Question 1

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 process is known as securitization, where mortgages are combined into a pool and transformed into a security that can be sold to investors. This provides liquidity to the mortgage market and encourages banks to issue more mortgages, as they can use the funds received from selling mortgages to Fannie Mae and Freddie Mac to issue more loans. Thus, this helps to reassure investors about the safety of investing in mortgages in the secondary market.

Question 2

The Fed has adopted an interest rate target for most of the time since World War II.

Accepted Answer

The Federal Reserve has generally followed an interest rate target since the end of World War II, with a few exceptions.

Question 3

Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.

Accepted Answer

The answer of Present two arguments as to why the...

Question 4

Inflation targeting has been adopted by the central banks of several countries including the European Central Bank.

Accepted Answer

Inflation targeting has indeed been adopted by several central banks including the European Central Bank.

Question 5

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

The substantial reduction in the demand for housing is what led the Fed to make these reductions in the federal funds rate. Lowering interest rates stimulates borrowing and investment, leading to an increase in demand for goods and services, which can help to stabilize the economy.

Question 6

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 because the homes are worth less. Therefore, consumption spending on furniture, appliances, and home improvements declines.

Question 7

A financial asset is considered a security if

Accepted Answer

A financial asset is considered a security if it can be traded in a secondary market. A security represents ownership in a publicly-traded company or a debt that has been issued by a company or government, and it can be bought or sold in a secondary market. While securities may provide dividends or capital gains, these are not the defining characteristics of a security. The security's ability to be traded in a secondary market is the key factor.

Question 8

An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run,the Fed can have an impact on inflation but not on real GDP.

Accepted Answer

The Federal Reserve can influence inflation rates through monetary policy in the long run, but its impact on real GDP is considered temporary, as real GDP is primarily determined by factors such as technology, labor, and capital, which are beyond the direct control of monetary policy.

Question 9

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 10

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

Accepted Answer

Prior to 1970, mortgages were not considered securities because they were rarely resold in the secondary market. Without a significant market for reselling mortgages, they did not meet the definition of a security. However, in the late 1960s, the government-sponsored entities Fannie Mae and Freddie Mac began purchasing mortgages from lenders and reselling them to investors, creating a secondary market for mortgages and paving the way for them to be considered securities.

Question 11

The Federal Reserve's performance in the mid-to-late 1980s,1990s,and early 2000s has received high marks from economists,even without inflation targeting.

Accepted Answer

Many economists believe that the Federal Reserve's performance during this time period was successful in terms of maintaining low inflation and promoting economic growth, despite not formally implementing an inflation targeting policy.

Question 12

How do economists generally rate the Fed's performance in the 1980s,1990s,and the early 2000s? Has the public been supportive of their policies? Is there anything on the horizon for the Fed that might cause the public concern?

Accepted Answer

The answer of How do economists generally rate the Fed's...

Question 13

Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.

Accepted Answer

The answer of Using the money demand and money supply...

Question 14

The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.

Accepted Answer

If the Fed could control money demand in addition to money supply, it could effectively target both the money supply and the interest rate simultaneously. By increasing money demand, the Fed could drive down interest rates, while decreasing money demand could result in higher interest rates.

Question 15

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 16

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, as they packaged mortgages into mortgage-backed securities and sold them to investors. This contributed to the growth of subprime lending and ultimately played a role in the 2008 financial crisis. The other options, such as Federal Reserve Banks or commercial/savings banks, do not accurately reflect the significant change that occurred in the secondary mortgage market during this time period.

Question 17

Write out the expression for the Taylor rule.Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate.

Accepted Answer

The answer of Write out the expression for the Taylor...

Question 18

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

The first blank requires a verb that means to make something stricter. The second blank requires an adjective that means more difficult. Therefore, the best answer is B, as it includes the verb "tightened" and the adjective "harder."

Question 19

Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?

Accepted Answer

The answer of Consider the Taylor rule for the target...

Question 20

Inflation targeting,typically,has been accompanied by lower inflation.

Accepted Answer

Inflation targeting is a monetary policy strategy where a central bank sets a target inflation rate and adjusts its policy tools such as interest rates to achieve that target. It has been observed that countries that have adopted inflation targeting have experienced lower inflation rates compared to non-inflation targeting countries. Therefore, the statement is true.

Quiz 15: Monetary Policy