Chapter 8 Questions

Question 1

Why would anyone buy a bond that did not make interest payments?

Answer 1

since they buy the bond for less than the face value, they are paid back more than they are paid

Question 2

in what ways do banks add value in the economy?

Answer 2

Spread the Risk of Nonpayment

Divide Denominations

Match Time Horizons

Evaluate Creditworthiness

Question 3

if the public decides to save less, what happens to the supply and/ or demand for loanable funds? what happens to the interest rate?

Answer 3

the supply of loanable funds falls, the interest rate rises

Question 4

If people decide to borrow more, what happens to the supply or demand for loanable funds? what happens to the interest rate?

Answer 4

demand for loanable funds rises, causing the interest rate to rise

Question 5

besides savers, which group can affect the supply of loanable funds?

Answer 5

the federal reserve

Question 6

How does the Federal Government affect the credit market?

Answer 6

The Federal Government is the largest borrower, so its a major part of the demand for loanable funds

Question 7

true, false. explain. Credit markets do not create value, they only move value around

Answer 7

False. Like all voluntary trade, borrowing and lending create value as resources flow to the highest valued uses

Question 8

what is the difference between stocks and bonds?

Answer 8

Someone who owns stock owns part of a company.

someone who owns bonds is the companys creditor

Question 9

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

Answer 9

False. Bastiat’s main objection is that loaning to less creditworthy people takes away from the supply of funds available to creditworthy borrowers

Question 10

Bastiat said, “to save is to spend” what did he mean?

Answer 10

Dollars that are saved, fuel investment and consumption , so saving is spending

Question 11

Fannie Mae was the major player in “the secondary market for home lending” means?

Answer 11

Fannie Mae bought home loans from banks and sold bonds to the public which were backed by the loan payments

Question 12

What is the relationship between the department of housing and urban development and Fannie Mae?

Answer 12

HUD directed fannie mae to make loans to purchase nonconforming loans

Question 13

what was the Fed’s role in the economic crisis of the early 200s?

Answer 13

The fed increased the money supply, kept interest rates low, resulting in an expansion of lending

Question 14

How did private lenders attempt to compete with fannie maes implicit government guarantee that their debt would be honored?

Answer 14

By insuring their bonds through AIG

Question 15

What is TARP? what was it intended to do?

Answer 15

Troubled assets relief program

to buy bad mortgage bonds

Question 16

What was done with TARP funds?

Answer 16

given to banks and other financial institutions and the auto industry

Question 17

When the FSOC identifies a firm as too big to fail, what happens to the firm?

Answer 17

the firm grows because it is guaranteed a bailout

Question 18

what is the effect of bailout insurance on banks?

Answer 18

Due to insurance, they will take more risks

Question 19

What was the major cause of unemployment during the recovery from the 2009 recession

Answer 19

unemployment benefits were extended from 26 weeks to 99

Question 20

How long was the average unemployed person out of work?

Answer 20

36 weeks. twice as long as the previous high

Question 21

What has happened to the money supply since the recession?

Answer 21

It has grown rapidly becuase the Fed printing money

Question 22

Why are excess reserves so high ?

Answer 22

because the fed began paying interest on reserves