Question

Which of the following two episodes in U.S. economic history were associated with a financial panic (choose two of the answers below)

		the Great Recession
		the recession of 1980-82
		the recession in the mid-1970s
		the Great Depression

Which of the following recessions was created by a supply shock that caused BOTH inflation and unemployment to increase

		the Great Recession
		the Great Depression
		the recession during the mid-1970s
		the recession of 1980-82

When a recession is caused by a negative aggregate demand shock, we would expect inflation to __________ and unemployment to ______________.

		rise, fall
		fall, rise
		rise, rise
		fall, fall

During the Great Recession, which of the following was the term used for the unconventional action by the Federal Reserve to lower long-term interest rates directly

		open market operations
		quantitative easing
		lending in the commercial paper market
		lending to Fannie Mae and Freddie Mac

Answer 1

Ans 1. Great recession (2007-08) and great depression (1928-30) were associated with the financial panic as in former the collateralized debt obligations or mortgage backed securities’ crashed due to housing bubble burst and in the latter stock market crashed like never before.

Ans 2. The recession in the mid 1970s was caused because of supply shock energy crisis hit the US economy. Due to which shortages of petroleum caused spike in inflation and then a recession. Petroleum shortages were caused because the extraction of oil in US topped out in early 1970s.

Ans 3. A negative demand shock caused AD curve to shift to left and because aggregate supply is unchanged it puts a downward pressure on prices and hence, decrease in inflation but because of this output also falls below potential level causing unemployment to increase from natural rate of unemployment.

Ans 4. During Great Recession, the Fed used quantitative easing was used to decrease long term interest rates. It is basically aims to decrease the borrowing rates in the economy to stimulate the private investment and consumption, it does this by the buying securities from the open markets and hence increasing money supply.

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