Chapter 8 Questions Flashcards
Why would anyone buy a bond that did not make interest payments?
since they buy the bond for less than the face value, they are paid back more than they are paid
in what ways do banks add value in the economy?
Spread the Risk of Nonpayment
Divide Denominations
Match Time Horizons
Evaluate Creditworthiness
if the public decides to save less, what happens to the supply and/ or demand for loanable funds? what happens to the interest rate?
the supply of loanable funds falls, the interest rate rises
If people decide to borrow more, what happens to the supply or demand for loanable funds? what happens to the interest rate?
demand for loanable funds rises, causing the interest rate to rise
besides savers, which group can affect the supply of loanable funds?
the federal reserve
How does the Federal Government affect the credit market?
The Federal Government is the largest borrower, so its a major part of the demand for loanable funds
true, false. explain. Credit markets do not create value, they only move value around
False. Like all voluntary trade, borrowing and lending create value as resources flow to the highest valued uses
what is the difference between stocks and bonds?
Someone who owns stock owns part of a company.
someone who owns bonds is the companys creditor
true, false. bastiat said that the only reason gov shouldnt get involved in guaranteeing loans to the less creditworthy is that the taxpayer is on the hook
False. Bastiat’s main objection is that loaning to less creditworthy people takes away from the supply of funds available to creditworthy borrowers
Bastiat said, “to save is to spend” what did he mean?
Dollars that are saved, fuel investment and consumption , so saving is spending
Fannie Mae was the major player in “the secondary market for home lending” means?
Fannie Mae bought home loans from banks and sold bonds to the public which were backed by the loan payments
What is the relationship between the department of housing and urban development and Fannie Mae?
HUD directed fannie mae to make loans to purchase nonconforming loans
what was the Fed’s role in the economic crisis of the early 200s?
The fed increased the money supply, kept interest rates low, resulting in an expansion of lending
How did private lenders attempt to compete with fannie maes implicit government guarantee that their debt would be honored?
By insuring their bonds through AIG
What is TARP? what was it intended to do?
Troubled assets relief program
to buy bad mortgage bonds
What was done with TARP funds?
given to banks and other financial institutions and the auto industry
When the FSOC identifies a firm as too big to fail, what happens to the firm?
the firm grows because it is guaranteed a bailout
what is the effect of bailout insurance on banks?
Due to insurance, they will take more risks
What was the major cause of unemployment during the recovery from the 2009 recession
unemployment benefits were extended from 26 weeks to 99
How long was the average unemployed person out of work?
36 weeks. twice as long as the previous high
What has happened to the money supply since the recession?
It has grown rapidly becuase the Fed printing money
Why are excess reserves so high ?
because the fed began paying interest on reserves
