Macroeconomics ch 11

Question 1

The functions of the Fed include

Answer 1

Fostering payment and settlement system safety and efficiency, promoting financial safety stability, and conducting monetary policy

Question 2

The FOMC’s primary means of adjusting monetary policy is

Answer 2

Changing its target for the federal funds rate

Question 3

Decreasing the target for the federal funds fate

Answer 3

is called expansionary monetary policy will likely cause other short-term interest rates to decrease, and is expected to increase economic activity

Question 4

During the Great Recession

Answer 4

The unemployment rate more than doubled from November 2007 to October 2009

Question 5

From July 1996 to July 2012

Answer 5

Home prices increased by over 121% and then decreased by over 27% and home prices increased by about 60%

Question 6

During the housing bubble, mortgage interest rates were low because

Answer 6

Of an influx of savings entering the U.S. from other countries

Question 7

The low short-term interest rates from 2002-2004

Answer 7

encouraged the use of adjustable rate mortgages

Question 8

Leveraging

Answer 8

Increased the financing available for mortgage lending and thus contributed to rising home prices and increased the impact of the bursting of the housing bubble because the deleveraging

Question 9

Beginning in 1996, Fannie Mae and Freddie Mac

Answer 9

Were required to hold an increasing percentage or mortgage loans to lower-income households in their portfolios and began to relax the standards that mortgages had to meet to be classified as “conforming”

Question 10

The greater competition in the mortgage market caused by the internet

Answer 10

Meant that home buyers were no longer limited to borrowing locally

Question 11

Subprime mortgages

Answer 11

Are home loans given to persons who are considered a poor credit risk

Question 12

The term “irrational exuberance” was first used by Alan Greenspan as he

Answer 12

Hinted in 1996 that stock prices might be unduly escalated due to irrational exuberance

Question 13

If a homeowner could have forseen the bursting of the housing bubble and had sold their home in 2003

Answer 13

They would have been worse off than if they has sold their home in 2007, one year after the bubble burst

Question 14

After Alan Greenspan made his “irrational exuberance” comment, the Dow Jones Industrial Average

Answer 14

Fell at 2% at the opening of trading the next day and increased by another 4788 points over the next 3 years

Question 15

When the housing bubble burst and home prices began to fall

Answer 15

The increase in foreclosures decreased the value of mortgage-backed securities making it difficult for investment banks to issue new mortgage-backed securities

Question 16

The bursting of any housing bubble would be expected to have an impact on the economy because

Answer 16

The decline in home construction would reduce GDP

Question 17

The increased perceived credit risk caused by the bursting of the housing bubble

Answer 17

DID NOT
cause the TED spread to increase to a record level of over 10% in October 2008 and didn’t cause real investment spending to decrease by over 80% from the 3rd quarter of 2007 to the 3rd quarter of 2008

Question 18

In response to the Great Recession, the federal government

Answer 18

Enacted four economic stimulus plans

Question 19

The essential cause of the housing bubble was

Answer 19

Irrational Exuberance

Question 20

The policy of quantitative easing

Answer 20

Led to a large increase in the assets held by the Fed

Question 21

If the monetary base increases by 200 million and the money supply increases by $550 million, the actual money multiplier is

Answer 21

2.75

Question 22

Open market operations is the Fed

Answer 22

Buying and selling U.S. governments securities in the open market

Question 23

If the Fed buys U.S. government securities in the open market

Answer 23

Bank reserves will increase, monetary base will increase, and the money supply will increase by a multiplied amount

Question 24

The Fed can decrease the money supply by

Answer 24

Selling U.S. government securities in the open market