University of California, Davis – ECN 1b Chapter 14

Chapter 14

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Concept Map

      I.  The Great Recession

          A.  Depth and Duration

          B.  Aggregate Demand and Aggregate Supply Analysis

     II.  The Great Depression

          A.  Depth and Duration

          B.  Aggregate Demand and Aggregate Supply Analysis

    III.  Classical Economics

    IV.  Keynesian Economics

MULTIPLE-CHOICE QUESTIONS

    1.  One similarity between the Great Recession and the Great Depression is that, in both episodes:

         a.  large numbers of banks failed.

         b.  there were significant problems in financial markets.

         c.  the U.S. government raised taxes.

         d.  the U.S. government allowed the money supply to decrease.

         e.  the unemployment rate exceeded 20%.

ANS:            

    2.  Which of the following best summarizes the main causes of the Great Recession?

         a.  Oil-producing countries deliberately raised the price of petroleum, leading to inflation and a deep recession.

         b.  The Federal Reserve raised short-term interest rates very high in an effort to decrease inflation, which also drove the economy into a recession.

         c.  The end of overseas war efforts led to a deep decrease in federal spending, which reduced employment and caused a recession.

         d.  The stock market collapsed following the end of a bubble in technology stock prices, which caused a decrease in investment spending and a recession.

         e.  The collapse of housing prices led to decreased wealth and significant problems in financial markets, as well as a decrease in expected income and a stock market collapse.

ANS:            

    3.  The Great Recession began in:

         a.  December 2009.

         b.  June 2009.

         c.  August 1929.

         d.  December 2007.

         e.  January 1930.

ANS:            

    4.  During the Great Recession, the unemployment rate climbed as high as _________ and remained around 8% _________ months after the recession began.

         a.  15%; 75

         b.  25%; 8

         c.  10%; 60

         d.  20%; 12

         e.  35%; 80

ANS:            

    5.  The Great Recession ended in:

         a.  June 2009.

         b.  January 2009.

         c.  March 1933.

         d.  June 1938.

         e.  June 2012.

ANS:            

    6.  The Great Recession lasted for:

         a.  12 months.

         b.  18 months.

         c.  32 months.

         d.  44 months.

         e.  56 months.

ANS:            

    7.  The Great Recession lasted from _________ to _________.

         a.  August 1929; March 1933

         b.  May 1937; June 1938

         c.  March 2001; November 2001

         d.  December 2007; June 2009

         e.  July 1991; June 1992

ANS:            

    8.  The Great Recession began in __________ and lasted for __________.

         a.  June 2011; 12 months

         b.  August 1929; 44 months

         c.  December 2007; 18 months

         d.  May 1937; 14 months

         e.  March 2001; 8 months

ANS:            

    9.  The Great Recession was similar to other recessions since World War II in that:

         a.  there was extremely high inflation.

         b.  real gross domestic product (GDP) initially declined and then recovered sometime later.

         c.  real GDP increased rapidly and then leveled off.

         d.  the rate of unemployment was unchanged.

         e.  the trade deficit fell to zero.

ANS:            

  10.  The Great Recession was similar to other recessions since World War II in that:

         a.  the rate of unemployment increased and then decreased at a later time.

         b.  the rate of inflation was extremely high.

         c.  real gross domestic product (GDP) rapidly increased and then leveled off.

         d.  the rate of economic growth was unchanged.

         e.  the rate of unemployment decreased and then increased at a later time.

ANS:            

  11.  The Great Recession was similar to most other recessions since World War II in that:

         a.  the economy rapidly bounced back and resumed normal growth quickly.

         b.  the economy never really declined much at all.

         c.  the economy did not return to normal for at least one year.

         d.  the economy increased rapidly following the beginning of the recession.

         e.  the economy essentially collapsed and never recovered.

ANS:            

  12.  The Great Recession was different from other recessions since World War II in that:

         a.  real gross domestic product (GDP) initially declined and then recovered sometime later.

         b.  the trade deficit was largely unaffected.

         c.  the rate of unemployment increased and then decreased at a later time.

         d.  the decline in real GDP was much larger and lasted longer.

         e.  the economy did not return to normal for at least one year.

ANS:            

  13.  The Great Recession was different from other recessions since World War II in that:

         a.  the rate of unemployment increased and then decreased at a later time.

         b.  the increase in unemployment was much greater and lasted longer.

         c.  real gross domestic product (GDP) initially declined and then recovered sometime later.

         d.  the economy did not return to normal for at least one year.

         e.  the rate of inflation did not change at all.

ANS:            

  14.  The Great Recession was different from other recessions since World War II in that:

         a.  the economy did not return to normal for at least one year.

         b.  most consumers were unaffected by the recession.

         c.  the overall economy took far longer to recover than the average.

         d.  the rate of unemployment increased and then decreased at a later time.

         e.  real gross domestic product (GDP) initially declined and then recovered sometime later.

ANS:            

  15.  The Great Recession lasted longer and was deeper than the average recession, in part, because:

         a.  oil-producing countries dramatically increased oil prices, causing very high inflation.

         b.  there was a dramatic cut in military spending in the years leading up to the recession.

         c.  the Federal Reserve refused to increase the money supply to stimulate aggregate demand.

         d.  the government raised tax rates in an effort to balance the federal budget.

         e.  there was a major financial crisis following the collapse of housing prices.

ANS:            

  16.  During the Great Recession, a major financial crisis followed the collapse of housing prices, which led to:

         a.  a decrease in the money supply by the Federal Reserve.

         b.  the decline in the health of many large financial firms and banks.

         c.  skyrocketing oil prices.

         d.  an increase in income tax rates to shrink the federal budget deficit.

         e.  an increase in expected income.

ANS:            

  17.  During the Great Recession, there was a financial crisis, a stock market crash, and a collapse in housing prices, all of which:

         a.  contributed to a very long and deep recession.

         b.  helped the U.S. economy perform better than the economies of other countries.

         c.  kept unemployment from rising above the historical average.

         d.  resulted in a very short and mild recession.

         e.  prevented the United States from experiencing a decline in real gross domestic product (GDP).

ANS:            

Use the following graph to answer the next seven questions. The graph depicts an economy where aggregate demand and long-run aggregate supply (LRAS) have decreased, with no change in short-run aggregate supply (SRAS).

  18.  As a result of aggregate demand and long-run aggregate supply decreasing, we can see that the price level _________ and real gross domestic product (GDP) _________.

         a.  remained unchanged; decreased

         b.  increased; decreased

         c.  decreased; remained unchanged

         d.  remained unchanged; increased

         e.  increased; increased

ANS:            

  19.  The graph accurately summarizes what happened during the Great Recession, because during that time, the price level _________ and real gross domestic product (GDP) _________.

         a.  decreased; decreased

         b.  increased; increased

         c.  remained largely unchanged; decreased

         d.  decreased; remained unchanged

         e.  remained unchanged; increased

ANS:            

  20.  Which of the following would have caused aggregate demand to decrease in the graph, such as occurred during the Great Recession?

         a.  an increase in expected income

         b.  a decrease in tax rates

         c.  a decrease in housing prices and stock prices

         d.  an increase in consumer sentiment

         e.  an advance in technology

ANS:            

  21.  During the Great Recession, real gross domestic product (GDP) decreased yet the aggregate price level remained largely unchanged, as depicted in the graph. Unemployment increased to above-normal levels. Which of following best explains why this happened?

         a.  A significant decline in military spending following the end of a war led to a recession.

         b.  A sharp recession followed the United States abandoning the gold standard.

         c.  A decline in housing prices and stock prices, plus a financial crisis, caused a recession.

         d.  A sudden increase in oil prices caused inflation and a deep recession.

         e.  A stock market crash, large numbers of bank failures, an increase in tax rates, and a tight money supply caused a recession.

ANS:            

  22.  During the Great Recession, real gross domestic product (GDP) fell yet the price level was largely unchanged, as depicted in the graph. Because of this, we know that:

         a.  both aggregate demand and long-run aggregate supply increased during the recession.

         b.  aggregate demand and long-run aggregate supply both decreased during the recession.

         c.  aggregate demand decreased and long-run aggregate supply increased during the recession.

         d.  aggregate demand decreased and short-run aggregate supply increased during the recession.

         e.  long-run aggregate supply increased and short-run aggregate supply decreased during the recession.

ANS:            

  23.  The decline in housing prices contributed to the Great Recession, as depicted in the graph, in that:

         a.  it caused real gross domestic product (GDP) and the price level to increase.

         b.  it caused an increase in oil and gas prices, which led to inflation.

         c.  it caused a decrease in household wealth and created a crisis in the loanable funds market.

         d.  it caused an increase in household wealth and a crisis in the loanable funds market.

         e.  it prevented unemployment from rising above historical averages.

ANS:            

  24.  In the graph, we see that long-run aggregate supply decreased during the Great Recession. This was due to a decline in housing prices and the subsequent financial crisis. Why did these factors cause long-run aggregate supply to decrease?

         a.  They caused household wealth and expected income to decline.

         b.  They caused permanent changes in the market for loanable funds.

         c.  They caused oil and gas prices to increase, causing inflation.

         d.  They caused unemployment to remain at normal levels.

         e.  They caused deflation and an increase in the value of the dollar.

ANS:            

  25.  During the Great Recession, the U.S. ________ curve shifted to the ________.

         a.  aggregate demand; right

         b.  short-run aggregate supply; right

         c.  long-run aggregate supply; right

         d.  aggregate demand; left

         e.  production possibilities; right

ANS:            

  26.  During the Great Recession, the U.S. ________ curve shifted to the ________.

         a.  aggregate demand; right

         b.  short-run aggregate supply; right

         c.  long-run aggregate supply; left

         d.  long-run aggregate supply; right

         e.  production possibilities; right

ANS:            

  27.  During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because:

         a.  unemployment in the United States decreased.

         b.  there was excessively high inflation during this time.

         c.  there was a stock market boom.

         d.  U.S. housing prices fell.

         e.  the government dramatically increased taxes.

ANS:            

  28.  During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because:

         a.  there was an increase in expected income.

         b.  the government dramatically increased taxes.

         c.  there was a decrease in expected income.

         d.  the Federal Reserve increased interest rates.

         e.  U.S. housing prices increased.

ANS:            

  29.  During the Great Recession, the U.S. long-run aggregate supply curve shifted to the left, in part, because:

         a.  the government dramatically increased taxes.

         b.  there was an institutional breakdown in financial markets.

         c.  there was a decline in the level of technology.

         d.  there was a decline in the U.S. population.

         e.  there was a decrease in expected income.

ANS:            

  30.  During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because:

         a.  the stock market declined in value by one-third.

         b.  there was a decline in the U.S. population.

         c.  there was an increase in expected income.

         d.  the U.S. government restricted trade with other countries.

         e.  there was an increase in housing prices.

ANS:            

  31.  When U.S. aggregate demand and long-run aggregate supply decreased during the Great Recession:

         a.  unemployment decreased.

         b.  real gross domestic product (GDP) also decreased.

         c.  real GDP increased.

         d.  real GDP was unaffected.

         e.  the price level decreased.

ANS:            

  32.  During the Great Recession, aggregate demand ________ and long-run aggregate supply ________.

         a.  increased; increased

         b.  decreased; decreased

         c.  decreased; remained unchanged

         d.  remained unchanged; decreased

         e.  increased; decreased

ANS:            

  33.  A decrease in U.S. housing prices would tend to cause:

         a.  aggregate demand to decrease.

         b.  long-run aggregate supply to increase.

         c.  short-run aggregate supply to decrease.

         d.  long-run aggregate supply to decrease.

         e.  aggregate demand to increase.

ANS:            

  34.  An institutional breakdown in U.S. financial markets would tend to cause:

         a.  aggregate demand to increase.

         b.  long-run aggregate supply to decrease.

         c.  short-run aggregate supply to increase.

         d.  long-run aggregate supply to increase.

         e.  aggregate demand to decrease.

ANS:            

  35.  A decline in U.S. wealth would tend to cause:

         a.  long-run aggregate supply to increase.

         b.  aggregate demand to decrease.

         c.  short-run aggregate supply to increase.

         d.  long-run aggregate supply to decrease.

         e.  aggregate demand to increase.

ANS:            

  36.  During the Great Recession, ___________ caused aggregate demand to decrease.

         a.  a cut in income tax rates

         b.  a rapid decline in housing prices

         c.  an increase in consumer sentiment

         d.  a decrease in interest rates

         e.  an increase in international trade

ANS:            

  37.  During the Great Recession, ___________ caused aggregate demand to decrease.

         a.  a decrease in stock prices

         b.  a decrease in business tax rates

         c.  an increase in immigration to the United States

         d.  an increase in consumer sentiment

         e.  a decrease in income taxes

ANS:            

  38.  During the Great Recession, __________ caused long-run aggregate supply to decrease.

         a.  an increase in international trade

         b.  an advance in technology

         c.  financial market turmoil

         d.  an increase in the U.S. labor force

         e.  an increase in the money supply

ANS:            

  39.  During the Great Recession, long-run aggregate supply decreased. This was caused by __________.

         a.  an advance in technology

         b.  a decrease in income and business tax rates

         c.  an increase in immigration to the United States

         d.  a breakdown in the loanable funds market

         e.  an increase in the U.S. labor force

ANS:            

  40.  The Great Recession is characterized by a decrease in aggregate demand. __________ would have caused such a decrease.

         a.  A decrease in consumer sentiment

         b.  A decrease in income tax rates

         c.  An increase in international trade

         d.  An increase in expected income

         e.  An increase in immigration to the United States

ANS:            

  41.  When stock prices declined during the Great Recession, it caused aggregate demand to decrease because:

         a.  households became more optimistic and increased consumer spending.

         b.  the government raised taxes and decreased spending.

         c.  firms’ net worth decreased, leading to an increase in investment spending.

         d.  household wealth decreased, leading to a decline in consumer spending.

         e.  the government refused to allow the money supply to increase.

ANS:                  

  42.  When financial markets went into a crisis during the Great Recession, it caused long-run aggregate supply to decrease because:

         a.  there was a decrease in the level of technology.

         b.  there were new regulations limiting the amount of loans that could be made.

         c.  the U.S. population and labor force declined abruptly.

         d.  all across the country, infrastructure began to fail.

         e.  profits in the financial industry increased.

ANS:                  

  43.  When U.S. housing prices declined prior to and during the Great Recession, it caused aggregate demand to decrease because:

         a.  the government raised interest rates to prevent inflation.

         b.  household wealth decreased, causing a decline in consumer spending.

         c.  the U.S. population and labor force declined abruptly.

         d.  the government refused to allow the money supply to increase.

         e.  the government raised taxes and decreased spending.

ANS:                  

  44.  During the Great Recession, U.S. household wealth declined, leading to a decrease in aggregate demand. Which pair of factors contributed to this decline in wealth?

         a.  an increase in tax rates and a decrease in stock prices

         b.  a decrease in stock prices and a decrease in housing prices

         c.  a decrease in housing prices and a decline in the level of technology

         d.  a financial-market crisis and an increase in gas prices

         e.  a decrease in housing prices and a decrease in the money supply

ANS:                  

  45.  During the Great Recession, consumer sentiment in the United States declined, leading to a decrease in consumer spending. Which of the following factors caused this decrease in consumer sentiment?

         a.  a decrease in expected income

         b.  an increase in household wealth

         c.  a decrease in the money supply

         d.  an increase in tax rates

         e.  falling gasoline prices

ANS:                  

  46.  A stock market crash in is generally viewed as the beginning of the Great Depression.

         a.  December 2007

         b.  March 1933

         c.  June 2009

         d.  October 1929

         e.  April 1945

ANS:            

  47.  The back-to-back recessions that began in 1929 and ended in 1938 are collectively known as:

         a.  the Gilded Age.

         b.  the Great Downturn.

         c.  the Roaring Twenties.

         d.  the Great Depression.

         e.  the Great Recession.

ANS:            

  48.  One similarity between the Great Depression and the Great Recession is that in both cases:

         a.  stock prices remained largely unaffected.

         b.  housing prices climbed rapidly.

         c.  there was very high inflation.

         d.  unemployment remained very low.

         e.  there was noticeable stress in financial markets.

ANS:            

  49.  One difference between the Great Recession and the Great Depression is that:

         a.  unemployment was far higher during the Great Recession.

         b.  very few banks failed during the Great Depression, but many failed during the Great Recession.

         c.  the U.S. government reduced the money supply during the Great Recession but raised it during the Great Depression.

         d.  the U.S. government reduced taxes during the Great Recession but raised them during the Great Depression.

         e.  there was significant inflation during the Great Depression and not during the Great Recession.

ANS:            

  50.  Which of the following best summarizes the main causes of the Great Depression?

         a.  Oil-producing countries deliberately raised the price of petroleum, leading to inflation and a deep recession.

         b.  The Federal Reserve raised short-term interest rates very high in an effort to decrease inflation, which also drove the economy into a recession.

         c.  The end of overseas war efforts led to a deep decrease in federal spending, which reduced employment and caused a recession.

         d.  A stock market crash led to a decrease in expected income and tight monetary policy. Higher tax rates and a banking crisis then drove the economy into a depression.

         e.  The stock market collapsed following the end of a bubble in technology stock prices, which caused a decrease in investment spending and a recession.

ANS:   

  51.  The Great Depression ended in:

         a.  June 2009.

         b.  May 1937.

         c.  August 1929.

         d.  June 1938.

         e.  August 2004.

ANS:   

  52.  The Great Depression actually consisted of two recessions, the first of which began in _________ and ended in _________.

         a.  May 1937; June 1938

         b.  August 1929; March 1933

         c.  March 2001; November 2001

         d.  December 2007; June 2009

         e.  February 1971; August 1972

ANS:   

  53.  The Great Depression actually consisted of two recessions, the second of which began in _________ and ended in _________.

         a.  October 1981; January 1984

         b.  August 1929; March 1933

         c.  March 2001; November 2001

         d.  December 2007; June 2009

         e.  May 1937; June 1938

ANS:   

  54.  The Great Depression actually consisted of two separate recessions. The “first wave” of the Great Depression first began in _________ and initially lasted for _________.

         a.  May 1937; 14 months

         b.  August 1929; 44 months

         c.  August 1945; 12 months

         d.  July 1991; 18 months

         e.  August 1972; 7 months

ANS:   

  55.  The Great Depression actually consisted of two separate recessions. The “second wave” of the Great Depression began in _________ and lasted for _________.

         a.  August 1929; 44 months

         b.  March 2001; 8 months

         c.  December 2007; 18 months

         d.  May 1937; 14 months

         e.  December 1974; 16 months

ANS:            

  56.  In comparison with other recessions, the Great Depression:

         a.  had much lower rates of unemployment.

         b.  had much higher levels of consumer sentiment.

         c.  had much higher international trade.

         d.  had much larger changes in stock prices.

         e.  had very small changes in real gross domestic product (GDP).

ANS:   

  57.  When compared to other recessions, the Great Depression:

         a.  had very high levels of immigration to the United States.

         b.  had much larger decreases in real gross domestic product (GDP).

         c.  had very low unemployment.

         d.  had very stable stock prices.

         e.  had much higher levels of consumer sentiment.

ANS:   

  58.  One of the reasons why the Great Depression was so severe is that:

         a.  the U.S. government lowered taxes.

         b.  stock prices increased during the Great Depression.

         c.  expected income increased.