Question : 17.6   Fed Policies During the 2007-2009 Recession 1) The Federal Reserve : 1266973

17.6   Fed Policies During the 2007-2009 Recession

1) The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008.  What event led the Fed to make these reductions in the federal funds rate?

A) It was in response to reductions in the discount rate, which was also lowered seven times over the same time period.

B) The chairman of the Federal Reserve System persuaded members of the Federal Open Market Committee to lower interest rates in order to reduce the price of oil in international markets.

C) During this period there was a substantial reduction in the demand for housing.

D) Several large investment banks failed during this time period.

2) When housing prices fall, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements ________ as many households found it ________ to borrow against the value of their homes.

A) declined; easier

B) declined; harder

C) increased; easier

D) increased; harder

3) 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.

A) tightened; easier

B) tightened; harder

C) eased; easier

D) eased; harder

4) A financial asset is considered a security if

A) the owner of the security receives dividends and realizes a capital gain when the asset is sold. 

B) it can be sold in a secondary market.

C) its value increases after it is sold in a primary market.

D) its value is secure;  that is, the owner will not suffer a financial loss when the asset is sold.

5) Which of the following explains why mortgages weren’t considered securities prior to 1970?

A) The Federal Reserve Act of 1913 prohibited mortgages from being considered securities.  An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities. 

B) Until 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable.  There has been a significant annual increase in housing prices and mortgage values since 1970.  

C) Congress passed a law in 1970 stipulating that mortgages could be classified as securities.

D) Prior to 1970, mortgages were rarely resold in the secondary market.  

6) 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

A) sell mortgages to investors and use the funds to purchase bonds from banks.

B) sell bonds to investors and use the funds to purchase mortgages from banks.

C) sell bonds to banks and use the funds to purchase mortgages from investors.

D) sell mortgages to banks and use the funds to purchase bonds from investors.

7) By the 2000s, an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages. 

A) investment banks

B) Federal Reserve Banks

C) commercial banks

D) savings banks

8) 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.

A) sub-prime; “Alt-A”

B) adjustable rate; shadow-banking

C) “credit crunch”; black market

D) “fresh-start”; prime rate

9) 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? 

A) The Fed made investment banks eligible for discount loans.

B) The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities.

C) The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves.

D) The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank.

10) Although the Federal Reserve had traditionally made discount loans only to commercial banks, in response to to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.  

A) the Treasury Department

B) mortgage brokers

C) savings banks

D) primary dealers