Great Recession – Principles of Macroeconomics Quiz

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Great Recession, Financial Markets, Principles of Macroeconomics Quiz

The key words in this Macroeconomics course include Great Recession, Financial Markets, Decline in both AD and LRAS, Real GDP, Principles of Macroeconomics

Which of the following is a reason the 2007–2009 recession came to be known as the Great Recession?

The atmosphere of the country was one of celebration despite stress in the financial markets.

There was noticeable stress in financial markets.

It was greater in length of all the recessions that had occurred since the Great Depression.

The effects of the Great Recession, in terms of both high unemployment rates and slow real GDP growth, were drastic but short-lived.

Explanation: Real GDP fell by an annual rate of 8.9% in the fourth quarter of 2008. The downturn in the financial markets made the downturn similar to that aspect of the Great Depression. If you look at business cycle dates, you will see that the length of the Great Recession was not longer than all previous ones combined.

Which of the following led to the Great Recession?

a rise in AD but a decline in LRAS

a decline in both AD and LRAS

a decline in AD

a decline in LRAS

Explanation: The financial crisis that caused the Great Recession led to a permanent breakdown in the loanable funds market, resulting in reduced funding opportunities for investment for the firms, which reduced the long-run aggregate supply. At the same time, large declines in consumer wealth contributed to a significant decline in aggregate demand.

Which of the following statements is consistent with what happened during the Great Recession?

Housing prices fell during the Great Recession, causing a decrease in consumer wealth. This decrease in wealth led to a decrease in aggregate supply and a decrease in potential GDP.

Aggregate demand and long-run aggregate supply decreased, causing unemployment to rise to 10%.

Aggregate demand and short-run aggregate supply increased, causing potential GDP to decrease.

Consumer sentiment fell prior to and during the Great Recession, leading to a decline in expected income that decreased the aggregate supply curve.

Explanation: During the Great Recession, aggregate demand and long-run aggregate supply both decreased. These shifts eventually led to an unemployment rate of slightly more than 10%. Consumer sentiment did drop prior to and during the Great Recession, but this change affected aggregate demand, not aggregate supply.

Which of the following statements is consistent with what happened during the Great Depression?

The Great Depression had an unemployment rate greater than the Great Recession that was largely due to a decrease in aggregate supply.

The unemployment rate was over 25% at the height of the Great Depression. This spike in unemployment was caused by the large decrease in aggregate demand.

It took four years for potential GDP to return to its pre-Depression level after the Great Depression.

Faulty macroeconomic policies were not a part of the cause of the Great Depression.

Explanation: A large decrease in aggregate demand had tumultuous effects on the U.S. economy during the late 1920s and 1930s. By 1933, the unemployment rate was over 25%. This spike in unemployment was in large part due to faulty macroeconomic policies. It would take seven years after the start of the depression for potential GDP to return to pre-Depression levels. And it wouldn’t be until the 1940s that the unemployment rate returned to single digits.

Which of the following was one of the causes of the aggregate demand shifts during the Great Recession?

an increase in  the natural rate of unemployment

an increase in import taxes

a shift in the balance of trade

a reduction in the prices of homes

Explanation: Falling home prices led to a reduction in wealth for many households. Household’s decrease in wealth caused a reduction in aggregate demand.