Topic 14

Question 1

Suspected causes of 2008 crash

Answer 1

1. Housing Price Bubble
2. House prices leveled off in mid-2006 and began to fall
3. The mortgage-related losses caused problems for financial institutions
4. Credit became difficult to get not only for mortgages but for other loans and spending started to fall

Question 2

Tools FED uses to in response to crash

Answer 2

a. Pay interest on reserves – began October 2008 - reduce the cost to banks of holding more in cash reserves
b. Quantitative Easing: Program to buy long-term bonds to lower long-term interest rates