Question 1

When expansionary monetary policy pushes interest rates to artificially low levels,
A) the demand for and prices of interest-sensitive goods, like housing, will increase.
B) people will delay their purchases of interest-sensitive goods, like housing, into the future.
C) the demand for interest-sensitive goods, like housing, will increase, but their prices will decline.
D) the demand for and prices of interest-sensitive goods, like housing, will decline.

Accepted Answer

When interest rates are artificially low due to expansionary monetary policy, people are more likely to take out loans to purchase big ticket items like homes. This increase in demand for housing drives up prices. Therefore, the demand for and prices of interest-sensitive goods, like housing, will increase.

Question 2

The substantial increase in household debt relative to income since the mid 1980s meant that in 2008 many households
A) had little savings or other reserve assets for use to deal with unexpected expenditures.
B) could safely afford to purchase larger homes because housing is always a good investment.
C) could spend everything they earned because their interest obligations on outstanding credit were low.
D) would be able to easily adjust their current spending if their monthly payments on adjustable rate mortgages rose.

Accepted Answer

The increase in household debt relative to income meant that households had less money available for savings or reserve assets to use in case of unexpected expenses. This can put them at financial risk if they suddenly face job loss, illness, or other emergencies.

Question 3

Which of the following was a result of the many programs introduced as part of the New Deal?
A) a business environment of uncertainty that reduced output and investment
B) a speeding up of the economic recovery process once these programs were enacted
C) an increase in trade, investment, and output within the business sector
D) a steady decline in the unemployment rate

Accepted Answer

The answer of Which of the following was a result...

Question 4

The secondary mortgage market is the market
A) designated specifically for prime and other low risk mortgages.
B) designated specifically for sub-prime and other high risk mortgages.
C) where mortgages originated by a lender are sold to another financial institution.
D) where home purchasers borrow funds from mortgage originators.

Accepted Answer

The secondary mortgage market is where the mortgages originated by a lender are sold to another financial institution. It is not specific to any type of mortgage (prime, sub-prime) or to home buyers borrowing funds.

Question 5

"The Great Depression was caused by the 1929 stock market crash." Which of the following is an indication that this statement is false?
A) The stock market had regained most of its losses from the October 1929 crash by April 1930.
B) The recessionary conditions actually began in the mid-1920s before the stock market crash.
C) The Great Depression was a result of government failure to intervene in market activity.
D) Economic theory indicates that a reduction in stock prices would reduce the consumer price index and thereby stimulate output and employment.

Accepted Answer

The answer of "The Great Depression was caused by the...

Question 6

Are new regulations likely to prevent a future financial crisis?
A) Yes, regulatory agencies have been effective at anticipating the secondary effects of new regulations.
B) Yes, industries that were highly regulated were unaffected by the Crisis of 2008.
C) No, regulators have a poor record with regard to foreseeing future problems.
D) No, current regulations could have prevented the Crisis of 2008, but were largely ignored.

Accepted Answer

Regulatory agencies have historically struggled to foresee future problems and effectively prevent financial crises. The Crisis of 2008 showed that even well-regulated industries can be affected by broader economic issues, and current regulations may not be enough to prevent future crises.

Question 7

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?
A) The bonus structures of most executives were tied to short-term profitability.
B) The rating agencies acted independently in assigning ratings to mortgage-backed securities and had no incentive to understate the risks.
C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings.
D) Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.

Accepted Answer

The bonus structures of most executives were tied to short-term profitability, which encouraged them to take on risky investments and prioritize short-term gains over long-term stability. This led to excessive risk-taking and ultimately contributed to the collapse of investment banks such as Lehman Brothers.

Question 8

Most economists believe the severity and duration of the Great Depression was primarily the result of
A) the large budget deficits of the federal government.
B) the reduction in tariffs and the influx of foreign imports during the early 1930s.
C) the excessive use of credit cards.
D) a sharp contraction in the money supply.

Accepted Answer

Most economists believe that a sharp contraction in the money supply, largely due to the failure of banks, was the primary cause of the severity and duration of the Great Depression. This led to a decrease in spending and investment, which amplified the economic downturn.

Question 9

The primary objective of the monetary policy of the Fed should be
A) low rates of unemployment.
B) the growth rate of real GDP.
C) the achievement of price stability.
D) the regulation of financial institutions.

Accepted Answer

The primary objective of the monetary policy of the Fed is the achievement of price stability, which means keeping inflation under control. This is because high and volatile inflation can harm the economy by reducing confidence, creating uncertainty, and increasing transaction costs. While low rates of unemployment and the growth rate of real GDP are important goals, they are secondary to price stability which is the foundation for long-term economic growth. The regulation of financial institutions is also important, but it is not the primary objective of the monetary policy of the Fed.

Question 10

Which of the following accurately describes the relationship between mortgage default rates and the 2008 recession?
A) The recession of 2008 triggered the initial increase in the mortgage default rate.
B) The rise in the mortgage default rate preceded the recession and it was a major cause of the 2008 economic downturn.
C) Both the increase in the mortgage default rate and the economic recession were the result of the stock market crash of 2008.
D) The rise in the mortgage default rate and the economic recession were separate issues and there was no relationship between the two.

Accepted Answer

The rise in mortgage default rates preceded the 2008 recession and was a major cause of the economic decline. As more homeowners defaulted on their mortgages, the housing market crashed, leading to a ripple effect throughout the economy. This was exacerbated by other factors such as the financial crisis and a decline in consumer spending.

Question 11

Compared to the 1970s and early 1980s, household debt as a share of income in 2007 has
A) increased at a steady rate over time.
B) remained about the same.
C) more than doubled.
D) decreased slowly over time.

Accepted Answer

According to the graph in the text, household debt as a share of income has increased from roughly 50% in the 1970s to over 120% in 2007, more than doubling over that time period.

Question 12

Which of the following resulted from the Smoot-Hawley trade bill of 1930?
A) The stock market began a steady recovery from the crash of October 1929.
B) Many countries responded by imposing higher tariffs on American products, and the volume of international trade fell sharply.
C) Imports decreased, while exports increased, resulting in an overall increase in GDP and tariff revenues.
D) The unemployment rate, which had been rising, began to steadily decline as jobs were protected by the trade restrictions.

Accepted Answer

The Smoot-Hawley trade bill of 1930 raised tariffs on over 20,000 imported goods, leading many other countries to retaliate with their own tariffs on American goods. This resulted in a significant decrease in international trade and ultimately worsened the Great Depression.

Question 13

Which of the following contributed to the soaring housing prices during 2002-2005?
A) the Fed's low-interest rate policy
B) regulations that reduced the required down payment and other lending standards for home mortgages
C) the increased leverage lending by Fannie Mae, Freddie Mac, and large investment banks
D) all of the above

Accepted Answer

All three factors contributed to the soaring housing prices during 2002-2005. The Fed's low-interest rate policy made borrowing cheaper and encouraged people to take out mortgages, regulations reduced the required down payment and other lending standards, making it easier for people to qualify for mortgages, and increased leverage lending by Fannie Mae, Freddie Mac, and large investment banks increased the amount of capital available for mortgage lending, further fueling the housing market.

Question 14

Based on the experience of the Great Depression and the New Deal, which one of the following strategies would be most likely to stimulate recovery from a serious economic recession?
A) increase trade restrictions and tariffs to save jobs and enhance tax revenue
B) a reduction in the money supply in order to strengthen the dollar and combat inflation
C) keep taxes low in order to stimulate production and minimize the decline in personal and business income
D) institute frequent policy changes in order to search for and find the policy combination that would be most effective

Accepted Answer

Keeping taxes low can stimulate production and boost income for both individuals and businesses, leading to economic growth. This approach was successfully used in the Reagan administration and has been favored by many conservative economists. Trade restrictions and tariffs could lead to a decrease in international trade and harm overall economic growth. A reduction in the money supply could lead to deflation and decrease consumer spending, further harming the economy. Instituting frequent policy changes could create uncertainty and be detrimental to businesses and consumers.

Question 15

When interest payments on home mortgages and home equity loans are tax deductible,
A) households will keep other forms of debt separate from their home mortgage.
B) households will shift other forms of debt to their home mortgage.
C) households are likely to increase the amount of equity in their home.
D) the overall amount of household debt is likely to decrease in relation to household income.

Accepted Answer

When interest payments on home mortgages and home equity loans are tax deductible, households are likely to shift other forms of debt to their home mortgage in order to take advantage of the tax deduction. This can lead to an increase in the overall amount of household debt.

Question 16

The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to
A) reduce their exposure to risk in the event that the overall mortgage default rate rose.
B) reduce the amount of capital required to back these bundled securities.
C) build up large reserves so they would be able to meet their obligations even if the mortgage default rate rose substantially.
D) quickly access funds to meet short-term debt obligations.

Accepted Answer

The answer of The bundling of mortgages together and the...

Question 17

Which of the following resulted from Fed policy that first kept short-term interest rates extremely low during 2002-2004, and then pushed them up substantially during 2005-2006?
A) a reduction in housing prices because variable rate mortgages were unattractive throughout this period
B) upward pressure on housing prices when the interest rates were low, but downward pressure on the price of housing as the interest rates rose
C) lower default rates on adjustable rate mortgages as the interest rates peaked during 2006
D) downward pressure on housing prices when the interest rates were low, but upward pressure on the price of housing as the interest rates rose

Accepted Answer

The answer of Which of the following resulted from Fed...

Question 18

In the latter half of the 1990s, the Department of Housing and Urban Development imposed regulations on Fannie Mae and Freddie Mac, requiring them to
A) extend more mortgage loans to households with low and moderate incomes.
B) accept only mortgages with at least a 20 percent down payment.
C) tighten lending standards and increase their holdings of low-risk, conventional mortgages.
D) extend more mortgage loans to households with middle and high incomes.

Accepted Answer

The Department of Housing and Urban Development imposed regulations on Fannie Mae and Freddie Mac in the latter half of the 1990s, requiring them to extend more mortgage loans to households with low and moderate incomes. These regulations were part of an effort to increase homeownership rates among underserved populations.

Question 19

When housing prices fell during 2007, the mortgage default rate
A) declined as well.
B) responded in a similar manner as during other recent recessions.
C) increased substantially.
D) changed very little.

Accepted Answer

When housing prices fell during 2007, the mortgage default rate increased substantially. This was due to many borrowers owing more on their homes than they were worth, making it more difficult to sell or refinance the property to avoid defaulting on the mortgage. Additionally, many borrowers had taken out adjustable-rate mortgages with low initial interest rates that later reset to higher rates, making it harder for them to make their mortgage payments.

Question 20

Which of the following makes it difficult for monetary policy-makers to institute policy changes in a manner that will promote economic stability?
A) Monetary policy-makers do not have sufficient tools to alter the supply of money.
B) The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.
C) Monetary policy is unable to alter short-term interest rates.
D) Even though monetary policy can alter interest rates, there is little evidence that interest rates influence the demand for and prices of housing.

Accepted Answer

The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable, making it difficult for monetary policy-makers to institute policy changes in a manner that will promote economic stability. Choices A, C, and D are inaccurate. Monetary policy-makers do have sufficient tools to alter the supply of money, monetary policy is able to alter short-term interest rates, and there is evidence that interest rates influence the demand for and prices of housing.

Quiz 16: Applying the Basics: Special Topics in Economics

When expansionary monetary policy pushes interest rates to artificially low levels,

The substantial increase in household debt relative to income since the mid 1980s meant that in 2008 many households

Which of the following was a result of the many programs introduced as part of the New Deal?

The secondary mortgage market is the market

"The Great Depression was caused by the 1929 stock market crash." Which of the following is an indication that this statement is false?

Are new regulations likely to prevent a future financial crisis?

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Most economists believe the severity and duration of the Great Depression was primarily the result of

The primary objective of the monetary policy of the Fed should be

Which of the following accurately describes the relationship between mortgage default rates and the 2008 recession?

Compared to the 1970s and early 1980s, household debt as a share of income in 2007 has

Which of the following resulted from the Smoot-Hawley trade bill of 1930?

Which of the following contributed to the soaring housing prices during 2002-2005?

Based on the experience of the Great Depression and the New Deal, which one of the following strategies would be most likely to stimulate recovery from a serious economic recession?

When interest payments on home mortgages and home equity loans are tax deductible,

The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to

Which of the following resulted from Fed policy that first kept short-term interest rates extremely low during 2002-2004, and then pushed them up substantially during 2005-2006?

In the latter half of the 1990s, the Department of Housing and Urban Development imposed regulations on Fannie Mae and Freddie Mac, requiring them to

When housing prices fell during 2007, the mortgage default rate

Which of the following makes it difficult for monetary policy-makers to institute policy changes in a manner that will promote economic stability?