978-1259663048 Chapter 30 Solutions Manual

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CHAPTER 30: FINANCIAL CRISES, PANICS, AND

UNCONVENTIONAL MACROECONOMIC

POLICY

Questions and Exercises

1. The Fed’s role as lender of last resort is important because if credit dries up, the

2. Because financial institutions could not sell their assets quickly enough at

3. Extrapolative expectations are expectations that a trend will accelerate. The

market may experience an initial shock that causes prices to rise. In an asset price

bubble, though, the initial rise in prices leads people to expect further price

4. Your initial investment is $10 and you borrowed $90. At a 10 percent interest, you

5. The Fed followed a much more expansionary policy because there was no sign of

6. In the standard AS/AD model, financial bubbles play no role in determining

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7. The efficient market hypothesis is that all financial decisions are made by rational

8. The moral hazard problem is a problem that arises when people’s actions do not

9. Three reasons the Glass-Steagall Act became less and less effective include: (1)

10. Large financial institutions are considered too big to fail because these institutions

11. Some economists believe that the Fed needs to unwind its unconventional

expansionary policies so that the private sector faces up to, and starts to deal with,

the structural problems of the economy. Eventually, something has to bring about

12. The primary goal of credit easing is to change the quality—or mix—of assets

from less liquid to more liquid assets by purchasing securities such as

13. Like credit easing, operation twist changes the composition of the Fed’s portfolio;

unlike credit easing, operation twist involves the Fed selling short-term Treasury

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14. Quantitative easing is designed to shift the entire yield curve down as shown in

graph (a) where as operation twist is designed to twist the yield curve–raising the

short-term rates and lowering the long-term rates as shown in graph (b).

(a)

Term to maturity

Y i e l d c u r v e

(b)

Term to maturity

Y i e l d c u r v e

15. The concern about quantitative easing was that it was increasing the money

16. Precommitments give people assurance that the policy that the Fed precommits to

Questions from Alternative Perspectives

1. Austrian

The gold standard can be seen as a type of precommittment policy in which

2. Post-Keynesian

Minsky’s theory is based on a view of the economy that involves people being

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3. Post-Keynesian

If the economy is nonergodic, the future is truly unknown to everyone, and

4. Post-Keynesian

If Greece makes its bonds legal payment for taxes, many of its taxes will be

5. Radical

The question whether there is what might be called regulatory capture where

Issues to Ponder

1. The answer to such questions is normative. If considering the direct effects on the

2. The answer to this question depends on the specifics of the crisis as well as what

view one takes regarding the state of the current economy. If one subscribes to the

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3. While the fact the people cannot consistently make money in market is consistent

with the efficient market hypothesis, it is not the only explanation. In order to

4. If the bailout is needed to keep the economy alive, it is possible that economists

5. This question has more than one right answer, but raises issues related to the

6. The financial crisis was in part caused be deregulation because deregulation

meant that there were fewer and fewer regulations that would help to keep banks

and financial institutions from making decisions that would put the financial

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