Question 1

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 answer of In 2008,the Treasury and Federal Reserve took...

Question 2

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. They are authorized to trade government securities directly with the Federal Reserve in order to help implement monetary policy.

Question 3

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 known as primary dealers. These large financial institutions are authorized to trade government securities directly with the Federal Reserve Bank of New York.

Question 4

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 5

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 provided funds to banks in exchange for stock. The other choices (A, B, and D) are not correct or do not exist.

Question 6

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 7

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

The Treasury's move to have the federal government take control of Fannie Mae and Freddie Mac was a significant action taken in response to the financial crisis in 2008. Fannie Mae and Freddie Mac were government-sponsored enterprises that played a major role in the housing market, and their financial instability threatened the overall economy. Taking control of these entities allowed the federal government to stabilize the housing market and prevent further catastrophic effects on the economy.

Question 8

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 chain reaction in which other firms that hold its securities could also fail, leading to a broader financial crisis. Therefore, the Treasury and Fed took action to prevent the collapse of large financial firms such as Bear Stearns and AIG, which had significant holdings of securities.

Question 9

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 demand for housing. This was done to stimulate borrowing and spending in the economy, and to encourage investment in the housing market. The other options (decreasing required reserve rate, conducting open market sales of Treasury securities, raising the discount rate) would have had different effects on the economy and were not the actions taken by the Fed during this time period.

Question 10

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

Accepted Answer

Prior to 1970, mortgages were rarely resold in the secondary market. The secondary market for mortgages did not develop until the 1970s.

Question 11

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 12

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, banks and other lenders tightened the requirements for borrowers, making it harder for potential home buyers to obtain mortgages.

Question 13

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 as they have less equity available. Therefore, consumption spending on furniture, appliances, and home improvements decline.

Question 14

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 that you have negative equity in your house. This situation can arise when the value of your house decreases, or you have taken on too much debt. It can be a risky situation as it means you owe more than your house is worth, and if you need to sell, you will not be able to pay off the full mortgage.

Question 15

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

One of the ways that the Fed responded to the 2008 financial crisis was by lending investment banks Treasury securities in exchange for mortgage-backed securities. This helped to provide liquidity to the financial system and stabilize the markets. The other choices are not accurate responses by the Fed to the crisis. The Fed did not ban investment banks from obtaining discount loans, lower the required reserve ratio on demand deposit accounts, or help Citibank to acquire General Motors and Chrysler.

Question 16

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 made primary dealers eligible for discount loans.

Question 17

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 18

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

By 2005 and early 2006, lenders had relaxed their standards for mortgage loans, resulting in many sub-prime borrowers with flawed credit histories being granted loans, as well as "Alt-A" borrowers who did not document their incomes. This eventually led to the housing bubble bursting in 2008. Option B is incorrect as it suggests borrowers had AAA credit ratings, which would not have resulted in sub-prime mortgages. Option C is also incorrect as it suggests borrowers were allowed to borrow more than the value of their house, which was not necessarily the case during the housing bubble. Option D is also incorrect as it suggests borrowers were buying houses in depressed markets or repossessed by government agencies, which is not a defining characteristic of sub-prime or "Alt-A" mortgages.

Question 19

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 created by the U.S. Congress to provide liquidity to the mortgage market by purchasing mortgages from banks and selling bonds to investors. This allowed banks to free up capital to make more loans and provided reassurance to investors that the mortgages they were buying had the backing of these government-sponsored enterprises.

Question 20

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 traded on a secondary market. Examples of securities include stocks, bonds, mutual funds, and exchange-traded funds. Commodity refers to a raw material or primary agricultural product that can be bought or sold, but it is not considered a financial asset. Liability refers to the legal obligation to pay debts or other financial obligations, while durable refers to a product that is designed to last a long time.

Quiz 15: Monetary Policy