Below is a sample practice essay question. (15 points)
The Global Financial crisis, which had its roots in the 2007 meltdown in the U.S. mortgage market,
hurt economies around the globe and weakened private consumption, firm investment and interna-
tional trade. Central banks around the world responded by cutting interest rates aggressively as the
crisis unfolded. Yet, as interest rates were driven to their lower bound, central banks encountered
a policy challenge related to the limitation on the extent to which conventional monetary policy
can be expansionary. Write a short essay to explain the consequences of the Global Financial crisis
and the role of macroeconomic policy in responding to it. In writing your answer, make sure to
address the following points:
i. Discuss the macroeconomic effects of the Global Financial Crisis. How did the crisis affect
the demand side of the economy?
ii. Evaluate the policy action of central banks to manage the demand shocks during the Global
Financial crisis.
iii. Discuss the policy options that governments and central banks have at their disposal when
they cannot pursue conventional monetary policy at the zero lower bound.
