John Taylor has argued that: "Considerable empirical work supports the view that interest rates were too low for too long in 2003-2005 and were a major factor in the housing boom and bust that resulted." Source: John Taylor, First Principles: Five Keys to Restoring America's Prosperity, New York: W.W. Norton & Company, 2012, p. 133. When comparing the actual target federal funds rate and the federal funds rate suggeted by the Taylor rule during the 2003-2005 period, the Taylor rule federal funds rate was greater than the actual target federal funds rate, thus indicating that interest rates were too low during the 2003-2005 period. The interest rates during the 2003-2005 period may have contributed to the housing boom and bust by: (Select all that apply) A. creating a situation where financial institutions made too many loans because of the high demand for mortgages. B. allowing Fannie Mae and Freddie Mac to bundle large amount of loans into mortgage-backed securites. C. keeping the demand for mortgage loans above the equilibrium level causing the prices to become inflated. D. setting interest rates at a level that caused the public to save a higher percentage of their income in mortgage loans.

Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 11CQ
Question
John Taylor has argued that: "Considerable empirical work supports the view that interest rates were too low for too long in 2003-2005 and were a major factor in the housing boom and bust that resulted."
Source: John Taylor, First Principles: Five Keys to Restoring America's Prosperity, New York: W.W. Norton & Company, 2012, p. 133.
When comparing the actual target federal funds rate and the federal funds rate suggeted by the Taylor rule during the 2003-2005 period, the Taylor rule federal funds rate was greater than the actual
target federal funds rate, thus indicating that interest rates were too low
during the 2003-2005 period.
The interest rates during the 2003-2005 period may have contributed to the housing boom and bust by: (Select all that apply)
A. creating a situation where financial institutions made too many loans because of the high demand for mortgages.
B. allowing Fannie Mae and Freddie Mac to bundle large amount of loans into mortgage-backed securites.
C. keeping the demand for mortgage loans above the equilibrium level causing the prices to become inflated.
D. setting interest rates at a level that caused the public to save a higher percentage of their income in mortgage loans.
Transcribed Image Text:John Taylor has argued that: "Considerable empirical work supports the view that interest rates were too low for too long in 2003-2005 and were a major factor in the housing boom and bust that resulted." Source: John Taylor, First Principles: Five Keys to Restoring America's Prosperity, New York: W.W. Norton & Company, 2012, p. 133. When comparing the actual target federal funds rate and the federal funds rate suggeted by the Taylor rule during the 2003-2005 period, the Taylor rule federal funds rate was greater than the actual target federal funds rate, thus indicating that interest rates were too low during the 2003-2005 period. The interest rates during the 2003-2005 period may have contributed to the housing boom and bust by: (Select all that apply) A. creating a situation where financial institutions made too many loans because of the high demand for mortgages. B. allowing Fannie Mae and Freddie Mac to bundle large amount of loans into mortgage-backed securites. C. keeping the demand for mortgage loans above the equilibrium level causing the prices to become inflated. D. setting interest rates at a level that caused the public to save a higher percentage of their income in mortgage loans.
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