Question 1

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.

Question 2

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 force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. This chain reaction of failures could lead to a financial crisis and cause severe economic damage. Therefore, the Treasury and the Federal Reserve took action to prevent the bankruptcy of these firms and stabilize the financial system.

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

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. This means that you owe more than your house is worth, which can make it difficult to sell or refinance your mortgage. It is important to work with a financial advisor or mortgage lender to come up with a plan to address this negative equity and avoid foreclosure.

Question 5

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 6

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

Accepted Answer

A security is a financial asset that can be sold in a secondary market. Examples of securities include stocks, bonds, and options. Commodity refers to a raw material or primary agricultural product that can be bought and sold, but may not necessarily be a financial asset. A liability is an obligation to pay back a debt or obligation, and is not considered a financial asset. Durable refers to a product's ability to withstand wear, pressure or damage.

Question 7

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

Accepted Answer

Prior to 1970, mortgages were rarely resold in the secondary market. This was primarily due to the lack of a well-established secondary market for mortgages, and the fact that most lenders preferred to hold their mortgages until they were paid off in full. It was not until the creation of government-sponsored entities like Fannie Mae and Freddie Mac that a viable secondary market for mortgages began to emerge.

Question 8

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 US government securities with the Federal Reserve Bank of New York, which conducts open market operations on behalf of the Federal Reserve System.

Question 9

In 2008,the Treasury and Federal Reserve took several actions in response to the deepening financial crisis.One action was the Treasury's move to have the federal government take control of

Accepted Answer

In 2008, the Treasury took control of Fannie Mae and Freddie Mac, two government-sponsored enterprises that were facing insolvency due to the subprime mortgage crisis. The move was aimed at preventing a complete meltdown of the housing market and the broader economy. The government's takeover of Fannie Mae and Freddie Mac was one of the most significant actions taken during the financial crisis.

Question 10

When housing prices ________,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements decline as many households find 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 decline.

Question 11

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 Federal Reserve expanded the types of financial institutions eligible for discount loans to include primary dealers, in addition to commercial banks. The other options (Treasury Department, mortgage brokers, and savings banks) were not made eligible for discount loans during this time.

Question 12

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 13

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 (as described in the first part of the sentence), it became harder for potential home buyers to obtain mortgages. This is because banks and other lenders tightened their requirements, which typically makes it more difficult for borrowers to qualify for a loan. Choice B is the only option that accurately reflects this cause-and-effect relationship.

Question 14

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 established by Congress to provide liquidity to the mortgage market by purchasing mortgages from banks and selling them to investors as bonds. This allowed banks to continue making mortgages and kept the secondary market for mortgages functioning during times of uncertainty.

Question 15

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 between September 2007 and March 2008. This was done in an attempt to stimulate economic activity by making it easier and cheaper for banks to lend money. Lowering the federal funds rate also reduces the cost of borrowing for consumers and businesses, which can increase demand for goods and services.

Question 16

In 2008,the Treasury and Federal Reserve took several actions in response to the deepening financial crisis.One action was the creation of the Term Securities Lending Facility,under which the Fed will loan up to $200 billion of treasury securities in exchange for

Accepted Answer

The Term Securities Lending Facility was created to improve liquidity in financial markets by allowing primary dealers to borrow Treasury securities in exchange for less liquid mortgage-backed securities.

Question 17

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 and provided funds to banks in exchange for stock. The other answer choices are not accurate descriptions of the program.

Question 18

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 19

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 responded to the 2008 financial crisis by implementing various measures, including lending investment banks Treasury securities in exchange for mortgage-backed securities. This program was called the Term Securities Lending Facility (TSLF). This allowed investment banks to temporarily swap out their harder-to-sell mortgage securities for more liquid Treasury securities. This helped alleviate some of the liquidity problems faced by investment banks during the crisis.

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

Accepted Answer

The question stated that lenders had "greatly loosened" the standards for obtaining a mortgage loan, which implies that borrowers with flawed credit histories (sub-prime) were able to obtain loans. Additionally, "Alt-A" borrowers are commonly understood to be those who did not document their incomes, which is why choice A is the best answer.

Quiz 26: Monetary Policy