Macroeconomics 12
During the housing boom, overeager lenders were said to have made "ninja" loans - that is, loans to individuals with "no income, job, or assets." How did ninja loans contribute to the securitization crisis in financial markets in 2007 and 2008?
As interest rates rise, an S&L's cost of funds might rise above the relatively fixed interest yield on its portfolio of earning assets (mortgage loans.) As home prices in a geographical area fall, the value of a local S&L's collateral might fall below the face value of its loan portfolio, exposing the S&L to increased default risk. Institutions such as Fannie Mae and Freddie Mac assemble mortgages originated by individual S&Ls into more widely (geographically) diversified pools of mortgages for purchase by investors, thereby reducing the risk borne by secondary mortgage market investors.
As a real interest rate rise, investment spending in the economy
Decreases
If interest rates increase, the present value of a fixed payment in the future _____.
Decreases
Creation of ________ following the Great Depression has greatly reduced the likely good of runs on banks today.
Deposit Insurance
The present value of lottery winnings paid over a 20- Year period will _______ (rise/fall) with a rise in interest rate.
Falls
An illiquid financial asset is one that can easily be used to buy goods and services. (T/F)
False
Corporate bonds, retained earning, and tax deductions are the three sources of funds that firms have for investments. (T/F)
False
Investment is a larger component of GDP than consumption, but it is much more volatile.
False, it is smaller than consumption (although more volatile).
The Q-theory of investment was developed by ____.
James Tobin
The economist who developed the multiplier accelerator model was ____.
Paul Samuelson
Financial intermediaries reduce the risk of assets through ________.
Portfolio Diversification
Investment spending is very ___________, since it moves in conjunction with GDP.
Procyclical
Since investment spending rises and falls with GDP, it is ______.
Procyclical
If a financial intermediary buys loans from a mortgage company and then packages them to sell in the financial markets, this is known as ________.
Securitization
In 2012, interest rates in home mortgages were in the neighbourhood of 5 percent - very low by historical standards - but many individuals did not wish to buy homes. Using the concept of the real interest rate, can you explain why low interest rates did not entice new buyers?
While nominal rates were low, home owners may not have expected any housing price appreciation or perhaps they even expected depreciation - that is, housing prices to fall. In this case, the real mortgage costs would be high.
