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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Students have asked these similar questions

Why did housing prices rise sharply during 2002-2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 before the 2008-2009 recession began?

Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point A after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point C after the change d The equilibrium will be at point E before the change in expectations and point C after the change

Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers increases, but producers are not affected. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point A after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point C after the change d The equilibrium will be at point E before the change in expectations and point C after the change

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.