Question 1

Compared to the 1970s and early 1980s, household debt as a share of income in 2007 has

Accepted Answer

A) increased at a steady rate over time. 
B) remained about the same. 
C) more than doubled. 
D) decreased slowly over time. 
A) increased at a steady rate over time. 
B) remained about the same. 
C) more than doubled. 
D) decreased slowly over time. C

Question 2

The share of new loans with a down payment of 5 percent or less extended by Freddie Mac and Fannie Mae

Accepted Answer

A) declined substantially after 1999. 
B) rose from 4 percent in 1998 to 12 percent in 2003 and 23 percent in 2007. 
C) rose from 4 percent in 1998 to 23 percent in 2002, but declined to less than 10 percent in 2007. 
D) never exceeded 10 percent of the new loans financed. 
A) declined substantially after 1999. 
B) rose from 4 percent in 1998 to 12 percent in 2003 and 23 percent in 2007. 
C) rose from 4 percent in 1998 to 23 percent in 2002, but declined to less than 10 percent in 2007. 
D) never exceeded 10 percent of the new loans financed. B

Question 3

What was the original stated purpose of Fannie Mae and Freddie Mac?

Accepted Answer

A) to allow the government to extend loans directly to low-income and minority households 
B) to help provide liquidity in the secondary mortgage markets 
C) to operate as non-profit entities that would provide competition for for-profit mortgage companies 
D) to take on mortgages going into default in order to prevent them from going into foreclosure 
A) to allow the government to extend loans directly to low-income and minority households 
B) to help provide liquidity in the secondary mortgage markets 
C) to operate as non-profit entities that would provide competition for for-profit mortgage companies 
D) to take on mortgages going into default in order to prevent them from going into foreclosure B

Question 4

The increase in the share of loans extended to borrowers with little or no down payment contributed to the financial crisis of 2008 because these loans

Accepted Answer

A) initially depressed housing prices. 
B) were extended only to borrowers with prime credit status. 
C) had much higher default rates than loans to borrowers making larger down payments. 
D) were unavailable to low-income borrowers, who would have profited the most from such loans. 
A) initially depressed housing prices. 
B) were extended only to borrowers with prime credit status. 
C) had much higher default rates than loans to borrowers making larger down payments. 
D) were unavailable to low-income borrowers, who would have profited the most from such loans.

Question 5

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Accepted Answer

A) an increase in demand for housing and higher housing prices. 
B) an increase in demand for housing and lower housing prices. 
C) a reduction in demand for housing and higher housing prices. 
D) a reduction in demand for housing and lower housing prices. 
A) an increase in demand for housing and higher housing prices. 
B) an increase in demand for housing and lower housing prices. 
C) a reduction in demand for housing and higher housing prices. 
D) a reduction in demand for housing and lower housing prices.

Question 6

During the 1980s and 1990s, the Federal Reserve's monetary policy focused primarily on

Accepted Answer

A) keeping short-term interest rates low in order to stimulate real output and economic growth. 
B) a variety of factors, such as unemployment and real GDP, resulting in variable inflation rates throughout this period. 
C) keeping inflation low and the general price level relatively stable. 
D) monetary expansion in order to reduce unemployment. 
A) keeping short-term interest rates low in order to stimulate real output and economic growth. 
B) a variety of factors, such as unemployment and real GDP, resulting in variable inflation rates throughout this period. 
C) keeping inflation low and the general price level relatively stable. 
D) monetary expansion in order to reduce unemployment.

Question 7

During 2006-2008, the housing foreclosure rate rose sharply

Accepted Answer

A) for fixed interest rate loans, but it was virtually unchanged for adjustable rate loans. 
B) for adjustable rate loans to both sub-prime and prime borrowers, but there was little change in the foreclosure rate on fixed interest rate loans. 
C) for adjustable rate loans to sub-prime borrowers, but the foreclosure rate on these loans to prime borrowers was virtually unchanged. 
D) for adjustable rate loans to prime borrowers, but the foreclosure rate on these loans to sub-prime borrowers was virtually unchanged. 
A) for fixed interest rate loans, but it was virtually unchanged for adjustable rate loans. 
B) for adjustable rate loans to both sub-prime and prime borrowers, but there was little change in the foreclosure rate on fixed interest rate loans. 
C) for adjustable rate loans to sub-prime borrowers, but the foreclosure rate on these loans to prime borrowers was virtually unchanged. 
D) for adjustable rate loans to prime borrowers, but the foreclosure rate on these loans to sub-prime borrowers was virtually unchanged.

Question 8

The substantial increase in household debt relative to income since the mid 1980s meant that in 2008 many households

Accepted Answer

A) had little savings or other reserve assets for use to deal with unexpected expenditures. 
B) could safely afford to purchase larger homes because housing is always a good investment. 
C) could spend everything they earned because their interest obligations on outstanding credit were low. 
D) would be able to easily adjust their current spending if their monthly payments on adjustable rate mortgages rose. 
A) had little savings or other reserve assets for use to deal with unexpected expenditures. 
B) could safely afford to purchase larger homes because housing is always a good investment. 
C) could spend everything they earned because their interest obligations on outstanding credit were low. 
D) would be able to easily adjust their current spending if their monthly payments on adjustable rate mortgages rose.

Question 9

A sub-prime loan is a loan extended to borrowers

Accepted Answer

A) at a subsidized interest rate below the prime rate normally offered to the most creditworthy borrowers. 
B) with blemished credit or limited documentation of their income, employment history, and other indicators of credit worthiness. 
C) seeking a 30-year, fixed rate mortgage. 
D) who have a FICO score above 660. 
A) at a subsidized interest rate below the prime rate normally offered to the most creditworthy borrowers. 
B) with blemished credit or limited documentation of their income, employment history, and other indicators of credit worthiness. 
C) seeking a 30-year, fixed rate mortgage. 
D) who have a FICO score above 660.

Question 10

The primary objective of the monetary policy of the Fed should be

Accepted Answer

A) low rates of unemployment. 
B) the growth rate of real GDP. 
C) the achievement of price stability. 
D) the regulation of financial institutions. 
A) low rates of unemployment. 
B) the growth rate of real GDP. 
C) the achievement of price stability. 
D) the regulation of financial institutions.

Question 11

After a period of price stability in the 1990s, housing prices increased dramatically during 2002-2005 because

Accepted Answer

A) regulations designed to make housing more affordable increased the demand for housing and drove housing prices upward. 
B) regulations designed to make housing more affordable decreased the number of sub-prime loans and made home buying a safer investment. 
C) mortgage lending standards tightened, and therefore mortgage loans for housing were only available to buyers purchasing highly expensive homes. 
D) home buyers were putting more money down and requiring more return on their investment, driving housing prices up. 
A) regulations designed to make housing more affordable increased the demand for housing and drove housing prices upward. 
B) regulations designed to make housing more affordable decreased the number of sub-prime loans and made home buying a safer investment. 
C) mortgage lending standards tightened, and therefore mortgage loans for housing were only available to buyers purchasing highly expensive homes. 
D) home buyers were putting more money down and requiring more return on their investment, driving housing prices up.

Question 12

Which of the following contributed to the rising mortgage default and foreclosure rates and the eventual economic crisis of 2008?

Accepted Answer

A) tightened mortgage lending standards and the reduction of loanable funds during 2001-2005 
B) the increase in the greed of Wall Street bankers and other commercial lenders 
C) the substantial increase in sub-prime and adjustable rate mortgages as a share of the total during 2001-2006 
D) the increase in the household savings rate during the two decades following 1985 
E) the increase in fixed rate mortgages as a share of the total during the decade prior to the crisis 
A) tightened mortgage lending standards and the reduction of loanable funds during 2001-2005 
B) the increase in the greed of Wall Street bankers and other commercial lenders 
C) the substantial increase in sub-prime and adjustable rate mortgages as a share of the total during 2001-2006 
D) the increase in the household savings rate during the two decades following 1985 
E) the increase in fixed rate mortgages as a share of the total during the decade prior to the crisis

Question 13

Between 2001-2005,

Accepted Answer

A) both sub-prime and adjustable rate mortgages decreased as a share of the total. 
B) both sub-prime and adjustable rate mortgages increased as a share of the total. 
C) sub-prime loans increased, but adjustable rate loans decreased as a share of the total. 
D) sub-prime loans decreased, but adjustable rate loans increased as a share of the total. 
A) both sub-prime and adjustable rate mortgages decreased as a share of the total. 
B) both sub-prime and adjustable rate mortgages increased as a share of the total. 
C) sub-prime loans increased, but adjustable rate loans decreased as a share of the total. 
D) sub-prime loans decreased, but adjustable rate loans increased as a share of the total.

Question 14

The mortgage default rate is

Accepted Answer

A) the percentage of home mortgage loans in which the borrower has failed to make the current monthly payment. 
B) equal to the foreclosure rate. 
C) the percentage of home mortgages in which the borrower is 90 days or more late with the payment or it is in the foreclosure process. 
D) the percentage of home mortgages in which the borrower owes more than the home is worth. 
A) the percentage of home mortgage loans in which the borrower has failed to make the current monthly payment. 
B) equal to the foreclosure rate. 
C) the percentage of home mortgages in which the borrower is 90 days or more late with the payment or it is in the foreclosure process. 
D) the percentage of home mortgages in which the borrower owes more than the home is worth.

Question 15

The Fed's low short-term interest rate policy of 2002 to 2004 made it highly attractive for buyers to purchase a house

Accepted Answer

A) with a large down payment and a 30-year, fixed rate mortgage. 
B) with a large down payment and an adjustable rate mortgage. 
C) with a small down payment and an adjustable rate mortgage. 
D) quickly before housing prices began to decline in 2006. 
A) with a large down payment and a 30-year, fixed rate mortgage. 
B) with a large down payment and an adjustable rate mortgage. 
C) with a small down payment and an adjustable rate mortgage. 
D) quickly before housing prices began to decline in 2006.

Question 16

The mortgage-backed securities issued by investment banks caused many investment banks to fail when

Accepted Answer

A) stock prices declined by approximately 40 percent in 2008. 
B) housing prices increased rapidly beginning in 2002. 
C) federal regulators required investment banks to maintain more capital against their residential housing loans than was true for commercial business loans. 
D) the default rates of the mortgages financed by the securities increased sharply. 
A) stock prices declined by approximately 40 percent in 2008. 
B) housing prices increased rapidly beginning in 2002. 
C) federal regulators required investment banks to maintain more capital against their residential housing loans than was true for commercial business loans. 
D) the default rates of the mortgages financed by the securities increased sharply.

Question 17

Since the mid-1990s, the percentage of new mortgages categorized as sub-prime or Alt-A loans has

Accepted Answer

A) remained steady at about 5 percent of all loans. 
B) decreased to about one third of all loans, while conventional loans have increased to about two-thirds. 
C) increased to about one third of all loans, while conventional loans have decreased to about one third as well. 
D) decreased as a result of regulations designed to tighten loan standards. 
A) remained steady at about 5 percent of all loans. 
B) decreased to about one third of all loans, while conventional loans have increased to about two-thirds. 
C) increased to about one third of all loans, while conventional loans have decreased to about one third as well. 
D) decreased as a result of regulations designed to tighten loan standards.

Question 18

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?

Accepted Answer

A) Their government sponsorship increased their cost of acquiring loanable funds. 
B) They were unable to earn profits and pay dividends to their shareholders. 
C) Congressional regulations exerted little or no impact on their business operations. 
D) Their activities were more susceptible to political influence and favoritism. 
A) Their government sponsorship increased their cost of acquiring loanable funds. 
B) They were unable to earn profits and pay dividends to their shareholders. 
C) Congressional regulations exerted little or no impact on their business operations. 
D) Their activities were more susceptible to political influence and favoritism.

Question 19

After new HUD guidelines were issued in 1999, Freddie Mac and Fannie Mae

Accepted Answer

A) extended fewer loans to borrowers making a down payment of 5 percent or less. 
B) extended more loans to borrowers making a down payment of 5 percent or less. 
C) extended new loans only to borrowers making a down payment of at least 20 percent. 
D) refused to extend new loans without full verification that the borrower had prime credit status. 
A) extended fewer loans to borrowers making a down payment of 5 percent or less. 
B) extended more loans to borrowers making a down payment of 5 percent or less. 
C) extended new loans only to borrowers making a down payment of at least 20 percent. 
D) refused to extend new loans without full verification that the borrower had prime credit status.

Question 20

In the latter half of the 1990s, the Department of Housing and Urban Development imposed regulations on Fannie Mae and Freddie Mac, requiring them to

Accepted Answer

A) extend more mortgage loans to households with low and moderate incomes. 
B) accept only mortgages with at least a 20 percent down payment. 
C) tighten lending standards and increase their holdings of low-risk, conventional mortgages. 
D) extend more mortgage loans to households with middle and high incomes. 
A) extend more mortgage loans to households with low and moderate incomes. 
B) accept only mortgages with at least a 20 percent down payment. 
C) tighten lending standards and increase their holdings of low-risk, conventional mortgages. 
D) extend more mortgage loans to households with middle and high incomes.

Exam 20: Appendix: the Crisis of 2008: Causes and Lessons for the Future

Compared to the 1970s and early 1980s, household debt as a share of income in 2007 has

The share of new loans with a down payment of 5 percent or less extended by Freddie Mac and Fannie Mae

What was the original stated purpose of Fannie Mae and Freddie Mac?

The increase in the share of loans extended to borrowers with little or no down payment contributed to the financial crisis of 2008 because these loans

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

During the 1980s and 1990s, the Federal Reserve's monetary policy focused primarily on

During 2006-2008, the housing foreclosure rate rose sharply

The substantial increase in household debt relative to income since the mid 1980s meant that in 2008 many households

A sub-prime loan is a loan extended to borrowers

The primary objective of the monetary policy of the Fed should be

After a period of price stability in the 1990s, housing prices increased dramatically during 2002-2005 because

Which of the following contributed to the rising mortgage default and foreclosure rates and the eventual economic crisis of 2008?

Between 2001-2005,

The mortgage default rate is

The Fed's low short-term interest rate policy of 2002 to 2004 made it highly attractive for buyers to purchase a house

The mortgage-backed securities issued by investment banks caused many investment banks to fail when

Since the mid-1990s, the percentage of new mortgages categorized as sub-prime or Alt-A loans has

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?

After new HUD guidelines were issued in 1999, Freddie Mac and Fannie Mae

In the latter half of the 1990s, the Department of Housing and Urban Development imposed regulations on Fannie Mae and Freddie Mac, requiring them to

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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