demand for​ housing, which in turn drove up real estate prices. b. The Federal​ Reserve's policies increased the multipliers in the​ economy, increasing the impact of the boom and therefore the subsequent crash. c. The rapid decrease in the federal funds rate led to increased consumption because of the low return on​ savings, which increased demand in the economy above the sustainable level. d. The low federal funds rate also lowered the rate at which businesses could​ borrow, driving an increase in demand for​ investment, which in turn drove up real wages.

a. The low federal funds rate also lowered mortgage​ rates, driving an increase in demand for​ housing, which in turn drove up real estate prices.

A multiplier is __________. a. an economic mechanism that causes an initial shock to be amplified by​ follow-on effects. b. a change in expectations about future economic activity. c. a factor that causes a change in the money supply to generate activity larger than the change in the money supply. d. a change in productivity that leads to increases in aggregate economic activity.

a. an economic mechanism that causes an initial shock to be amplified by​ follow-on effects.

Why is the rise in housing prices between the late 1990's and 2006 characterized as a bubble by some economists? a. The rate of home foreclosures increased over its​ long-run average. b. The large increase in the price of housing assets did not reflect the true​ long-run value of the assets. c. Houses became too expensive for ordinary people to buy. d. Speculators had purchased houses strictly to sell later at a higher price.

b. The large increase in the price of housing assets did not reflect the true​ long-run value of the assets.

An example of a multiplier is when ________. (Check all that apply) a. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. b. a reduction in business investment is offset by increases in consumption and net exports. c. a decrease in labor demand with rigid wages causes a larger increase in unemployment than the same decrease with flexible wages. d. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending.

a. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. d. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending.

According to his theory animal spirits and sentiment, changes in sentiment cause economic fluctuations through __________-. a. Changes in government expenditure b. Changes in household consumption and firm investment c. Changes in productivity d. Decreases in offsetting movements in exports & imports

b. Changes in household consumption and firm investment

In​ 1973, the major​ oil-producing nations of the world declared an oil embargo. The price of​ oil, a key source of​ energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s​ recession? a. Monetary theory b. Real business cycle theory c. Keynesian theory d. Okun's Theory

b. Real business cycle theory

Look at #8 graph The figure shows the relationship between an​ economy's output and employment. Suppose the economy is currently operating on the production function F2 and E2 is the level of employment in the country. If the demand curve for labor shifts to the​ left, ________. a. employment will remain unchanged at E1 b. employment will decrease from E2 to E1 c. output will increase from Y2 to Y3 d. employment will increase from E2 to E3

b. employment will decrease from E2 to E1

Real Business Cycle Theory _________. a. Explains how monetary factors drive business cycles b. Explains how initial economic shocks are amplified through the multiplier process c. Emphasizes the role of changing productivity and technology in causing economic fluctuations d. Emphasizes the role of sentiments that create the self-fulfilling prophecies that drive economic fluctuations

c. Emphasizes the role of changing productivity and technology in causing economic fluctuations

___________ used the concepts of animal spirits and sentiments to explain economic fluctuations. a. Irving Fisher b. Milton Friedman c. John Maynard Keynes d. Arthur Cecil Pigou

c. John Maynard Keynes

Economic Fluctuations are _________. a. Long-run changes in the growth of GDP b. Changes to the trend line of GDP growth c. Short-run changes in the growth of GDP d. Economic shocks characterized by downward wage rigidity & multipliers

c. Short-run changes in the growth of GDP

An economic expansion begins _______. a. In the middle of a recession b. At the midpoint between the trough and peak of GDP growth c. After the peak of GDP growth d. At the end of a recession

d. At the end of a recession