How did mortgage defaults affect banks involved in mortgage lending and mortgage investing?
What will be an ideal response?
Defaults on home mortgage loans caused losses for financial institutions that either directly or indirectly loaned these funds. Many loans were subprime mortgage loans, which were made to individuals with higher credit risk and at higher interest rates. As the economy declined and unemployment rose, the banks suffered reserve losses and had less capacity to extend loans or credit. Contributing to the problem was that some mortgages were bundled together to create mortgage-backed securities, which in essence are bonds backed by mortgage payments. Banks then lent money to investment firms to purchase such bonds. When defaults rose, banks lost more money on the loans made to the investment firms, thus further reducing bank reserves.
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John moved his office from a building he was renting downtown to the carriage house he owns in back of his house. How will his profit change?
a. Implicit costs fall. b. Explicit costs remain unchanged while implicit costs rise. c. Economic profit must fall. d. Explicit costs rise. e. Accounting profit will rise.
Imagine that the U.S. economy is in equilibrium at full employment without inflation where national income is at $6,700 billion. The MPC = 0.8 . If massive flooding along the Mississippi River leads Congress to approve a spending package of $10 billion to aid flood victims, the government must also take which of the following actions to keep the economy in equilibrium at full employment without
inflation? a. increase taxes by $10 billion b. decrease taxes by $10 billion c. increase taxes by more than $10 billion d. decrease taxes by more than $10 billion e. increase taxes by less than $10 billion