Test Questions & Answers The Global Financial Crisis Ch.7

CHAPTER 7

The Global Financial Crisis

Multiple-Choice

1. The financial crisis of 2008–2009
   1. had a positive impact on economies in Western Europe.
   2. affected little more than trade.
   3. was partly caused by the costly war on terror and increased globalization.
   4. was partly caused by the “Occupy Wall Street” protests.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Which of the following were precursors to the 2008–2009 financial crisis?
   1. Excessive financial pessimism
   2. Economic globalization
   3. American isolationism
   4. Dramatic reduction in U.S. government debt

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Prior to the financial crisis, the chairman of the U.S. Federal Reserve, who kept interest rates low to increase the availability of money, was
   1. Simon Johnson.
   2. Henry Paulson.
   3. Freddie Mac.
   4. Alan Greenspan.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. In the lead-up to the 2008–2009 crisis, the Securities and Exchange Commission
   1. tightened its regulation of investment banking.
   2. restricted the movement of capital across borders.
   3. decreased regulatory enforcement of the banking industry.
   4. updated regulations to keep up with financial innovations.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Subprime loans that helped cause the financial crisis included
   1. adjustable-rate mortgages.
   2. sovereign wealth funds.
   3. hedge funds.
   4. A and B

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. India largely avoided the global financial crisis because
   1. its Reserve Bank had taken a conservative approach and rejected many financial innovations.
   2. the country was protected by its geographic distance from the United States.
   3. real estate development is unknown in India.
   4. of the country’s close relationship with Japan.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Easy

1. In response to the financial crisis, the United States
   1. renewed its commitment to financial liberalization.
   2. poured billions of dollars into credit markets and banks to restore confidence.
   3. clearly stated that there was no similarity to the Great Depression of the 1930s.
   4. failed to reach consensus between Republicans and Democrats about how to proceed.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. China’s response to the financial crisis was
   1. to seek loans from the United States.
   2. to take measures to strengthen its power vis-à-vis the United States.
   3. to ratchet down its manufacturing activity.
   4. to resist pressure to create a stimulus package.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Efforts to establish global banking regulations through the Basel accords demonstrate
   1. domestic regulatory reforms would be more effective than global regulations.
   2. the United States is fully supportive of global banking regulations.
   3. global banking regulations are highly effective.
   4. B and C

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. The amount of money earned by some American executives
   1. was in no way a cause of the financial crisis.
   2. was regulated by the government before the financial crisis.
   3. has played a pivotal role in creating the crisis and in its aftermath.
   4. A and B

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Fannie Mae and Freddie Mac
   1. were a fictitious American couple used by the media as an example of overspending.
   2. were U.S. government corporations that made more money available to lenders and borrowers preceding the crisis by selling loans to investors.
   3. were agencies that warned the public about the dangers of subprime loans before the crisis.
   4. were corporations that requested loans from the European Union to stabilize Ireland’s failing economy.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Credit default swaps were
   1. an unregulated financial innovation that helped create the financial crisis by transferring credit risks away from banks.
   2. low-interest credit cards created by the U.S. Federal Reserve Bank.
   3. a part of the war against terrorism.
   4. a form of real estate “flipping.”

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. American real estate foreclosures in the financial crisis
   1. were rarely seen due to quick action by the U.S. government.
   2. spread quickly and were associated with many facets of America’s financial decline.
   3. helped increase real estate values.
   4. had little effect.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Easy

1. Europeans in general took a less frantic approach to the 2008–2009 financial crisis than Americans because
   1. their governments had created numerous safety nets, including national health insurance and generous pensions.
   2. home ownership is rare in Europe.
   3. Europeans have a very low rate of saving.
   4. they are not part of the global financial community.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Globally, a major impact of the 2008–2009 financial crisis is
   1. a global power shift, in which some countries emerged stronger than the United States, Western Europe, and Japan.
   2. the creation of a European Union.
   3. a new nuclear disarmament treaty.
   4. the Glass-Steagall Treaty.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Easy

True/False

1. Hedge funds enabled wealthy investors to avoid some financial regulations in global markets.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Following September 11, 2001, a new globalization agenda, as part of a security strategy, freed American companies from restraints imposed by countries in which they were operating.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. High interest rates were a cause of the global financial crisis of 2008–2009.

Explanation: Low interest rates were a cause.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. The Federal Deposit Insurance Corporation (FDIC) destroyed Americans’ confidence in banks.

Explanation: The FDIC gives Americans confidence in banks.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. President Lyndon B. Johnson believed in limiting the role of government and took steps in the 1980s that increased financial deregulation and promoted financial globalization.

Explanation: It was President Ronald Reagan

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Decreasing enforcement by the Securities and Exchange Commission is a deregulatory policy.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. Financial innovations like securitization and hedge funds came along with many new government regulations to keep them in check, which is why they were not a cause of the financial crisis.

Explanation: They were largely unregulated and they were a cause of the crisis.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. The Asian financial crisis of 1997 was one precursor to the 2008–2009 global financial crisis.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. The head of the U.S. Federal Reserve was in favor of more regulation of the financial sector after the financial crisis.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Understanding

Difficulty Level: Easy

1. The BRIC countries enhanced their power in relation to the United States as a result of the global financial crisis.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Easy

Fill in the Blank

1. The power of investment bankers grew after the 1999 demise of the ______________________, which had prohibited commercial banks from marketing securities.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. Bundling loans into securities that are sold to investors is called _____________________.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. Parties involved in a ______________________________agreed that one would pay the other if a particular borrower, a third party, could not repay its loan.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. Hedge funds were one of the largely unregulated new practices called _______________________that led to the 2008–2009 financial crisis.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. Integral to hedge funds is a technique called _______________________________, which means simultaneously buying funds at a lower price in one market and selling at a higher price in another market to make a profit.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. ______________________________ refer to credit given to individuals who fail to meet rigorous standards usually expected by lending institutions.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. ___________________________ is the practice of owning a house for a short period with the sole intention of selling it quickly for a higher price to make a significant profit.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. In the run-up to the crisis, a belief in unending prosperity and a herd mentality fostered excessive risk taking called______________________________.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. India, China, Brazil, Russia, and South Africa are collectively known as the _______________________________ countries.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Moderate

1. ___________________________________ is the process whereby a bank takes possession of a house because the owner is unable to pay the mortgage.

Topic/Concept: The Impact of the Global Financial Crisis

7.2: Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

Skill Level: Understanding

Difficulty Level: Moderate

Matching

Answers to Matching

1) C) global financial liberalization

2) A) stimulus package

3) D) sovereign wealth funds

4) E) Glass-Steagall Act of 1993

5) B) derivatives

Essay

1. Discuss how deregulation of financial markets and low interest rates contributed to creating the financial crisis.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Understanding

Difficulty Level: Moderate

1. Discuss the implications of the stimulus package for the United States. In light of the benefits derived from Europe’s safety net, discuss the pros and cons of America’s adoption of European policies, such as universal health care and job protection.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Analysis

Difficulty Level: Difficult

1. Discuss the role of subprime loans in real estate in the financial crisis and their broader social and economic implications.

Topic/Concept: Causes of the Global Financial Crisis

7.1: Evaluate the causes that contributed to creating the financial crisis

Skill Level: Analysis

Difficulty Level: Moderate

1. In your view, has the financial crisis weakened the United States globally and strengthened

China? Discuss.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Analysis

Difficulty Level: Difficult

1. Evaluate the global responses to the financial crisis. Give examples.

Topic/Concept: Global Responses to the Financial Crisis

7.3: Evaluate the concerns that made different countries respond in different ways to the financial crisis

Skill Level: Evaluation

Difficulty Level: Moderate