The financial crisis of 2008 was attributed to the macroeconomic effects of the

Question

The financial crisis of 2008 was attributed to the macroeconomic effects of the burst of the housing bubble. Some commentators claim that interest rates during the period leading to the bubble were too low. The central bank's expansionary monetary policy artificially lowered interest rates and increased demand. With low borrowing costs, money was pumped into housing and other sectors leading to an unsustainable increase in prices. Which of the following, if true, would weaken the claim that low interest rates fueled the housing bubble in the U.S.?

A. Recent economic research shows that the short-term nominal interest rate has been delinked from the long-term real interest rate.

B. Prior to the crisis, household debt as a proportion of income was at its highest level in 18 years.

C. The corporate tax rate was also high during the same period.

D. The ambit of government-sponsored health care was recently widened leading to an increase in projected government expenditure.

E. To prevent bank-runs, bank deposits are insured by a government agency.

Explanation / Answer

A) Short term nominal intrest rates have been delinked from long-term real intrest rates, This shows that only short-term nominal intrest rates are provided by banks.

If nominal rates are delinked from real intrest rates then certainly other parameters would be looked to decide what the potential intrest rates must be which will lead to increased intrest rates.

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