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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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.