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Chapter 13
Question 9
The Federal Reserve System is the central bank of the United States. The Fed is exclusively a
banker's bank and does not conduct commercial banking activities. Its goal is to attain stable
economic growth in the nation, and through its actions, influence the flow of money and credit in
the economy. Specifically, the Fed’s powers and responsibilities include; formulating monetary
policy by making changes in the Cash Reserve Ratio and Statutory Liquidity Ratio, acting as
lender of last resort for the nation's banks and depository institutions; facilitating the collection
and clearance of checks; regulating and supervising banks and other financial institutions; acting
as fiscal agent for the United States Treasury; distributing coin and currency to the public
through depository institutions; and Implementing certain regulations of consumer credit
legislation. Two mandates of Fed are Lender of the last resort; Formulating monetary policy by
making changes in the required reserve ratios.
10. ( Subprime Mortgages) What are subprime mortgages, and what role did they play in the
financial crisis of 2008?
Answer Subprime mortgages is a type of mortgage loan granted to the high risk customers who
have higher chances of default for repayment. The bank charges higher interest rate on such
mortgages as compared to the conventional mortgages to compnesate themselves for the high
risk factor involved.
The basic reason behind the U.S recession in 2008 was that there was too much increase in the
money supply in the economy because central bank had reduced the interest rate. It motivated the
investors to borrow high amount for more investment particularly in the real estate sector in the
economy. Increase in money supply in the economy helped in easing out the credit access which
encourages people to take loans particularly home loans. This leads to rise in the demand for
homes and the prices of real estate had shoot up. Particularly the mortgage lenders offered too
much “creative financing” to lot of risky borrowers who did not had good credit background as
well. They allowed for adjustable rate mortgages which took the loans on unpaid interest on the

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principal amount of home loans. They were speculating that the price of the real estate sector
will increase a lot giving them benefit in long run. But in the long run, people were not able to
pay back their loan which made the banking sector bankrupt. The whole U.S shook down and
there was drastic fall in the money supply in the country which resulted into the recessionary
situation. The main blame went onto the mortgage brokers and investment firms which were
offering high loans to even high risk people. Critics also targeted mortgage giants Fannie Mae
and Freddie Mac, which encouraged loose lending standards by buying or guaranteeing hundreds
of billions of risky loans. (Bianco, 2008)
Chapter 14
6. (Money Creation) Show how each of the following would initially affect a bank assets and
liabilities.
A. Someone makes a $10,000 deposit into a checking account.
Answer The liability of the bank will increase by $10,000.
B. A bank makes a loan of $ 1,000 by establishing a checking account for $1,000.
Answer The asset side will increase in the name of ‘loan’ by $1,000
C. The Loan described in part (B) is spent.
Answer The liability of the bank will increase by $1,000
D. A bank must write off a loan because the borrower defaults.
Answer The liability side will increase.
8. ( Monetary Tools) What tools does the Fed have to purse monetary policy. Which tool does it
use the most.

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Chapter 13 Question 9 The Federal Reserve System is the central bank of the United States. The Fed is exclusively a banker's bank and does not conduct commercial banking activities. Its goal is to attain stable economic growth in the nation, and through its actions, influence the flow of money and credit in the economy. Specifically, the Fed’s powers and responsibilities include; formulating monetary policy by making changes in the Cash Reserve Ratio and Statutory Liquidity Ratio, acting as lender of last resort for the nation's banks and depository institutions; facilitating the collection and clearance of checks; regulating and supervising banks and other financial institutions; acting as fiscal agent for the United States Treasury; distributing coin and currency to the public through depository institutions; and Implementing certain regulations of consumer credit legislation. Two mandates of Fed are –Lender of the last resort; Formulating monetary policy by making changes in the required reserve ratios. 10. ( Subprime Mortgages) What are subprime mortgages, and what role did they play in the financial crisis of 2008? Answer – Subprime mortgages is a type of mortgage loan granted to the high risk customers who have higher chances of default for repayment. The bank charges higher interest rate on such mortgages as compared to the conventional mortgages to compnesate themselves for the high risk factor involved. The basic reason behind the U.S recession in 2008 was tha ...
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