Module M12 Quiz: Financial Crises
25 questions · Introductory · Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.
Question 1
Lesson L01 · Monetary Policy
What type of crisis involves bank insolvency or runs from large loan losses?
Type: Multiple Choice
- A) Currency crisis
- B) Banking crisis
- C) Sovereign debt crisis
- D) Asset price bubble
Show Answer
Answer: B) Banking crisis
Banking crises feature bank insolvency and runs as depositors withdraw simultaneously.
Question 2
Lesson L01 · Monetary Policy
A bank has $500m assets and $450m deposits. Assets fall 12%. Calculate new equity.
Type: Calculation
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Answer: -$10m
New equity = (500×0.88) - 450 = 440 - 450 = -$10m (insolvent)
Question 3
Lesson L01 · Monetary Policy
Why are bank runs self-fulfilling even if a bank is fundamentally solvent?
Type: Short Answer
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Answer: Fractional reserve banking means banks cannot repay all depositors simultaneously — fear of a run causes actual insolvency.
All depositors withdrawing at once forces distressed asset sales.
Question 4
Lesson L01 · Monetary Policy
Which mechanism allows a local financial shock to spread globally?
Type: Multiple Choice
- A) Contagion via interconnected balance sheets
- B) Fiscal policy transmission
- C) Inflation expectations
- D) Labour market hysteresis
Show Answer
Answer: A) Contagion via interconnected balance sheets
Contagion spreads losses through interbank exposures and confidence channels.
Question 5
Lesson L01 · Monetary Policy
With 20:1 leverage a bank needs a _% fall in asset values to become insolvent.
Type: Calculation
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Answer: 5%
Equity = 1/20 = 5% of assets; a 5% fall wipes equity to zero.
Question 6
Lesson L02 · Monetary Policy
The 2008 GFC originated in which market?
Type: Multiple Choice
- A) Australian residential mortgages
- B) US subprime mortgage-backed securities
- C) European sovereign bonds
- D) Chinese property
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Answer: B) US subprime mortgage-backed securities
US subprime MBS losses triggered the global financial cascade via Lehman's collapse.
Question 7
Lesson L02 · Monetary Policy
Lehman Brothers collapsed in September 2008. What made this the GFC's turning point?
Type: Short Answer
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Answer: Its collapse froze global interbank lending markets as counterparty risk became unquantifiable.
Uncertainty about who held toxic MBS assets paralysed lending.
Question 8
Lesson L02 · Monetary Policy
US house prices peaked in 2006 and fell ~33% by 2012. If a CDO was backed by $200m in mortgages worth $150m net of defaults, what was the loss rate?
Type: Calculation
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Answer: 25%
($200m - $150m) / $200m = 25% loss rate.
Question 9
Lesson L02 · Monetary Policy
What is 'contagion' in the context of the 2008 GFC?
Type: Multiple Choice
- A) Spreading of infectious disease among bankers
- B) Transmission of financial distress across institutions via balance sheet linkages
- C) Government fiscal deficits spreading internationally
- D) Currency depreciation spreading between countries
Show Answer
Answer: B) Transmission of financial distress across institutions via balance sheet linkages
Contagion occurs when losses at one institution impair others through direct and confidence channels.
Question 10
Lesson L02 · Monetary Policy
Which feature of mortgage-backed securities made the 2008 crisis so severe?
Type: Multiple Choice
- A) They were only held by US banks
- B) Their complexity made it impossible to value them once defaults rose
- C) They were backed by government guarantees
- D) They had no connection to housing prices
Show Answer
Answer: B) Their complexity made it impossible to value them once defaults rose
Opacity of MBS valuation caused 'unknown unknowns' that froze interbank lending globally.
Question 11
Lesson L03 · Monetary Policy
Australia avoided recession in the GFC. Which factor was LEAST important?
Type: Multiple Choice
- A) China's continued iron ore demand
- B) RBA cutting the cash rate
- C) Australia's fixed exchange rate
- D) Strong bank capital buffers
Show Answer
Answer: C) Australia's fixed exchange rate
Australia had a floating exchange rate — this is incorrect; the float helped (AUD depreciated). Actually Australia's banks were well-capitalised and APRA regulation was the key factor.
Question 12
Lesson L03 · Fiscal Policy
The Rudd government's 2008-09 stimulus was approximately $42bn. With a multiplier of 1.5 what was the estimated GDP boost?
Type: Calculation
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Answer: $63bn
$42bn × 1.5 = $63bn GDP support
Question 13
Lesson L03 · Monetary Policy
Why did Australian banks not hold large quantities of US subprime MBS?
Type: Short Answer
Show Answer
Answer: APRA's prudential standards limited bank exposure to complex structured products and required higher capital ratios.
Australian banks focused on domestic mortgage lending under tighter regulation.
Question 14
Lesson L03 · Monetary Policy
Which RBA action most directly supported Australian credit markets during the GFC?
Type: Multiple Choice
- A) Raising the cash rate
- B) Cutting the cash rate from 7.25% to 3.0% (2008-09)
- C) Introducing yield curve control
- D) Buying government bonds
Show Answer
Answer: B) Cutting the cash rate from 7.25% to 3.0% (2008-09)
The RBA cut aggressively — 425bp — to maintain credit conditions and support demand.
Question 15
Lesson L03 · Unemployment
Australia's unemployment rose from 4.1% (2008) to 5.9% (2009) during the GFC. Using Okun's Law (coefficient=2) estimate the output gap.
Type: Calculation
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Answer: -3.6%
-2 × (5.9 - 4.1) = -3.6% output gap
Question 16
Lesson L04 · Growth
COVID-19 was unique as a macro shock because:
Type: Multiple Choice
- A) It was purely a demand shock
- B) It was purely a supply shock
- C) It was simultaneously a supply shock (lockdowns) and demand shock (income loss)
- D) It only affected financial markets
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Answer: C) It was simultaneously a supply shock (lockdowns) and demand shock (income loss)
COVID combined supply disruption (closures) with demand collapse (income loss and uncertainty).
Question 17
Lesson L04 · Fiscal Policy
JobKeeper cost a final audited $89bn. With transfer multiplier b/(1-b+m) where b=0.8 m=0.1 calculate the GDP impact.
Type: Calculation
Show Answer
Answer: $237bn
Multiplier = 0.8/0.3 = 2.67; 89 × 2.67 = $237bn (theoretical upper bound)
Question 18
Lesson L04 · Monetary Policy
The RBA cut the cash rate to 0.10% in November 2020. What additional unconventional tool did it introduce?
Type: Multiple Choice
- A) Negative interest rates
- B) Quantitative easing and 3-year yield curve control (YCC) targeting 0.10%
- C) Lending directly to households
- D) Buying foreign exchange
Show Answer
Answer: B) Quantitative easing and 3-year yield curve control (YCC) targeting 0.10%
RBA introduced YCC (targeting 3-year AGS at 0.10%) and a bond purchase program alongside the rate cut.
Question 19
Lesson L04 · Fiscal Policy
Australia's GDP fell 7% in Q2 2020 but rebounded quickly. What primarily drove the rapid recovery?
Type: Short Answer
Show Answer
Answer: Massive fiscal stimulus (JobKeeper $89bn) maintained household incomes and employment connections during lockdowns.
Preserving firm-worker relationships prevented the hysteresis seen in previous recessions.
Question 20
Lesson L04 · Monetary Policy
YCC was abandoned in November 2021. What market development forced this?
Type: Multiple Choice
- A) Inflation fell below target
- B) Bond markets pushed 3-year yields above 0.10% as inflation expectations rose; defending the target became untenable
- C) The government ordered the RBA to end YCC
- D) Australia entered recession
Show Answer
Answer: B) Bond markets pushed 3-year yields above 0.10% as inflation expectations rose; defending the target became untenable
Rising inflation expectations drove bond yields higher; defending the 0.10% target required unlimited bond purchases.
Question 21
Lesson L05 · Inflation
What does the 'sacrifice ratio' measure?
Type: Multiple Choice
- A) The fiscal cost of a recession
- B) The percentage point rise in unemployment per percentage point reduction in inflation
- C) The output loss from a supply shock
- D) The depreciation of the exchange rate during a crisis
Show Answer
Answer: B) The percentage point rise in unemployment per percentage point reduction in inflation
The sacrifice ratio measures the cumulative output (or unemployment) cost of reducing inflation by 1pp.
Question 22
Lesson L05 · Monetary Policy
Which macroeconomic school emphasises expectations as the key transmission mechanism?
Type: Multiple Choice
- A) Keynesian economics
- B) Monetarism
- C) New Keynesian economics
- D) Classical economics
Show Answer
Answer: C) New Keynesian economics
New Keynesian models feature rational/adaptive expectations as central to policy effectiveness.
Question 23
Lesson L05 · Fiscal Policy
Australia's policy response to COVID cost ~$300bn. If nominal GDP was $2.0t what was stimulus as a share of GDP?
Type: Calculation
Show Answer
Answer: 15%
$300bn / $2,000bn = 15% of GDP
Question 24
Lesson L05 · Monetary Policy
What key lesson did the GFC teach about financial regulation?
Type: Short Answer
Show Answer
Answer: Micro-prudential regulation of individual banks is insufficient — macro-prudential oversight of systemic risk is also needed.
Systemic risk from interconnected institutions requires a whole-of-system approach.
Question 25
Lesson L05 · Monetary Policy
Which best describes the 'divine coincidence' in New Keynesian macro?
Type: Multiple Choice
- A) Monetary and fiscal policy always agree
- B) When inflation is at target output is also at potential — stabilising inflation stabilises output
- C) The RBA always achieves its targets
- D) Supply shocks never cause stagflation
Show Answer
Answer: B) When inflation is at target output is also at potential — stabilising inflation stabilises output
The divine coincidence means price stability and output stability coincide under demand shocks — not supply shocks.