Question

Recent financial crises have resulted from

a. Sharp declines in asset prices

b. Affected financial institutions having a mismatch between the maturity of their liabilities and the maturity of their assets

c. Uncertainty about the financial condition and liquidity of important financial institutions

Because of the financial crisis

		a. Aggregate demand plunged
		b. The level of the federal funds rate required to restore output to potential and to stabilize inflation was negative
		c. The Fed augmented a federal funds rate of zero with forward guidance and large-scale asset purchases
		d. All of the above

Answer 1

Recent financial crisis resulted from,

c. Uncertainty about the financial condition and liquidity of important financial institutions

Reason: Before financial crisis financial institutions were granting loans to high risk borrowers freely but due to increase in interest compared to increase in income many borrowers failed to repay their loans and this resulted in bankruptcy of many financial institutions which ultimately lead to financial crisis.

Answer 2

Because of financial crisis

d All of the above

Reason: Due to financial crisis aggregate demand of product decreased and to stabilize economy fed decided to cut interest rate to zero with increase in asset buying program.