1 Copyright © 2021 Pearson Education, Inc. 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 th at 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 we ll. 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 o utput. 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 r emain 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 de clining 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 incre ase in public debt over 2 Copyright © 2021 Pearson Education, Inc. time. Countries must now reduce their deficits, and this is proving difficult. In some European countries, governments may not be able to adjust and may default on their debt. Diff: 2 1.2 The United States 1) In 2018, output per capita in the United States was approximately equal to A) $15,500. B) $25,800. C) $43,800. D) $62,500. Answer: D Diff: 2 2) The standard of living typically refers to A) the rate of unemployment. B) output per capita. C) wealth per capita. D) all of these Answer: B Diff: 1 3) In 2018 , the U.S. GDP accounts for ________ of world output. A) 20% B) 24% C) 45% D) 50% Answer: B Diff: 1 4) In 2018, the unemployment in the U.S. was A) 5%. B) 11%. C) 3.7%. D) 4.6%. Answer: C Diff: 2 5) Inflation represents A) an increase in output. B) an increase in the aggregate price level. C) an increase in the unemployment rate. D) a recession. Answer: B Diff: 1 1.3 The Euro area 3 Copyright © 2021 Pearson Education, Inc. 1) Economists have suggested that the relatively higher unemployment in Euro pe has been caused by which of the following? A) relatively high unemployment benefits B) relatively high level of worker protection C) inadequate macroeconomic policies D) increased labor costs E) all of these Answer: E Diff: 2 2) Which of the following countries had the lowest level of output per capita in 2018? A) Spain B) France C) Italy D) German Answer: A Diff: 2 3) How many countries are in the European Union? A) 27 B) 6 C) 21 D) 17 Answer: A Diff: 2 4) How many countries are in the Euro area? A) 19 B) 27 C) 21 D) 11 Answer: A Diff: 2 5) Some economists believe that the source of European high unemployment in the past two decades is A) labor market rigidities. B) tight monetary policy. C) tight fiscal policy. D) financial crisis. Answer: A Diff: 2 6) Discuss the types of policies that could be implemented to reduce European unemployment. Answer: There are basically two sets of policies. First, policy makers could reduce labor market rigidities that some economists believe have contributed to the high unemployment. Some examples of labor market rigidities are high unemployment benefits, high minimum wages, and excessive job protection regulations. The second set of policies includes bad labor relatio ns and 4 Copyright © 2021 Pearson Education, Inc. inadequate macroeconomic policies. Diff: 2 7) Discuss what is meant by labor market rigidities and explain how they might cause the relatively high unemployment in Europe. Answer: Examples of labor market rigidities are: relatively high minimum wa ge, relatively high unemployment benefits, and relatively high level of worker protection. All three of these are hypothesized to cause a reduction in employment and, therefore, an increase in the unemployment rate. Diff: 2 8) Discuss some of the potentia l benefits and costs of the adoption of the Euro. Answer: One of the benefits of the Euro is largely symbolic. Countries that have in the past century been in wars against each other are now using the same currency. There are economic benefits as well. Th e use of the same currency will eliminate the need to convert currencies when, for example, buying foreign goods from a country that has also adopted the Euro. One of the possible costs of the Euro is that it will force countries to pursue the same monetar y policy. No longer will policy makers in these countries pursue independent monetary policy. Diff: 2 1.4 China 1) In 2018, output per capita in China was approximately equal to A) $2,100. B) $9,700. C) $22,100. D) $32,100. Answer: B Diff: 2 2) Between 2010 and 2017 the annual rate of output growth in China was approximately equal to A) 2%. B) 5%. C) 8%. D) 20%. Answer: C Diff: 2 3) Which of the following explains the relatively high growth rate of output in China since 1980? A) accumulation of capital B) technological progress C) a transition from central planning to a market economy D) all of these Answer: C Diff: 2 4) What are the two primary sources of economic growth in China since 1980? Answer: The relatively high output growth in Chin a has occurred as a result of capital
