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 helps to increase liquidity in the housing market and provide investors with a more secure investment option.

Question 2

A financial asset is considered a security if

Accepted Answer

A security is a financial asset that can be bought and sold in a secondary market, such as a stock exchange. The other options do not fully capture the definition of a security. Dividends and capital gains may be earned on securities, but they are not the defining characteristic. The increase in value of a security may or may not occur after it is sold in a primary market, and the value of a security is not always guaranteed. Therefore, the best choice is B.

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 mortgage defaults. The Fed cut the federal funds rate to encourage borrowing and stimulate economic growth.

Question 4

Inflation targeting has typically been accompanied by lower inflation.

Accepted Answer

Inflation targeting is a monetary policy framework that aims to keep inflation within a specific target range. Studies have shown that countries that adopt inflation targeting have generally experienced lower inflation rates than those that do not. However, it is important to note that inflation targeting is not a silver bullet and its effectiveness can be influenced by a variety of factors, such as the credibility of the central bank and the overall macroeconomic environment.

Question 5

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 banks and other lenders tighten the requirements for borrowers, it means they are making the lending process more difficult and strict. Therefore, the correct option is B because it states that the lenders tightened the requirements, making it harder for potential home buyers to obtain mortgages.

Question 6

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 7

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

The statement is true. The Federal Reserve's performance during this time period was generally praised for its management of inflation and monetary policy, even though it did not officially adopt inflation targeting as a policy framework.

Question 8

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 increased the required reserve ratio on demand deposit accounts in order to limit the amount of bank reserves and control inflation during the crisis.

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

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 their homes are worth less. As a result, consumption spending on furniture, appliances, and home improvements declines.

Question 11

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 12

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 Federal Reserve could control money demand along with money supply, it could use both tools to achieve its monetary policy goals simultaneously. By increasing or decreasing the money supply and manipulating interest rates, the Fed could stabilize inflation and promote economic growth. However, in reality, the Fed does not have direct control over money demand, which is influenced by numerous factors such as consumer preferences and expectations.

Question 13

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 14

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 15

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

Accepted Answer

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

Question 16

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 characteristic of securities. Without active buying and selling of mortgages, they were not classified as securities. It wasn't until the development of government-sponsored enterprises like Fannie Mae and Freddie Mac, and the creation of a secondary market for mortgages, that mortgages became treated as securities.

Question 17

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, where investors can buy and sell existing mortgages. This allowed for greater liquidity in the market, as investment banks could package mortgages into securities and sell them to investors. This helped fuel the housing bubble of the early 2000s, which ultimately led to the financial crisis. Federal Reserve Banks, commercial banks, and savings banks may also participate in the secondary market, but investment banks were the primary players in the mortgage-backed securities market.

Question 18

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 19

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 20

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 with flawed credit histories, while "Alt-A" refers to borrowers who did not document their incomes. The other choices are not related to the types of borrowers who were granted mortgages during the housing bubble.

Quiz 26: Monetary Policy