Aa 5. When the Fed does too much Which of the following is true regarding Federa

Question

Aa 5. When the Fed does too much Which of the following is true regarding Federal Reserve policy in 2001-20047 O The Federal Funds rate was held very low to make credit cheap O Implemented contractionary monetary policy to prevent inflation O Did very little to combat the high unemployment rate Some economists argue that the Federal Reserve contributed to the housing price bubble and eventual bust that caused the 2007-2008 financial crisis. Why didn't the Fed pop the bubble with tight monetary policy before housing prices rose too high? Check all that apply. The Fed did not have any power over banks to restrain subprime mortgages. Tight m onetary policy would have increased unemployment. The Fed may not have anticipated the havoc the housing bust would create.

Explanation / Answer

5.

1.

A. the federal fund rate was held very low to make credit cheap

The federal fund rate was 6.5% in the year 2000, but came down to 2% to combat the recession and high level of unemployment rate. Further, the federal fund rate came down to 1% by the mid of 2004 to push the economy on a path of growth and end the recessionary impacts. Hence, from 2001 to 2003, the federal fund rate has been come down on a consistent basis to make credit to be cheap.

2.

C

Federal Reserve had the power to regulate the banks and their nature of transactions. But, the Federal Reserve hoped to implement the mop-up strategy and never thought that the bubble bust will create such a big problem. Further, the Federal Reserve had already high level of federal fund rates at 5% to 5.26% between 2006 and July 2007. Afterwards, it slowly came down. Hence, before the onset of crisis of 2007-8, there was tightened monetary policy in place.

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