Reason for the great recession of 2008-2009.

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Answer 1

Question

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

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The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry. Price (dollars) 24 8 MC ATC MR 30 D 45 50 Quantity/time The firm will maximize its profit at a quantity of units. After choosing the profit maximizing quantity, the firm will charge a price of The firm will receive $ in revenue at the profit-maximizing quantity. The total cost of production for this profit-maximizing quantity is S The maximum profit the firm can earn in this situation is $ per unit for this output. How will the situation change over time? Profits will attract rival firms into the market until the profit-maximizing price falls to the level of per-unit cost. ◇ Losses will induce firms to leave this market until the profit maximizing price falls to zero. The market will adjust until the price charged by this firm no longer exceeds marginal cost at the profit-maximizing quantity. This market is already in long-run equilibrium, and will not…

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Answer 2

Question

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

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Answer 3

Question

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

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Answer 4

Question

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

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Answer 5

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

Answer 6

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.

Answer 7

Chapter ST5, Problem 1CQ

To determine

Reason for the great recession of 2008-2009.

Answer 8

Expert Solution & Answer

Explanation of Solution

The recession of 2001 induces the Fed to adopt highly expansionary monetary policy. As a part of this policy change, the Fed kept the interest rate at the lowest level in history. This low rate of interest leads to a huge increase in investment especially in housing properties. This increasing demand on houses increases its price also. And this leads to the emergence of mortgage-backed securities, financed with short-term leveraged lending. As a result, there is an increase in mortgage default rate and the mortgage-backed securities become more risky than before. This situation leads to a fall in the value of mortgage securities. Finally, this leads to the collapse of investment banks and the emergence of great recession.