Macroeconomics, 7e (Blanchard)
Chapter 1: A Tour of the World
1.1 The Crisis
1) The most recent financial crisis started in
A) stock market.
B) bond market.
C) foreign exchange market.
D) housing market.
Answer: D
Diff: 2g
2) Briefly explain why the decline in housing prices led to a major financial crisis.
Answer: Many of the mortgage loans that had been given out during earlier expansion were of
poor quality. Many of the borrowers had taken too large a loan and were increasingly unable to
make mortgage payments. mortgage backed securities were so complex that their value was
nearly impossible to assess. Not knowing the quality of the assets that other banks had on their
balance sheet, banks became very reluctant to lend to each other for fear that the bank to which
they lent might not be able to repay. The credit market froze up. Unable to borrow, and with
assets if uncertain value, many banks found them in trouble. The bankruptcy of Lehman Brothers
put other banks at risk of going bankrupt as well. The whole financial system was in trouble.
Diff: 2
3) Explain how the financial crisis turned into a major economic crisis.
Answer: Hit by the decrease in housing prices and the collapse in stock prices, and worried that
this might be the beginning of another Great Depression, people sharply cut back consumption.
Worried about sales and uncertain about the future, firms sharply cut back investment..
Decreases in consumption and investment led to decrease in demand, which in turn, led to
decrease in output.
Diff: 2
4) Explain why the U.S. crisis became a world crisis.
Answer: Other countries were affected through two channels. The first channel was trade. As
U.S. consumers and firms cut spending, part of the decrease fell on imports of foreign goods.
The second channel was financial. U.S. banks, badly needing funds in the United States,
repatriated from other countries, creating problems for banks in those countries. The result was
not just a U.S., but a world recession.
Diff: 2
,5) What problems remain in advanced countries after the crisis?
Answer: Both in the United States and the Euro area, unemployment remains very high. What is
behind this persistently high unemployment is low output growth, and behind this low growth
are many factors like declining housing prices and low housing investment. Banks are still not in
good shape, and bank lending is still tight. Consumers are cutting consumption. And the crisis
has led to a large increase in budget deficits, which have in turn led to a large increase in public
debt over time. Countries must now reduce their deficits, and this is proving difficult. In some
European countries, governments may not be able to adjust and may default on their debt.
Diff: 2
1.2 The United States
1) In 2014, output per capita in the United States was approximately equal to
A) $15,500.
B) $25,800.
C) $43,800.
D) $54,592.
Answer: D
Diff: 2
2) The standard of living typically refers to
A) the rate of unemployment.
B) output per capita.
C) wealth per capita.
D) all of the above
Answer: B
Diff: 1
3) In 2014 , the U.S. GDP accounts for ________ of world output.
A) 20%
B) 23%
C) 45%
D) 50%
Answer: B
Diff: 1
4) In 2015, the unemployment in the U.S. was
A) 5%.
B) 11%.
C) 5.4%.
D) 4.6%.
Answer: C
Diff: 2
,5) Inflation represents
A) an increase in output.
B) an increase in the aggregate price level.
C) an increase in the unemployment rate.
D) a recession.
Answer: B
Diff: 1
1.3 The Euro area
1) Economists have suggested that the relatively higher unemployment in Europe has been
caused by which of the following?
A) relatively high unemployment benefits
B) relatively high level of worker protection
C) inadequate macroeconomic policies
D) increased labor costs
E) all of the above
Answer: E
Diff: 2
2) Which of the following countries had the lowest level of output per capita in 2014?
A) Spain
B) France
C) Italy
D) German
Answer: A
Diff: 2
3) At what point could the Euro be used as currency?
A) January 1, 1998
B) January 1, 1999
C) January 1, 2000
D) January 1, 2002
Answer: D
Diff: 2
4) How many countries are in the European Union?
A) 28
B) 6
C) 21
D) 17
Answer: A
Diff: 2
, 5) How many countries are in the Euro area?
A) 19
B) 27
C) 21
D) 11
Answer: A
Diff: 2
6) Most economists believe that the source of European high unemployment in the past two
decades is
A) labor market institutions.
B) tight monetary policy.
C) tight fiscal policy.
D) financial crisis.
Answer: A
Diff: 2
7) Discuss the types of policies that could be implemented to reduce European unemployment.
Answer: There are basically two sets of policies. First, policy makers could reduce labor market
rigidities that some economists believe have contributed to the high unemployment. Some
examples of labor market rigidities are high unemployment benefits, high minimum wages, and
excessive job protection regulations. The second set of policies includes bad labor relations and
inadequate macroeconomic policies.
Diff: 2
8) Discuss what is meant by labor market rigidities and explain how they might cause the
relatively high unemployment in Europe.
Answer: Examples of labor market rigidities are: relatively high minimum wage, relatively high
unemployment benefits, and relatively high level of worker protection. All three of these are
hypothesized to cause a reduction in employment and, therefore, an increase in the
unemployment rate.
Diff: 2
9) Discuss some of the potential benefits and costs of the adoption of the Euro.
Answer: One of the benefits of the Euro is largely symbolic. Countries that have in the past
century been in wars against each other are now using the same currency. There are economic
benefits as well. The use of the same currency will eliminate the need to convert currencies
when, for example, buying foreign goods from a country that has also adopted the Euro. One of
the possible costs of the Euro is that it will force countries to pursue the same monetary policy.
No longer will policy makers in these countries pursue independent monetary policy.
Diff: 2
Chapter 1: A Tour of the World
1.1 The Crisis
1) The most recent financial crisis started in
A) stock market.
B) bond market.
C) foreign exchange market.
D) housing market.
Answer: D
Diff: 2g
2) Briefly explain why the decline in housing prices led to a major financial crisis.
Answer: Many of the mortgage loans that had been given out during earlier expansion were of
poor quality. Many of the borrowers had taken too large a loan and were increasingly unable to
make mortgage payments. mortgage backed securities were so complex that their value was
nearly impossible to assess. Not knowing the quality of the assets that other banks had on their
balance sheet, banks became very reluctant to lend to each other for fear that the bank to which
they lent might not be able to repay. The credit market froze up. Unable to borrow, and with
assets if uncertain value, many banks found them in trouble. The bankruptcy of Lehman Brothers
put other banks at risk of going bankrupt as well. The whole financial system was in trouble.
Diff: 2
3) Explain how the financial crisis turned into a major economic crisis.
Answer: Hit by the decrease in housing prices and the collapse in stock prices, and worried that
this might be the beginning of another Great Depression, people sharply cut back consumption.
Worried about sales and uncertain about the future, firms sharply cut back investment..
Decreases in consumption and investment led to decrease in demand, which in turn, led to
decrease in output.
Diff: 2
4) Explain why the U.S. crisis became a world crisis.
Answer: Other countries were affected through two channels. The first channel was trade. As
U.S. consumers and firms cut spending, part of the decrease fell on imports of foreign goods.
The second channel was financial. U.S. banks, badly needing funds in the United States,
repatriated from other countries, creating problems for banks in those countries. The result was
not just a U.S., but a world recession.
Diff: 2
,5) What problems remain in advanced countries after the crisis?
Answer: Both in the United States and the Euro area, unemployment remains very high. What is
behind this persistently high unemployment is low output growth, and behind this low growth
are many factors like declining housing prices and low housing investment. Banks are still not in
good shape, and bank lending is still tight. Consumers are cutting consumption. And the crisis
has led to a large increase in budget deficits, which have in turn led to a large increase in public
debt over time. Countries must now reduce their deficits, and this is proving difficult. In some
European countries, governments may not be able to adjust and may default on their debt.
Diff: 2
1.2 The United States
1) In 2014, output per capita in the United States was approximately equal to
A) $15,500.
B) $25,800.
C) $43,800.
D) $54,592.
Answer: D
Diff: 2
2) The standard of living typically refers to
A) the rate of unemployment.
B) output per capita.
C) wealth per capita.
D) all of the above
Answer: B
Diff: 1
3) In 2014 , the U.S. GDP accounts for ________ of world output.
A) 20%
B) 23%
C) 45%
D) 50%
Answer: B
Diff: 1
4) In 2015, the unemployment in the U.S. was
A) 5%.
B) 11%.
C) 5.4%.
D) 4.6%.
Answer: C
Diff: 2
,5) Inflation represents
A) an increase in output.
B) an increase in the aggregate price level.
C) an increase in the unemployment rate.
D) a recession.
Answer: B
Diff: 1
1.3 The Euro area
1) Economists have suggested that the relatively higher unemployment in Europe has been
caused by which of the following?
A) relatively high unemployment benefits
B) relatively high level of worker protection
C) inadequate macroeconomic policies
D) increased labor costs
E) all of the above
Answer: E
Diff: 2
2) Which of the following countries had the lowest level of output per capita in 2014?
A) Spain
B) France
C) Italy
D) German
Answer: A
Diff: 2
3) At what point could the Euro be used as currency?
A) January 1, 1998
B) January 1, 1999
C) January 1, 2000
D) January 1, 2002
Answer: D
Diff: 2
4) How many countries are in the European Union?
A) 28
B) 6
C) 21
D) 17
Answer: A
Diff: 2
, 5) How many countries are in the Euro area?
A) 19
B) 27
C) 21
D) 11
Answer: A
Diff: 2
6) Most economists believe that the source of European high unemployment in the past two
decades is
A) labor market institutions.
B) tight monetary policy.
C) tight fiscal policy.
D) financial crisis.
Answer: A
Diff: 2
7) Discuss the types of policies that could be implemented to reduce European unemployment.
Answer: There are basically two sets of policies. First, policy makers could reduce labor market
rigidities that some economists believe have contributed to the high unemployment. Some
examples of labor market rigidities are high unemployment benefits, high minimum wages, and
excessive job protection regulations. The second set of policies includes bad labor relations and
inadequate macroeconomic policies.
Diff: 2
8) Discuss what is meant by labor market rigidities and explain how they might cause the
relatively high unemployment in Europe.
Answer: Examples of labor market rigidities are: relatively high minimum wage, relatively high
unemployment benefits, and relatively high level of worker protection. All three of these are
hypothesized to cause a reduction in employment and, therefore, an increase in the
unemployment rate.
Diff: 2
9) Discuss some of the potential benefits and costs of the adoption of the Euro.
Answer: One of the benefits of the Euro is largely symbolic. Countries that have in the past
century been in wars against each other are now using the same currency. There are economic
benefits as well. The use of the same currency will eliminate the need to convert currencies
when, for example, buying foreign goods from a country that has also adopted the Euro. One of
the possible costs of the Euro is that it will force countries to pursue the same monetary policy.
No longer will policy makers in these countries pursue independent monetary policy.
Diff: 2
