Question 1

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 equity in their homes decreases. Therefore, consumption spending on furniture, appliances, and home improvements would decline.

Question 2

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 a government program enacted in response to the 2008 financial crisis, aimed at stabilizing the financial system. It provided funds to banks in exchange for stock, with the goal of increasing confidence in the banking system and preventing a complete collapse. The other options (A, B, and D) are not accurate names of programs or agencies related to the financial crisis.

Question 3

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

Accepted Answer

This is the definition of defaulting on a loan.

Question 4

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

Accepted Answer

The term "primary dealers" is used to refer to the firms that regularly participate in open market transactions with the Federal Reserve. These firms are typically large banks and securities dealers that are authorized to purchase and sell government securities directly with the Fed on behalf of their clients.

Question 5

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 made primary dealers eligible for discount loans in addition to traditional commercial banks.

Question 6

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 arrangement allows investors to have more confidence in buying mortgages through the secondary market, as Fannie Mae and Freddie Mac provide a level of protection and stability.

Question 7

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 decrease mortgage payments, leaving homeowners with more disposable income. This increase in disposable income would then lead to an increase in aggregate demand, as consumers would have more money to spend on other goods and services.

Question 8

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 9

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 more than the price of the house, it means you have negative equity in your house. This is also referred to as being "underwater" on your mortgage. It is not a desirable situation as it means that if you were to sell your house, you would still owe money to your lender even after the sale proceeds are applied to your mortgage balance.

Question 10

A financial asset is considered a security if

Accepted Answer

A financial asset is considered a security if it can be sold in a secondary market. This includes stocks, bonds, mutual funds, and other types of assets that can be bought and sold on stock exchanges or other markets. The ability to sell the asset in a secondary market makes it more liquid and allows investors to easily buy and sell as needed. Dividends, capital gains, and value/security are all factors that may apply to securities, but they are not the defining characteristic.

Question 11

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 the requirement for borrowers. This means that they made it harder for potential home buyers to obtain mortgages. Therefore, option B is the most appropriate choice.

Question 12

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 necessary component for a financial instrument to be considered a security.

Question 13

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. This tool is typically used to control inflation and stimulate economic growth, but was not a direct response to the crisis. A, B, and D are all correct responses as they represent actions taken by the Fed during the crisis, such as providing loans to investment banks and intervening to prevent the collapse of Bear Stearns.

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 ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

The terms "sub-prime" and "Alt-A" are used to describe borrowers with flawed credit histories or who did not document their incomes. These types of borrowers were able to obtain mortgages during the height of the housing bubble due to the loosened standards by lenders. The other choices, such as "adjustable rate," "shadow-banking," "credit crunch," "black market," and "prime rate," are not directly related to the issue of loosened mortgage standards during the housing bubble.

Question 15

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 the seven reductions in the federal funds rate between September 2007 and March 2008. These rate cuts were aimed at stimulating the economy and preventing further decreases in demand for housing.

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 such as Goldman Sachs and Morgan Stanley became significant participants in the secondary market for mortgages by packaging and securitizing mortgage loans into financial products such as mortgage-backed securities (MBS). This allowed for greater liquidity in the mortgage market and also contributed to the housing bubble that ultimately led to the financial crisis of 2008.

Question 17

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 18

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 19

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 20

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 domino effect on other financial firms that hold its securities, potentially causing further failures and instability in the financial system. Therefore, the government took action to prevent these firms from failing and causing widespread financial disruption. The other options either do not accurately reflect the reasons behind the government's actions or are not relevant.

Quiz 26: Monetary Policy

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.