Question 1

Which of the following explains why mortgages weren't considered securities prior to 1970?

Accepted Answer

Prior to 1970, mortgages were rarely traded or resold in the secondary market. This made it difficult for them to be considered securities. It wasn't until the development of mortgage-backed securities that mortgages became a viable option for investors.

Question 2

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 3

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, as they securitized mortgages and sold them to investors. This contributed to the growth of the subprime mortgage market and ultimately led to the housing market crash in 2008. Federal Reserve Banks, commercial banks, and savings banks have always been significant participants in the mortgage market, but the question is specifically asking about a change that occurred in the 2000s.

Question 4

If the amount you owe on your house is greater than the price of the house, you have

Accepted Answer

This is known as negative equity, meaning you owe more on your mortgage than what your property is currently worth. It can be a tough situation to be in, as you may have difficulty selling the property or refinancing the mortgage.

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, providing funds to banks in exchange for stock. The other options (A, B, and D) are not correct names for the program.

Question 6

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.

Question 7

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 requirements for borrowers, making it harder for potential home buyers to obtain mortgages.

Question 8

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 9

A financial asset is considered a security if

Accepted Answer

A financial asset is considered a security if it can be sold in a secondary market, such as a stock exchange. The ability to be traded in a secondary market distinguishes securities from other types of financial assets, such as loans or bank deposits. The other options listed (receiving dividends/capital gains, value increase after primary market sale, and value security) may apply to some securities, but are not the defining characteristic.

Question 10

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. This term refers to a select group of large financial institutions that have an established business relationship with the Federal Reserve Bank of New York and are authorized to trade government securities directly with the Federal Reserve.

Question 11

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 passage states that lenders had loosened the standards for obtaining a mortgage loan, and specifically mentions sub-prime borrowers with flawed credit histories and "Alt-A" borrowers who did not document their incomes.

Question 12

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 13

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 during the financial crisis to help prevent banks from excessively leveraging themselves.

Question 14

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 question is discussing the loosened standards for obtaining a mortgage loan during the height of the housing bubble, specifically mentioning borrowers with flawed credit histories and those who did not document their incomes. These types of borrowers are typically referred to as "sub-prime" and "Alt-A" borrowers. Therefore, the correct answer is A.

Question 15

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 easily bought or sold in a secondary market. Commodities are physical goods such as gold, oil, or wheat. Liabilities are debts owed by an individual or entity. Durables are physical goods that can be used repeatedly over a long period of time.

Question 16

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 and lead to the failure of other firms that hold the same securities. This could trigger a financial crisis and have a severe impact on the overall economy. Therefore, the government took measures to prevent the failure of these firms and stabilize the financial system.

Question 17

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 18

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 since they have less equity. As a result, consumption spending on furniture, appliances, and home improvements decline.

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 the two government sponsored enterprises used by the U.S. Congress to sell bonds to investors and use the funds to purchase mortgages from banks, in order to reassure investors who were unwilling to buy mortgages in the secondary market. The other options listed are not relevant to this specific situation.

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 and use the funds to purchase mortgages from banks. This helps to provide liquidity to the mortgage market and lower the interest rates on mortgages. The mortgages are then packaged into mortgage-backed securities and sold to investors.

Quiz 26: Monetary Policy