Chapter 14
The Recession of 2007-2009: Causes and Policy Responses
Multiple Choice
1. One of the most, if not the most severe recession since World War II began in the
A) fall of 2005.
B) summer of 1964.
C) summer of 1927.
D) fall of 2007.
2. When comparing the severity of recessions since World War II economists focus on
the ones in
A) 1990 and 2001.
B) 1968 and 1974.
C) 2001 and 2007-2009.
D) 1982 and 2007-2009.
3. One of the most significant factors causing the recession of 2007-2009 was
A) very low crude oil prices.
B) the bursting of the housing bubble.
C) very low interest rates maintained by the Federal Reserve.
D) the huge federal government budget surplus.
4. In the years immediately prior to 2005 in the U.S.,
A) home prices were rising briskly.
B) home prices were falling precipitously.
C) home prices were constant.
D) bankers were confident that home prices would decrease in 2005.
5. If home prices rise far above the value of the homeowner’s mortgage loan,
A) default risk faced by lenders tends to decrease.
B) default risk faced by lenders tends to increase.
C) homeowners will be tempted to default on their mortgage loans.
D) homeowners will have greater difficulty obtaining a home equity line of credit.
6. Home price escalation in the U.S. during 2005 fueled booms in
A) Iraq and Afghanistan.
B) stocks of dot com startups in Silicon Valley and U.S. government bonds.
C) home building and home equity lines of credit.
D) mortgage foreclosures and home demolition.
7. In 2007 relative to 2001 in the U. S., household
A) revolving debt was higher and household non-revolving debt was lower.
B) revolving debt was lower and household non-revolving debt was higher.
C) revolving and non-revolving debt both were lower.
D) revolving and non-revolving debt both were higher.
8. In January of 2006, the Federal Reserve
A) increased its target federal funds rate by a larger amount than it had in several
years.
B) increased its target federal funds rate by a smaller amount than it had in several
years.
C) increased its target federal funds rate by the same amount as it had in recent years.
D) left its target federal funds rate unchanged.
9. The beginning date of the recession of 2007-2009 has been determined by the
A) Board of Governors of the Federal Reserve System.
B) National Bureau of Economic Research.
C) University Interscholastic League.
D) Council on Foreign Relations.
10. During the recession of 2007-2009, the Federal Reserve began cutting its target for
the Federal Funds rate in
A) January of 2007.
B) September of 2007.
C) September of 2008.
D) January of 2009.
11. The stimulus package proposed by the Bush Administration in early 2008 relied upon
A) a permanent increase in personal income tax rates.
B) a temporary surtax added to existing personal income tax rates.
C) making permanent the 2003 income tax rate cuts, as well as tax rebates to
taxpayers.
D) a requirement that any children claimed as dependents have social security
numbers.
12. Of the stimulus package proposed by the Bush Administration in 2008,
A) the tax rebates were rejected while the extension of temporary tax cuts was
adopted.
B) none of the proposed components of the package were actually implemented.
C) all of the proposed components of the package were quickly implemented.
D) the tax rebates were adopted while the extension of temporary tax cuts was
rejected.
13. The stimulus package implemented by the Bush Administration in 2008 included
A) rebates to individual taxpayers of $600 per individual and $1200 per married
couple.
B) rebates to individual taxpayers of $600 per individual and $900 per married
couple.
C) rebates to individual taxpayers of $900 per individual and $600 per married couple.
D) no rebates of any kind to individual taxpayers, only corporations.
14. As the U.S. recession was developing in the summer of 2008, oil prices peaked near
A) $30 per barrel.
B) $60 per barrel.
C) $110 per barrel.
D) $140 per barrel.
15. Between Labor Day weekend and the date of the U.S. presidential election in 2008,
A) Fannie Mae and Freddie Mac were placed in conservatorship.
B) Lehman Brothers filed for bankruptcy.
C) the U.S. Treasury and the Federal Reserve asked Congress for $700 billion for
TARP.
D) all of the options are correct.
16. In the recession of 2007-2009, the unemployment rate first began to increase sharply
A) in the first quarter of 2007.
B) in the third and fourth quarters of 2008.
C) in the first quarter of 2008.
D) in the fourth quarter of 2007.
17. In the recession of 2007-2009, the Net Change in Employment was
A) positive during every month of 2006 and 2007.
B) positive during every month of 2007.
C) negative during every month of 2007.
D) negative during every month of 2008.
18. The stimulus package proposed in 2009 by newly-elected President Obama included
A) reduced income tax rates for high-income individuals.
B) reduced levels of federal government aid to state and local governments.
C) a combination of tax changes and significant increases in federal government
spending.
D) rapid contraction of the overall size of the federal government as a share of GDP.
19. As unemployment rose in 2008, non-discretionary fiscal policy measures included
A) increased spending on unemployment insurance, food stamps and Medicaid.
B) major reductions in federal spending on bridges and highways.
C) significant reductions in the income tax rates paid by high-income individual.
D) provision of Universal Health Insurance for all Americans.
20. The stimulus package adopted in 2009 by newly-elected President Obama included
A) only discretionary fiscal policy programs.
B) only non-discretionary fiscal policy programs.
C) both discretionary and non-discretionary fiscal policy programs.
D) neither discretionary nor non-discretionary fiscal policy programs.
21. If a fiscal policy program requires new legislation to make it happen, it is necessarily
A) non-discretionary.
B) discretionary.
C) contractionary.
D) unconstitutional.
22. The deepening recession in late 2008 sharply reduced consumer confidence, causing
A) aggregate demand to contract markedly.
B) aggregate supply to contract markedly.
C) aggregate supply to expand markedly.
D) aggregate demand to expand markedly.
23. The stimulus plan adopted in 2009 by newly-elected President Obama consisted of
A) only tax cuts.
B) only spending increases on newly-created federal programs.
C) only attempts to shore up Medicaid, welfare and unemployment programs.
D) roughly equal tax cuts and spending increases, with additional spending to shore
up existing federal programs.
24. The elements of the stimulus package adopted in 2009 that allowed states to continue
to make their unemployment compensation payments despite having exhausted their
funds should be considered
A) discretionary fiscal policy.
B) non-discretionary fiscal policy.
C) monetary policy.
D) neither discretionary nor non-discretionary fiscal policy programs.
25. The elements of the stimulus package adopted in 2009 that allowed states to pay
Medicaid providers despite having exhausted their funds should be considered
A) discretionary fiscal policy.
B) non-discretionary fiscal policy.
C) monetary policy.
D) neither discretionary nor non-discretionary fiscal policy programs.
26. The elements of the stimulus package adopted in 2009 that allowed states to pay $25
per week more than they had being paying in unemployment compensation should be
considered
A) discretionary fiscal policy.
B) non-discretionary fiscal policy.
C) monetary policy.
D) neither discretionary nor non-discretionary fiscal policy programs.
27. Non-discretionary fiscal policy initiatives adopted in 2009 were intended mainly to
A) increase aggregate supply.
B) decrease aggregate supply.
C) increase aggregate demand.
D) decrease aggregate demand.
28. The discretionary fiscal policy initiatives adopted in 2009 were intended mainly to
A) increase aggregate supply.
B) increase aggregate demand.
C) decrease aggregate supply.
D) decrease aggregate demand.
29. If an adverse shock reduces the level of aggregate demand, it is likely to lead to
A) lower Real GDP (“RGDP”) and a higher price level (“PI”).
B) higher Real GDP (“RGDP”) and a higher price level (“PI”).
C) lower Real GDP (“RGDP”) and a lower price level (“PI”).
D) higher Real GDP (“RGDP”) and a lower price level (“PI”).
30. Discretionary fiscal policies that increase aggregate demand tend to result in
A) lower Real GDP (“RGDP”) and a higher price level (“PI”).
B) higher Real GDP (“RGDP”) and a higher price level (“PI”).
C) lower Real GDP (“RGDP”) and a lower price level (“PI”).
D) higher Real GDP (“RGDP”) and a lower price level (“PI”).
31. Non-discretionary fiscal policies that increase aggregate demand tend to result in
A) lower Real GDP (“RGDP”) and a higher price level (“PI”).
B) higher Real GDP (“RGDP”) and a higher price level (“PI”).
C) lower Real GDP (“RGDP”) and a lower price level (“PI”).
D) higher Real GDP (“RGDP”) and a lower price level (“PI”).
32. The main effect on the economy of the financial sector crisis in late 2008 was
A) reduced aggregate demand.
B) increased aggregate demand.
C) reduced aggregate supply.
D) increased aggregate supply.
33. If not corrected, the financial sector crisis of late 2008 would have tended to
A) increase both Real GDP and the general price level.
B) increase Real GDP and lower the general price level.
C) lower Real GDP and increase the general price level.
D) lower both Real GDP and the general price level.
34. Discretionary fiscal policy designed to counteract a reduction in aggregate demand
might include
A) an increase in the money stock.
B) a return to the gold standard.
C) increased government infrastructure spending.
D) all of the options are correct.
35. Non-discretionary fiscal policy designed to counteract a reduction in aggregate
demand might include
A) an increase in the money stock.
B) a return to the gold standard.
C) increased government spending on unemployment benefits.
D) all of the options are correct.
36. Monetary policy designed to counteract a reduction in aggregate demand might
include
A) an increase in the money stock.
B) a sharp increase in short-term interest rates.
C) increased government infrastructure spending.
D) an increase in individual income tax rates.
37. Monetary policy designed to counteract a reduction in aggregate demand might
include
A) a reduction in the money stock.
B) a reduction in short-term interest rates.
C) increased government infrastructure spending.
D) an increase in individual income tax rates.
38. A factor tending to slow the U.S. economy early in the recession of 2007-2009 was
A) historically low interest rates.
B) unprecedented levels of federal deficit spending.
C) rapid growth of the money stock.
D) sharply rising crude oil prices.
39. A factor that might have contributed to the weakening of the U.S. economy in 2007-
2009 was
A) historically low interest rates.
B) uncertainty concerning the outcome of the 2008 presidential election.
C) rapid growth of the money stock.
D) rising levels of federal government spending.
40. A factor that might have contributed to the weakening of the U.S. economy in 2007-
2009 was
A) historically low interest rates.
B) rapid growth of the money stock.
C) the impending expiration of the Bush Tax Cuts of 2003.
D) rising levels of federal government spending.
41. A factor that might have contributed to the weakening of the U.S. economy in 2007-
2009 was
A) increases by the Federal Reserve in its target short-term interest rate.
B) rapid growth of the money stock.
C) the unexpected return to the gold standard.
D) rising levels of federal government spending.
42. Economic growth leading into the 2007-2009 recession was
A) much greater than it had been in the previous 20 years.
B) much slower than it had been in the previous 20 years.
C) somewhat greater than it had been in the previous 20 years.
D) almost precisely the same as it had been in the previous 20 years.
43. Housing prices peaked
A) right as the recession began in December 2007.
B) after the recession began in December 2007.
C) before the recession of 2007-2009 began.
D) In 1999
44. Prior to the recession of 2007-2009
A) revolving debt was rising rapidly but non-revolving debt was not.
B) non-revolving debt was rising rapidly but revolving debt was not.
C) neither revolving nor non-revolving debt were rising rapidly.
D) both revolving and non-revolving debt were rising rapidly.
45. Housing Starts peaked
A) right as the recession began in December 2007.
B) after the recession began in December 2007.
C) before the recession of 2007-2009 began.
D) In 1999
46. TARP was
A) the name given to the auto company bailouts.
B) the name given to the bank bailouts.
C) what kept AIG afloat.
D) the name given to the stimulus package of 2009.
47. The recession of 2007-2009 started
A) with the financial collapse.
B) rather mildly in late 2007.
C) abruptly in 2007 with higher gasoline prices.
D) in 2006.
48. The Federal Reserve is blamed by some for the recession of 2007-2009 because it
A) raised interest rates too fast in 2005-2007.
B) lowered interest rates too fast in 2008.
C) kept interest rates high in 2005-2007.
D) kept interest rates too low prior to 2005 leading to a housing boom (that
ultimately went bust.
49. The efforts to revive the economy in 2009 through 2011 were drawn from
A) the traditional tools of monetary policy.
B) new tools of monetary policy.
C) discretionary fiscal policy.
D) all of the options are correct.
50. TARP was created during the Presidency of
A) President Clinton and only implemented by President G.W. Bush.
B) President G.H.W. Bush and only implemented by President G.W. Bush.
C) President G.W. Bush.
D) President B. Obama.
51. QE2 was an efforts to revive the economy in 2010 and 2011. It relied on
A) the traditional tools of monetary policy.
B) new tools of monetary policy.
C) discretionary fiscal policy.
D) all of the options are correct.
52. The lowering of the federal funds rate to nearly zero in 2008 is an example of the use
of
A) the traditional tools of monetary policy.
B) new tools of monetary policy.
C) discretionary fiscal policy.
D) all of the options are correct .
53. The efforts to revive the economy in 2009 through the stimulus package is an
example of
A) the traditional tools of monetary policy.
B) new tools of monetary policy.
C) discretionary fiscal policy.
D) all of the options are correct.
54. The efforts to reduce the deficit in 2011 can be best thought of as using
A) the traditional tools of monetary policy.
B) new tools of monetary policy.
C) discretionary fiscal policy.
D) none of these options are correct.