Question 1

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. These were the two categories of borrowers who were granted mortgages with loosened standards during the housing bubble. None of the other choices accurately describe the types of borrowers who were given mortgages during this time period.

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 passed by Congress in October 2008, which allowed the Treasury to provide funds to banks in exchange for stock. The other choices (A, B, and D) are not correct names or programs that were passed by Congress during this time.

Question 3

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 4

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 buy and sell securities directly with the Federal Reserve.

Question 5

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 6

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 led to a decline in the price of housing and an increase in mortgage defaults. This ultimately led to a financial crisis in the banking sector and the need for the Federal Reserve to cut the federal funds rate in order to stimulate economic growth and prevent a recession.

Question 7

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 create a domino effect, forcing the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. This would lead to a financial crisis and a severe recession. Therefore, the government took measures to save large financial firms like Bear Stearns and AIG from failing to prevent such a crisis.

Question 8

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, and the value of homes decreases, homeowners find it harder to borrow money against their homes. This makes it difficult to spend on furniture, appliances, and home improvements, leading to a decline in consumption spending. Therefore, option B is the correct answer.

Question 9

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 10

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 Fed made primary dealers eligible for discount loans in addition to traditional commercial banks. The other options (A, B, and C) were not made eligible for discount loans during this time.

Question 11

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 12

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 will decrease the cost of borrowing, leading to an increase in disposable income for households. This, in turn, will increase their spending, increasing aggregate demand.

Question 13

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, leading to the rise of mortgage-backed securities and the widespread securitization of mortgages. This was a major shift in the mortgage market, as investment banks had not traditionally been involved in the origination or servicing of mortgages.

Question 14

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 to respond to the 2008 financial crisis. This tool is typically used to implement monetary policy and influence the broader economy, but it was not a specific response to the crisis. The other three options are correct responses and actions taken by the Fed during and after the financial crisis.

Question 15

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 means they were not considered securities as they didn't fit the definition of a security at the time.

Question 16

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, it means you have negative equity in your house. This is also known as being "underwater" on your mortgage. It is not a desirable situation as you owe more than you own, which can make it difficult to sell the house and pay off the mortgage in full. It is important to address this situation by either paying down the mortgage or working with a financial professional to find a solution.

Question 17

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

Accepted Answer

When a borrower stops making payments on a loan, he/she is considered to have defaulted on the loan.

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

When banks and lenders "tighten" their requirements, it means they are becoming more strict and less lenient with whom they lend money to. Therefore, it becomes "harder" for potential home buyers to obtain mortgages. The opposite of tightening would be to "ease" requirements, which would make it "easier" for borrowers to get mortgages, so options C and D can be eliminated.

Question 19

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 20

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 to raise funds, and then use those funds to purchase mortgages from banks. This provides liquidity to the banks and reassures investors that their investment in the secondary mortgage market is backed by these government-sponsored enterprises.

Quiz 17: Monetary Policy

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.