P1.T1.703. Policy responses and real effects of global financial crisis (Gorton)

Discussion in 'Today's Daily Questions' started by Nicole Seaman, Jan 11, 2017.

  1. Nicole Seaman

    Nicole Seaman Administrator

    Learning objectives: Describe the historical background leading to the recent financial crisis. Distinguish between the two main panic periods of the financial crisis and describe the state of the markets during each. Assess the governmental policy responses to the financial crisis and review their short-term impact. Describe the global effects of the financial crisis on firms and the real economy.


    703.1. Gorton says, "The recent crisis is often described as being the worst global crisis since the Great Depression, and the evidence supports this label." The financial crisis included two main panic periods: August 2007 and September‐October 2008. Gorton's literature review compares the crisis to the long history of previous and numerous financial crises. This comparison produced two interesting features: on the one hand, the authors found a crucial SIMILARITY to historical predicates but, on the other hand, they found a novel DIFFERENCE from previous crises. Which of the following best summarizes, respectively, the feature common (aka, similarity) to previous crises and the novel difference observed in the recent crisis?

    a. Dependence on fiat money (similarity or feature in common) and Innovation in financial instruments (the novel difference)
    b. Growth in notional derivatives outstanding (similarity) and Acceleration in leverage (the novel difference)
    c. Central banking support and intervention (similarity) and Erosion of lending standards (the novel difference)
    d. Acceleration in leverage prior to the crisis (similarity) and Shadow banking system as the location of bank runs (the novel difference)

    703.2. The IMF analyzed the policy responses to the financial crisis, which were grouped according to the following:


    Which best summarizes Gorton's conclusion about the efficacy of these policy responses?

    a. None of the policies was found to be effective in the short-run, at least in terms of statistical significance
    b. In all three stages (ie, pre- and post-Lehman) interest rate reductions and liability guarantees were highly effective
    c. In the early stages, liquidity support was effective; but after the fall of Lehman, recapitalizations were the most effective policy
    d. In the early stages, interest rate reductions were effective; but after the fall of Lehman, liquidity support was the most effective policy

    703.3. Gorton wrote, "For some economists, the financial crisis only becomes interesting if it has effects for the real economy." Among each of the following factually true statements, which provides the BEST EVIDENCE of a direct channel (transmission) from financial shocks during the global financial crisis to adverse impacts on the real economy?

    a. Corporate acquisitions funded by investment banks declined during the recession
    b. Syndicated lending started to fall in mid‐2007 and the fall accelerated during the banking panic that began in September 2008
    c. There was an overall decrease in demand for consumer loans, as measured by applications to both affected and unaffected savings banks
    d. Commercial and industrial loans reported by the U.S. regulated banking sector rose by about $100 billion from September to mid‐October 2008

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