As a result of the failure of Fed policy between 2004 and 2007: Question 42 opti

Question

As a result of the failure of Fed policy between 2004 and 2007: Question 42 options: a)The failure of long term interest rates to rise allowed the housing bubble to continue to grow. b)The decrease in long term interest rates resulted in an inflation rate that exceeded 10%. c)A steep rise in long term interest rates led to the current banking crisis. d)The increase in the Federal Funds interest rate led to the current recession that started in December 2007.

Between January 2004 and 2007, the federal funds interest rate increased from 1% to over 5%. As a result: Question 43 options: a)The 10-year Treasury rate also increased by 4%. b)The 20-year Treasury rate remained about constant. c)The 10-year Treasury rate decreased by 4%. d)The 20-year Treasury rate increased by 3%.

Between January 2007 and January 2009, the federal funds interest rate decreased from 5.25% to below 1%. As a result: Question 44 options: a0The 10-year Treasury rate decreased by 5% resulting in a significant increase in business investment. b)The 10-year Treasury rate remained relatively constant, but there was still a significant increase in business investment due to strong consumer demand. c)The 10-year Treasury rate remained relatively constant, and so did business investment. d)Despite a decrease in the 10-year Treasury rate, business investment failed to respond due to weak consumer demand.

Explanation / Answer

As a result of the failure of Fed policy between 2004 and 2007: c)A steep rise in long term interest rates led to the current banking crisis.

Between January 2004 and 2007, the federal funds interest rate increased from 1% to over 5%. As a result: a) The 10-year Treasury rate also increased by 4%.

Between January 2007 and January 2009, the federal funds interest rate decreased from 5.25% to below 1%. As a result: d) Despite a decrease in the 10-year Treasury rate, business investment failed to respond due to weak consumer demand.

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