Question 1

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 decrease in home prices and an increase in mortgage defaults, which in turn put significant pressure on the financial system. The Federal Reserve lowered interest rates in an attempt to stimulate the economy and mitigate the effects of the housing crisis.

Question 2

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 tightened the requirements for borrowers, it made it harder for potential home buyers to obtain mortgages. Choices A and D are not fitting because "eased" would mean the opposite of tightening, which is not what happened.

Question 3

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 4

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 often used to describe borrowers with less-than-ideal credit histories or those who do not document their incomes. Adjustable rate and shadow banking are not directly related to the issue described in the question. "Credit crunch" and "black market" are not applicable in this context, and "fresh-start" and "prime rate" do not describe the types of borrowers mentioned in the question.

Question 5

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 6

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 did not need to be regulated as securities. It wasn't until the secondary mortgage market grew, and mortgages began to be bought and sold more frequently, that they were considered securities.

Question 7

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 both the money supply and money demand, it would be able to simultaneously target both the money supply and interest rate. By decreasing or increasing money supply and manipulating money demand, it could influence both variables. However, in reality, the Fed does not have complete control over money demand, making it more challenging to target both variables simultaneously.

Question 8

Inflation targeting has typically been accompanied by lower inflation.

Accepted Answer

Inflation targeting involves a central bank setting a specific inflation rate as its target and adjusting monetary policy to achieve that target. Research has shown that countries that implement inflation targeting tend to have lower inflation compared to those that do not have an explicit inflation target.

Question 9

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 10

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 11

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 12

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 is often credited with helping to maintain stable economic growth and low inflation, even though they did not formally adopt an inflation targeting policy until much later.

Question 13

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 ability to trade the asset in a secondary market is what distinguishes a security from other financial assets. The other options mentioned in the question are characteristics that may apply to some securities, but are not defining features of a security itself.

Question 14

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. This is because the equity in their homes, which they could use as collateral for loans, decreases. As a result, consumption spending on furniture, appliances, and home improvements declines.

Question 15

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 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 became significant participants in the secondary market for mortgages in the 2000s, with the growth of mortgage-backed securities and collateralized debt obligations. This led to an increase in the availability of credit and a surge in housing prices, but also contributed to the financial crisis of 2008. The other options, Federal Reserve Banks, commercial banks, and savings banks, may also have played a role in the mortgage market, but they were not specifically noted as significant participants in the secondary market during this time period.

Question 17

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 18

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 the European Central Bank and several other central banks around the world, including the central banks of Australia, Canada, New Zealand, and the United Kingdom.

Question 19

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, thus standing between investors and banks that grant mortgages. This provides reassurance to investors who may have been previously unwilling to buy mortgages in the secondary market.

Question 20

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 during the 2008 financial crisis. Instead, the Fed engaged in open market operations, providing banks with additional reserves through the purchase of Treasury securities and mortgage-backed securities. This helped to increase the availability of credit and alleviate the liquidity problems faced by many financial institutions.

Quiz 15: Monetary Policy