Financial Crisis & Agregate Demand-Supply Quiz

What usually triggers a financial crisis in credit markets?

• Increased consumer confidence

• Sharp drop in inflation

• Sudden loss of trust in financial institutions

• Rise in minimum wage

• Stable interest rates

Why can excessive risk-taking by banks lead to systemic crisis?

• It increases market transparency

• It boosts investor confidence

• It exposes the entire system to potential collapse

• It ensures higher returns

• It limits financial innovation

What is a “liquidity trap” in a financial crisis?

• Inflation rises

• Interest rates become negative

• People hoard cash and avoid spending/investing

• Money supply doubles

• Banks increase lending

How can a housing bubble contribute to a financial crisis?

• Increases GDP

• Reduces consumer debt

• Inflated prices eventually crash, triggering widespread defaults

• Increases tax revenue

• Boosts employment permanently

What policy helps contain financial crises?

• Decreasing transparency

• Ignoring systemic banks

• Strengthening regulation and oversight

• Freeing all interest rates

• Deregulation

During which phase of the business cycle is unemployment typically highest?

• Expansion

• Peak

• Recession

• Recovery

• Boom

What happens during the expansion phase of the business cycle?

• Output falls

• Prices deflate

• GDP rises and unemployment drops

• Business investment declines

• Consumption slows

What triggers the transition from expansion to recession?

• Rising consumer spending

• Peak interest in investment

• Decline in consumer and business confidence

• Wage growth

• Inflation control

Which of the following best reflects the cyclical nature of economic output?

• Stable prices

• Linear GDP growth

• Periodic rises and falls in GDP

• Constant inflation

• Increasing debt

What kind of policy is most useful during a downturn?

• Tight monetary policy

• Budget surplus

• Expansionary fiscal stimulus

• Increasing interest rates

• Currency devaluation