Question 1

A borrower defaults on a loan when he stops making payments on the loan.

Accepted Answer

When a borrower stops making payments on a loan, it is considered a default.

Question 2

By the 2000s,an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages.

Accepted Answer

Investment banks became significant participants in the secondary market for mortgages in the 2000s, contributing to the rise of mortgage-backed securities and the expansion of subprime lending.

Question 3

The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008.What event led the Fed to make these reductions in the federal funds rate?

Accepted Answer

During this period there was a substantial reduction in the demand for housing, which led to a decline in housing prices and an increase in foreclosures. This caused turmoil in financial markets and led to a significant slowdown in the economy, prompting the Fed to lower interest rates in order to stimulate economic growth.

Question 4

A financial asset is considered a security if

Accepted Answer

A security is a financial asset that is tradable and can be bought or sold in a secondary market. The fact that it can be sold in a secondary market is what distinguishes it from other financial assets like bank deposits or loans. A and C are not exclusive to securities and depend on the performance of the underlying asset. D is not a characteristic of any financial asset as all assets carry some degree of risk.

Question 5

In October 2008,Congress passed the ________,under which the Treasury provided funds to banks in exchange for stock.

Accepted Answer

The Troubled Asset Relief Program (TARP) was passed by Congress in October 2008, which allowed the Treasury to provide funds to banks in exchange for stock. The other choices listed are not actual programs or agreements related to this topic.

Question 6

Although the Federal Reserve had traditionally made discount loans only to commercial banks,in response to to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.

Accepted Answer

In response to the financial crisis in 2008, the Federal Reserve expanded its eligibility for discount loans to include not only commercial banks but also primary dealers. The primary dealers are a group of 24 financial institutions authorized to trade directly with the Fed as counterparties in open market operations. This move was intended to provide liquidity to the financial system and stabilize the markets during the crisis. The other choices (Treasury Department, mortgage brokers, savings banks) were not made eligible for discount loans during the crisis.

Question 7

While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008,others were critical of these actions.The critics were concerned that by not allowing large firms to fail,

Accepted Answer

Critics argued that rescuing large firms sets a precedent, encouraging other firms to take on excessive risk with the expectation of government bailouts, a concept known as "moral hazard."

Question 8

When housing prices fell as they did beginning in 2006 following the housing market bubble,most banks and other lenders ________ the requirement for borrowers,making it ________ for potential home buyers to obtain mortgages.

Accepted Answer

When housing prices fell, banks and other lenders tightened their requirements for borrowers, making it harder for potential home buyers to obtain mortgages.

Question 9

Which of the following explains why mortgages weren't considered securities prior to 1970?

Accepted Answer

Prior to 1970, mortgages were rarely resold in the secondary market, which is a key feature of securities. As a result, they were not considered as securities before 1970.

Question 10

When housing prices fall,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements ________ as many households found it ________ to borrow against the value of their homes.

Accepted Answer

When housing prices fall, it becomes harder for households to borrow against the value of their homes, as the equity in their homes decreases. Therefore, consumption spending on furniture, appliances, and home improvements would decline.

Question 11

In September 2011,the Fed announced a new policy in which it would invest in additional mortgage-backed securities in an attempt to further reduce mortgage rates and boost the housing market.Lower mortgage rates should lead to an increase in refinancing,which should ________ disposable income and therefore ________ aggregate demand.

Accepted Answer

Lower mortgage rates would lead to more people refinancing their mortgages, resulting in lower monthly payments and an increase in disposable income. This would lead to an increase in consumer spending, driving up aggregate demand. Therefore, option A is the correct answer.

Question 12

In the Taylor rule,does the target for the federal funds rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Accepted Answer

The answer of In the Taylor rule,does the target for...

Question 13

If the amount you owe on your house is greater than the price of the house,you have

Accepted Answer

When the amount you owe on your house is greater than the price of the house, it means you have negative equity. This situation can arise due to a decline in the value of the property, taking out a large loan, or heavy borrowing against the property. It can be a dangerous financial situation as it means that if you sell the house, you will owe more than the sale price. Therefore, it is essential to manage your debts and liabilities prudently and ensure that you are not over-leveraged.

Question 14

Firms that participate in regular open market transactions with the Federal Reserve are called

Accepted Answer

Firms that participate in regular open market transactions with the Federal Reserve are called primary dealers. These are typically large financial institutions such as banks and securities dealers that have a close relationship with the Federal Reserve and are authorized to deal directly with the Federal Reserve Bank of New York in buying and selling securities in open market operations.

Question 15

By the height of the housing bubble in 2005 and early 2006,lenders had greatly loosened the standards for obtaining a mortgage loan,with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

The terms "sub-prime" and "Alt-A" specifically refer to borrowers with flawed credit histories and those who do not document their incomes, respectively. The other answer choices are not relevant to the situation described in the sentence.

Question 16

The Federal Reserve responded to the 2008 financial crisis in several ways.Which of the following is not one of the ways the Fed responded?

Accepted Answer

The Fed actually raised the required reserve ratio during the financial crisis in order to prevent banks from overextending themselves with risky loans. The other options listed are accurate responses by the Fed to the crisis.

Question 17

According to the Taylor rule,does the target for the federal funds rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Accepted Answer

The answer of According to the Taylor rule,does the target...

Question 18

In 2008,the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing.Which of the following is one reason why these measures were taken?

Accepted Answer

The bankruptcy of a large financial firm would have had a ripple effect on the financial system, potentially causing other firms to also fail if they held the same securities as the bankrupt firm. This would have led to a domino effect of failures, ultimately harming the overall economy. The government stepped in to prevent this outcome by providing financial assistance to these firms. The Emergency Economic Stabilization Act did provide authority for the government to take such actions, but it was not the sole reason why these measures were taken. The government did not want Freddie Mac and Fannie Mae to buy these firms, they wanted to prevent them from failing. The failure of these firms would have affected the overall economy, but it would not have forced the Fed to increase interest rates.

Question 19

The larger the fraction of an investment financed by borrowing,

Accepted Answer

Financing a larger portion of an investment with borrowing (leverage) amplifies both potential returns and potential losses because the investor is using borrowed funds to increase the size of the investment, which magnifies outcomes in both directions.

Question 20

To reassure investors who were unwilling to buy mortgages in the secondary market,the U.S.Congress used two government sponsored enterprises,Fannie Mae and Freddie Mac,to stand between investors and banks that grant mortgages.Fannie Mae and Freddie Mac

Accepted Answer

Fannie Mae and Freddie Mac sell bonds to investors and use the funds to purchase mortgages from banks. This helps to reassure investors by providing a government-backed intermediary between them and mortgage lenders.

Quiz 15: Monetary Policy