Question 1

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 2

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 3

By the 2000s,an important market change occurred when investment banks became significant participants in the secondary market for

Accepted Answer

By the 2000s, investment banks had become significant participants in the secondary market for mortgages, particularly through the securitization of mortgage-backed securities. This played a key role in the financial dynamics leading up to the 2008 financial crisis.

Question 4

Prior to 1970,mortgages were ________ resold in the secondary market.

Accepted Answer

Prior to 1970, mortgages were rarely resold in the secondary market. This changed with the creation of Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac, which were established to buy and sell mortgages in the secondary market, increasing the availability of funds for new mortgage loans.

Question 5

A financial asset is considered ________ if it can be sold in a secondary market.

Accepted Answer

A security is a type of financial asset that can be traded in a secondary market. Commodities and durables are physical assets, while liabilities are obligations rather than assets.

Question 6

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 could cause a ripple effect and lead to other firms failing if they hold securities or have other business relationships with the failing firm. This could potentially trigger a widespread financial crisis. Therefore, the government intervened to prevent such a scenario from occurring. The other choices do not accurately explain the reason for the government's intervention.

Question 7

Between September 2007 and March 2008 there was a substantial reduction in the demand for housing.What action did the Fed take in response to the reduction in the demand for housing?

Accepted Answer

The Federal Reserve cut the federal funds rate seven times in response to the reduction in the demand for housing. This was done in an effort to stimulate economic growth and increase demand for housing by making borrowing cheaper for consumers. The other options (A, B, and D) are not directly related to addressing the reduction in demand for housing.

Question 8

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 term "sub-prime" refers to borrowers who have flawed credit histories, while "Alt-A" (alternative documentation) borrowers are those who did not document their incomes. These were the types of borrowers to whom lenders were granting mortgages during the height of the housing bubble in 2005 and early 2006. The other answer choices do not accurately describe the situation.

Question 9

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 did not lower the required reserve ratio on demand deposit accounts in response to the 2008 financial crisis. Instead, they implemented policies such as making investment banks eligible for discount loans, lending Treasury securities in exchange for mortgage-backed securities, and helping JP Morgan acquire Bear Stearns. Lowering the required reserve ratio would have been a tool for increasing the amount of money banks can lend out, but it was not specifically used in response to the crisis.

Question 10

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 in October 2008, and allowed the Treasury to provide funds to banks in exchange for stock. The other options (Bank Rescue Alliance Treaty, Mortgage Transfer Agency, and Financial Assurance Association) are not real programs or treaties.

Question 11

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 firms are authorized to trade government securities directly with the Federal Reserve, allowing the Fed to carry out its monetary policy operations effectively. Currently, there are 24 primary dealers in the United States, which include large banks, investment banks, and some foreign banks.

Question 12

Firms that participate in regular open market transactions with ________ are called primary dealers.

Accepted Answer

Primary dealers are firms that participate in regular open market transactions with the Federal Reserve.

Question 13

Although the Federal Reserve had traditionally made discount loans only to commercial banks,in response 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 Fed made primary dealers eligible for discount loans as well. Primary dealers are financial institutions that are authorized to trade directly with the Federal Reserve, and including them in the discount loan program increased the number of institutions that could access liquidity during the crisis.

Question 14

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 sub-prime borrowers ________ and "Alt-A" borrowers ________.

Accepted Answer

By loosening the standards for obtaining a mortgage loan, lenders granted mortgages to sub-prime borrowers with flawed credit histories and Alt-A borrowers who did not document their incomes.

Question 15

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

Accepted Answer

When housing prices fell in 2006, banks tightened the requirements for borrowers, making it harder for potential home buyers to obtain mortgages.

Question 16

The Federal Reserve responded to the 2008 financial crisis in several ways.Which of the following is one of the ways the Fed responded?

Accepted Answer

The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities as a way to provide liquidity and stabilize the financial system. This program was known as the Term Asset-Backed Securities Loan Facility (TALF). Option A is incorrect because the Fed did not ban investment banks from obtaining discount loans, but it did restrict their access. Option C is partially correct as the Fed did lower the required reserve ratio, but this was not specifically on demand deposit accounts. Option D is incorrect as the Fed did not help Citibank acquire General Motors and Chrysler.

Question 17

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, you have negative equity in your house which means you currently owe more on the mortgage than the home is worth. This can be a difficult financial situation as it can make it hard to sell the house or refinance the mortgage.

Question 18

To reassure investors who were unwilling to buy mortgages in the secondary market,the U.S.Congress used two government sponsored enterprises,________,to sell bonds to investors and use the funds to purchase mortgages from banks.

Accepted Answer

Fannie Mae and Freddie Mac were the two government sponsored enterprises used by Congress to sell bonds to investors and purchase mortgages from banks, in order to reassure investors who were unwilling to buy mortgages in the secondary market.

Question 19

When housing prices ________,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements declined 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. Therefore, consumption spending on furniture, appliances, and home improvements declined as mentioned in the statement.

Question 20

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

Accepted Answer

The Federal Reserve traditionally made discount loans primarily to commercial banks. In response to the financial crisis in 2008, it expanded eligibility to include primary dealers, which are not limited to commercial banks but can include other financial institutions.

Quiz 15: Monetary Policy