Test Bank For Macroeconomics, 8th Edition by Olivier Blanchard Chapter(1-24) With Appendix(1 2 3)

Test Bank For Macroeconomics, 8th Edition Olivier Blanchard Chapter 1-24 With Appendix (1 2 3) Chapter 1: A Tour of the World 1.1 The Crisis 1) The most recent financial crisis started in A) stock market. B) bond market. C) foreign exchange market. D) housing market. Answer: D Diff: 2 2) Briefly explain why the decline in housing prices led to a major financial crisis. Answer: Many of the mortgage loans that had been given out during earlier expansion were of poor quality. Many of the borrowers had taken too large a loan and were increasingly unable to make mortgage payments. mortgage backed securities were so complex that their value was nearly impossible to assess. Not knowing the quality of the assets that other banks had on their balance sheet, banks became very reluctant to lend to each other for fear that the bank to which they lent might not be able to repay. The credit market froze up. Unable to borrow, and with assets if uncertain value, many banks found them in trouble. The bankruptcy of Lehman Brothers put other banks at risk of going bankrupt as well. The whole financial system was in trouble. Diff: 2 3) Explain how the financial crisis turned into a major economic crisis. Answer: Hit by the decrease in housing prices and the collapse in stock prices, and worried that this might be the beginning of another Great Depression, people sharply cut back consumption. Worried about sales and uncertain about the future, firms sharply cut back investment. Decreases in consumption and investment led to decrease in demand, which in turn, led to decrease in output. Diff: 2 4) Explain why the U.S. crisis became a world crisis. Answer: Other countries were affected through two channels. The first channel was trade. As U.S. consumers and firms cut spending, part of the decrease fell on imports of foreign goods. The second channel was financial. U.S. banks, badly needing funds in the United States, repatriated from other countries, creating problems for banks in those countries. The result was not just a U.S., but a world recession. Diff: 2 5) What problems remain in advanced countries after the crisis? Answer: Both in the United States and the Euro area, unemployment remains very high. What is behind this persistently high unemployment is low output growth, and behind this low growth are many factors like declining housing prices and low housing investment. Banks are still not in good shape, and bank lending is still tight. Consumers are cutting consumption. And the crisis has led to a large increase in budget deficits, which have in turn led to a large increase in public debt over 1 Copyright © 2021 Pearson Education, Inc.