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chapter:
ECONOMICS
MACROECONOMICS
29 14
Money, Banking, and the Federal
Reserve System
1.
For each of the following transactions, what is the initial effect (increase or decrease)
on M1? On M2?
a. You sell a few shares of stock and put the proceeds into your savings account.
b. You sell a few shares of stock and put the proceeds into your checking account.
c. You transfer money from your savings account to your checking account.
d. You discover $0.25 under the floor mat in your car and deposit it in your checking
account.
e. You discover $0.25 under the floor mat in your car and deposit it in your savings
account.
Solution
1.
a. Shares of stock are not a component of either M1 or M2, so holding fewer shares
does not decrease either M1 or M2. However, depositing the money into your savings account increases M2, since savings accounts are part of M2 (but not part of
M1). M1 does not change.
b. Shares of stock are not a component of either M1 or M2, and so holding fewer
shares does not decrease either M1 or M2. However, depositing the money into
your checking account increases M1, since checking accounts are part of M1. It
also increases M2, since M1 is part of M2.
c. Moving money from savings to checking has no effect on M2, since both savings accounts and checking accounts are included in M2. However, since savings
accounts are not part of M1, moving money from savings to checking does
increase M1.
d. Depositing cash into a checking account does not change M1 or M2. You are simply transferring money from one component of M1 (currency in circulation) to
another component of M1 (checkable deposits).
e. Depositing $0.25 into your savings account has no effect on M2, since both savings accounts and currency in circulation are in M2. However, since savings
accounts are not part of M1, depositing the $0.25 into your savings account
reduces M1.
2.
There are three types of money: commodity money, commodity-backed money, and
fiat money. Which type of money is used in each of the following situations?
a. Bottles of rum were used to pay for goods in colonial Australia.
b. Salt was used in many European countries as a medium of exchange.
c. For a brief time, Germany used paper money (the “Rye Mark”) that could be
redeemed for a certain amount of rye, a type of grain.
d. The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which
can be used to purchase local goods and services.
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MACROECONOMICS, CHAPTER 14
ECONOMICS, CHAPTER 29
2.
Solution
a. A bottle of rum is commodity money since the rum has other uses.
b. Salt is commodity money since it has other uses.
c. The “Rye Mark” is commodity-backed money since its ultimate value is guaranteed
by a promise that it can be converted into valuable goods (rye grain).
d. Ithaca HOURS are fiat money because their value derives entirely from their status
as a means of payment in Ithaca.
3.
The table below shows the components of M1 and M2 in billions of dollars for the
month of December in the years 2000 to 2010 as published in the 2011 Economic
Report of the President. Complete the table by calculating M1, M2, currency in circulation as a percentage of M1, and currency in circulation as a percentage of M2. What
trends or patterns about M1, M2, currency in circulation as a percentage of M1, and
currency in circulation as a percentage of M2 do you see? What might account for
these trends?
Year
Currency
in
circulation
Traveler’s
checks
Checkable
deposits
Savings
deposits
Time
deposits
Money
market
funds
M1
M2
Currency
in
circulation
as a
percentage
of M1
Currency
in
circulation
as a
percentage
of M2
2000
$531.2
$8.3
$547.4
$1,878.0
$1,046.0
$902.0
?
?
?
?
2001
581.1
8.0
592.9
2,309.5
974.5
962.5
?
?
?
?
2002
626.2
7.8
585.7
2,773.4
894.5
887.5
?
?
?
?
2003
662.5
7.7
636.2
3,162.8
817.8
777.0
?
?
?
?
2004
697.7
7.6
671.1
3,508.8
827.9
694.7
?
?
?
?
2005
724.1
7.2
643.5
3,606.0
993.1
699.4
?
?
?
?
2006
749.6
6.7
610.0
3,694.6
1,205.3
799.0
?
?
?
?
2007
759.7
6.3
607.6
3,872.6
1,275.0
972.7
?
?
?
?
2008
815.0
5.5
782.1
4,106.1
1,455.7
1,080.5
?
?
?
?
2009
861.5
5.1
827.0
4,836.9
1,177.4
820.8
?
?
?
?
2010
915.7
4.7
911.7
5,357.6
926.6
700.0
?
?
?
?
Source: 2011 Economic Report of the President.
Solution
3.
In the completed table that follows, M1 consists of currency in circulation, traveler’s checks, and checkable deposits. M2 consists of M1 plus money market funds,
time deposits, and savings deposits. From 2000 to 2010, M1 nearly doubled, and the
same was true of M2, which also almost doubled from 2000 to 2010. Currency as a
percentage of M1 was relatively stable, at around 50%, with a rise during the econmic boom years until 2007 and subsequent fall. Currency as a percentage of M2 was
almost constant at between 10% and 11%.
The increase in currency as a percentage of M1 during the mid-2000s could reflect
increased use of credit cards, with a corresponding reduction in the importance of
traveler’s checks and checkable deposits. Yet, since currency as a percentage of M2
did not change, it could also reflect a shift from checkable deposits to money market
funds, time deposits, and savings deposits.
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S-195
Year
Currency
in
circulation
Traveler’s
checks
Checkable
deposits
Savings
deposits
Time
deposits
Money
market
funds
M1
M2
Currency
in
circulation
as a
percentage
of M1
Currency
in
circulation
as a
percentage
of M2
2000
$531.2
$8.3
$547.7
$1,878.0
$1,046.0
$902.0
$1,087.2
$4,913.2
49%
11%
2001
581.1
8.0
592.9
2,309.5
974.5
962.5
1,182.0
5,428.5
49
11
2002
626.2
7.8
585.7
2,773.4
894.5
887.5
1,219.7
5,775.1
51
11
2003
662.5
7.7
636.2
3,162.8
817.8
777.0
1,306.4
6,064.0
51
11
2004
697.7
7.6
671.1
3,508.8
827.9
694.7
1,376.4
6,407.8
51
11
2005
724.1
7.2
643.5
3,606.0
993.1
699.4
1,374.8
6,673.3
53
11
2006
749.6
6.7
610.0
3,694.6
1,205.3
799.0
1,366.3
7,065.2
55
11
2007
759.7
6.3
607.6
3,872.6
1,275.0
972.7
1,373.6
7,493.9
55
10
2008
815.0
5.5
782.1
4,106.1
1,455.7
1,080.5
1,602.6
8,244.9
51
10
2009
861.5
5.1
827.0
4,836.9
1,177.4
820.8
1,693.6
8,528.7
51
10
2010
915.7
4.7
911.7
5,357.6
926.6
700.0
1,832.1
8,816.3
50
10
Source: 2011 Economic Report of the President.
4.
Indicate whether each of the following is part of M1, M2, or neither:
a. $95 on your campus meal card
b. $0.55 in the change cup of your car
c. $1,663 in your savings account
d. $459 in your checking account
e. 100 shares of stock worth $4,000
f. A $1,000 line of credit on your Sears credit card
4.
Solution
a. $95 on your campus meal card is similar to a gift certificate. Because it can only be
used for one purpose, it is not part of either M1 or M2.
b. $0.55 in the change cup of your car is part of currency in circulation; it is part of
both M1 and M2.
c. $1,663 in your savings account isn’t directly usable as a medium of exchange, so
it is not part of M1; but because it can readily be converted into cash or checkable
deposits, it is part of M2.
d. A $459 balance in your checking account is part of both M1 and M2; it represents
a checkable deposit.
e. 100 shares of stock are not part of either M1 or M2. Although an asset, stock is not
a highly liquid asset.
f. A $1,000 line of credit on your Sears credit card is not part of either M1 or M2
because it does not represent an asset.
5.
Tracy Williams deposits $500 that was in her sock drawer into a checking account at
the local bank.
a. How does the deposit initially change the T-account of the local bank? How does it
change the money supply?
b. If the bank maintains a reserve ratio of 10%, how will it respond to the new
deposit?
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MACROECONOMICS, CHAPTER 14
ECONOMICS, CHAPTER 29
c. If every time the bank makes a loan, the loan results in a new checkable bank
deposit in a different bank equal to the amount of the loan, by how much could
the total money supply in the economy expand in response to Tracy’s initial cash
deposit of $500?
d. If every time the bank makes a loan, the loan results in a new checkable bank
deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of 5%, by how much could the money supply expand in
response to Tracy’s initial cash deposit of $500?
Solution
5.
a. Initially, the bank’s reserves rise by $500, as do its checkable deposits. There is no
initial change in the money supply; currency in circulation has fallen by $500 but
checkable deposits have increased by $500.
Assets
Reserves
+$500
Liabilities
Checkable Deposits
+$500
b. The bank will hold $50 as reserves against the new deposit and make additional
loans equal to $450.
c. The money supply can expand by $4,500. When Tracy deposits $500, the bank now
holds $450 in excess reserves. This will ultimately lead to an increase in the money
supply of $450/0.1 = $4,500.
d. The money supply can expand by $9,500. When Tracy deposts $500, the bank now
holds $475 in excess reserves. This will ultimately increase the money supply by
$475/0.05 = $9,500.
6.
Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps
it in his wallet.
a. How will the withdrawal change the T-account of the local bank and the money
supply?
b. If the bank maintains a reserve ratio of 10%, how will it respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount
of deposits it holds until its level of reserves satisfies its required reserve ratio. The
bank reduces its deposits by calling in some of its loans, forcing borrowers to pay
back these loans by taking cash from their checking deposits (at the same bank) to
make repayment.
c. If every time the bank decreases its loans, checkable bank deposits fall by the
amount of the loan, by how much will the money supply in the economy contract
in response to Ryan’s withdrawal of $400?
d. If every time the bank decreases its loans, checkable bank deposits fall by the
amount of the loan and the bank maintains a reserve ratio of 20%, by how much
will the money supply contract in response to a withdrawal of $400?
Solution
6.
a. Initially, the bank’s reserves fall by $400, as do its checkable deposits. There is no
initial change in the money supply; currency in circulation has risen by $400 but
checkable deposits have decreased by $400.
Assets
Reserves
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−$400
Liabilities
Checkable Deposits
−$400
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b. Assuming that the bank has other checkable deposits, the bank will be holding
insufficient reserves. The bank was holding $40 of the $400 withdrawal as required
reserves for the $400 deposit; however, the remaining $360 was being held as
required reserves for other deposits. The bank will have to reduce its deposits by
$360/0.1 = $3,600 to reduce its required reserves by $360 (10% of $3,600) in
order to maintain the required reserve ratio of 10%.
c. The money supply will contract by ($400/0.1) − $400 = $3,600. Checkable deposits fall by $4,000, but only $3,600 represents a decrease in the money supply
because $400 of the $4,000 fall in checkable deposits has been converted into cash
in Ryan’s wallet.
d. The money supply will decrease by ($400/0.2) − $400 = $1,600. Checkable deposits fall by $2,000, but only $1,600 represents a decrease in the money supply.
7.
The government of Eastlandia uses measures of monetary aggregates similar to those
used by the United States, and the central bank of Eastlandia imposes a required
reserve ratio of 10%. Given the following information, answer the questions below.
Bank deposits at the central bank = $200 million
Currency held by public = $150 million
Currency in bank vaults = $100 million
Checkable bank deposits = $500 million
Traveler’s checks = $10 million
a. What is M1?
b. What is the monetary base?
c. Are the commercial banks holding excess reserves?
d. Can the commercial banks increase checkable bank deposits? If yes, by how much
can checkable bank deposits increase?
7.
Solution
a. M1 equals the sum of currency held by the public ($150 million), checkable deposits ($500 million), and traveler’s checks ($10 million), or $660 million.
b. The monetary base is the sum of currency held by the public ($150 million) and
the reserves of the commercial banks [currency in bank vaults ($100 million) and
bank deposits at the central bank ($200 million)]. The monetary base is $450
million.
c. Required reserves are $50 million (10% of $500 million). Because total reserves
are $300 million [currency in bank vaults ($100 million) plus bank deposits at
the central bank ($200 million)], the commercial banks are holding $250 million
($300 million − $50 million) in excess reserves.
d. Since the commercial banks are holding excess reserves, they can increase deposits.
With a required reserve ratio of 10%, reserves of $300 million can support a total
of $300 million/0.1 = $3,000 million in deposits. Commercial banks can increase
deposits by an additional $2,500 million.
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MACROECONOMICS, CHAPTER 14
ECONOMICS, CHAPTER 29
8.
In Westlandia, the public holds 50% of M1 in the form of currency, and the required
reserve ratio is 20%. Estimate how much the money supply will increase in response
to a new cash deposit of $500 by completing the accompanying table. (Hint: The first
row shows that the bank must hold $100 in minimum reserves—20% of the $500
deposit—against this deposit, leaving $400 in excess reserves that can be loaned out.
However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5
= $200 of the loan will be deposited in round 2 from the loan granted in round 1.)
How does your answer compare to an economy in which the total amount of the loan
is deposited in the banking system and the public doesn’t hold any of the loan in currency? What does this imply about the relationship between the public’s desire for
holding currency and the money multiplier?
Round
Deposits
Required
reserves
Excess
reserves
Loans
Held as
currency
1
$500.00
$100.00
$400.00
$400.00
$200.00
2
200.00
?
?
?
?
3
?
?
?
?
?
4
?
?
?
?
?
5
?
?
?
?
?
6
?
?
?
?
?
7
?
?
?
?
?
8
?
?
?
?
?
9
?
?
?
?
?
10
?
?
?
?
?
?
?
?
?
?
Total after
10 rounds
Solution
8.
As shown in the accompanying table, after 10 rounds, loans can expand by $666.60;
this is also the increase in the money supply at this point. (Although deposits increase
by $833.25, currency held by the public falls by $166.70—it initially fell by $500 and
eventually rose again by $333.30.) If the total amount of each loan is deposited in the
banking system (that is, the public does not hold any of the loans in currency), the
money supply would increase by ($500/0.2) − $500 = $2,000; deposits would increase
by $2,500. The money multiplier decreases in size as the public holds a greater percentage of loans in currency.
Round
Deposits
Required
reserves
Excess
reserves
Loans
Held as
currency
1
$500.00
$100.00
$400.00
$400.00
$200.00
2
200.00
40.00
160.00
160.00
80.00
3
80.00
16.00
64.00
64.00
32.00
4
32.00
6.40
25.60
25.60
12.80
5
12.80
2.56
10.24
10.24
5.12
6
5.12
1.02
4.10
4.10
2.05
7
2.05
0.41
1.64
1.64
0.82
8
0.82
0.16
0.66
0.66
0.33
9
0.33
0.07
0.26
0.26
0.13
10
0.13
0.03
0.10
0.10
0.05
$833.25
$166.65
$666.60
$666.60
$333.30
Total after
10 rounds
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M O N E Y, B A N K I N G, A N D T H E F E D E R A L R E S E R V E S Y S T E M
9.
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What will happen to the money supply under the following circumstances in a
checkable-deposits-only system?
a. The required reserve ratio is 25%, and a depositor withdraws $700 from his checkable bank deposit.
b. The required reserve ratio is 5%, and a depositor withdraws $700 from his checkable bank deposit.
c. The required reserve ratio is 20%, and a customer deposits $750 to her checkable
bank deposit.
d. The required reserve ratio is 10%, and a customer deposits $600 to her checkable
bank deposit.
Solution
9.
a. Checkable deposits contract by $2,800, but $700 is converted into currency held by
the public. The money supply contracts by $2,100.
b. Checkable deposits contract by $14,000, but $700 is converted into currency held
by the public. The money supply contracts by $13,300.
c. Checkable deposits expand by $3,750, but currency in circulation falls by $750.
The money supply expands by $3,000.
d. Checkable deposits expand by $6,000, but currency in circulation falls by $600.
The money supply expands by $5,400.
10.
Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to
manage the money supply, the central bank of Albernia does. The commercial banks
of Albernia have $100 million in reserves and $1,000 million in checkable deposits;
the initial required reserve ratio is 10%. The commercial banks follow a policy of
holding no excess reserves. The public holds no currency, only checkable deposits in
the banking system.
a. How will the money supply change if the required reserve ratio falls to 5%?
b. How will the money supply change if the required reserve ratio rises to 25%?
Solution
10.
a. If the required reserve ratio falls to 5%, the commercial banks of Albernia will be
holding $50 million in excess reserves. Since the banks follow a policy of holding
no excess reserves, the banks will expand deposits by making loans. The banks’
reserves of $100 million will support $2,000 million in deposits at a reserve ratio
of 5%. The bank will expand loans and deposits by $1,000 million, so the money
supply expands by $1,000 million.
b. If the required reserve ratio rises to 25%, the commercial banks of Albernia will
not be holding enough reserves to support $1,000 million in deposits. The banks’
reserves will only support $400 million in deposits. The commercial banks will
have to decrease loans and deposits by $600 million, so the money supply will contract by $600 million.
11.
Using Figure 14-6, find the Federal Reserve district in which you live. Go to
http://www.federalreserve.gov/bios/pres.htm and click on your district to identify the
president of the Federal Reserve Bank in your district. Go to http://www.federal
reserve.gov/fomc/ and determine if the president of the regional Federal Reserve bank
in your district is currently a voting member of the Federal Open Market Committee
(FOMC).
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MACROECONOMICS, CHAPTER 14
ECONOMICS, CHAPTER 29
11.
Solution
Answers will vary depending on where you live and when you look up your answer. For
example, if you lived in Reedley, California, in September 2011, you were in the San
Francisco district of the Federal Reserve system. John C. Williams was the president of
the Federal Reserve Bank of San Francisco and an alternate (nonvoting) member of the
FOMC at that time.
12.
Show the changes to the T-accounts for the Federal Reserve and for commercial banks
when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds
a fixed amount of currency (so that all loans create an equal amount of deposits in
the banking system), the minimum reserve ratio is 10%, and banks hold no excess
reserves, by how much will deposits in the commercial banks change? By how much
will the money supply change? Show the final changes to the T-account for commercial banks when the money supply changes by this amount.
Solution
12.
When the Federal Reserve buys $50 million in Treasury bills from commercial banks, its
assets increase by $50 million (it now owns $50 million in Treasury bills) but its liabilities also increase by $50 million as it credits the banks’ accounts at the Federal Reserve,
part of the monetary base. From the perspective of commercial banks, their assets fall by
$50 million because they sell Treasury bills to the Fed, but their assets also rise by $50
million when their deposits at the Fed (reserves) are credited with $50 million.
Initial changes to the T-account of the Federal Reserve immediately after the Fed purchase of $50 million in Treasury bills:
Assets
Treasury bills
+$50 million
Liabilities
Monetary base
+$50 million
Initial changes to the T-account of commercial banks immediately after the Fed purchase of $50 million in Treasury bills:
Assets
Treasury bills
Reserves
−$50 million
+$50 million
Liabilities
No change
After the Federal Reserve buys $50 million from commercial banks, the banks are
holding $50 million in excess reserves. Since the banks do not want to hold any excess
reserves, they will increase loans and deposits by $500 million, the maximum amount
that $50 million in reserves can support. Therefore, the money supply will also
increase by $500 million.
Total changes to the T-account of commercial banks after the Fed purchase of
$50 million in Treasury bills:
Assets
Treasury bills −$50 million
Reserves
+$50 million
Loans
+$500 million
13.
KrugWellsECPS3e_Macro_CH14.indd S-200
Liabilities
Checkable deposits
+$500 million
Show the changes to the T-accounts for the Federal Reserve and for commercial banks
when the Federal Reserve sells $30 million in U.S. Treasury bills. If the public holds a
fixed amount of currency (so that all new loans create an equal amount of checkable
bank deposits in the banking system) and the minimum reserve ratio is 5%, by how
much will checkable bank deposits in the commercial banks change? By how much
will the money supply change? Show the final changes to the T-account for the commercial banks when the money supply changes by this amount.
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M O N E Y, B A N K I N G, A N D T H E F E D E R A L R E S E R V E S Y S T E M
S-201
Solution
13.
When the Federal Reserve sells $30 million in Treasury bills to commercial banks, its
assets decrease by $30 million (it now owns $30 million less in Treasury bills), but
its liabilities also decrease by $30 million as the banks pay the Federal Reserve for the
Treasury bills from their accounts at the Fed (part of the monetary base). From the
perspective of commercial banks, their assets rise by $30 million because they buy the
Treasury bills from the Fed, but their assets also fall by $30 million when they pay for
the Treasury bills from their deposits at the Fed (their reserves).
Initial changes to the T-account of the Federal Reserve immediately after the Fed sale
of $30 million in Treasury bills:
Assets
Treasury bills
−$30 million
Liabilities
Monetary base
−$30 million
Initial changes to the T-account of commercial banks immediately after the Fed sale
of $30 million in Treasury bills:
Assets
Treasury bills
Reserves
+$30 million
−$30 million
Liabilities
No change
After the Federal Reserve sells $30 million in Treasury bills, the banks are no longer
holding enough reserves to support their deposits. The banks will need to reduce loans
and deposits by $600 million—the amount of deposits that were supported by the
$30 million in reserves used to buy the Treasury bills. So the money supply will also
decrease by $600 million.
All changes to the T-account of commercial banks after the Fed sale of $30 million in
Treasury bills:
Assets
Treasury bills +$30 million
Reserves
−$30 million
Loans
−$600 million
14.
Liabilities
Checkable deposits
−$600 million
The Congressional Research Service estimates that at least $45 million of counterfeit
U.S. $100 notes produced by the North Korean government are in circulation.
a. Why do U.S. taxpayers lose because of North Korea’s counterfeiting?
b. As of August 2011, the interest rate earned on one-year U.S. Treasury bills was
0.11%. At a 0.11% rate of interest, what is the amount of money U.S. taxpayers are
losing per year because of these $45 million in counterfeit notes?
Solution
14.
a. When North Korea circulates fake currency, the Federal Reserve does not hold any
assets, and the U.S. government does not get the interest from the Treasury bills
it would have gotten if it had printed the notes. The cost of counterfeiting is the
interest forgone on U.S. Treasury bills that the U.S. government would receive from
legally printed $100 notes. U.S. taxpayers lose because the government does not get
this interest.
b. The amount of interest forgone per year is 0.11% × $45 million = $49,500.
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MACROECONOMICS, CHAPTER 14
ECONOMICS, CHAPTER 29
15.
As shown in Figure 14-9, the portion of the Federal Reserve’s assets made up of U.S.
Treasury bills has declined since 2007. Go to www.federalreserve.gov. Under “Select
Statistical Releases,” click on “All Statistical Releases.” Under the heading “Money
Stock and Reserve Balances,” click on “Factors Affecting Reserve Balances.” Click on
the date of the current release.
a. Under “Statement of Condition of Each Federal Reserve Bank,” look in the “Total”
column. What is the amount displayed next to “Total assets”? What is the amount
displayed next to “U.S. Treasury securities”? What percentage of the Federal
Reserve’s total assets are currently made up of U.S. Treasury bills?
b. Do the Federal Reserve’s assets consist primarily of U.S. Treasury securities, as they
did in January 2007, the beginning of the graph in Figure 14-9, or does the Fed still
own a large number of other assets, as it did in mid-2011, the end of the graph in
Figure 14-9?
15.
Solution
a. Answers will vary. As of data released on October 5, 2011, the Fed’s assets
were $2,862,954 million, and U.S. Treasury holdings were $1,671,784 million;
($1,671,784/$2,862,954) × 100 = 58.4% of the Fed’s total assets were made up of
U.S. Treasury securities.
b. As of October 5, 2011, the Federal Reserve still owned a large number of other
assets, and the Fed’s balance sheet had not yet returned to normal.
16.
The accompanying figure shows new U.S. housing starts, in thousands of units per
month, between January 1980 and August 2011. The graph shows a large drop in new
housing starts in 1984–1991 and 2006–2009. New housing starts are related to the
availability of mortgages.
New housing
starts
(thousands)
2,500
2,000
1,500
1,000
Source: Federal Reserve Bank of St. Louis.
20
10
20
05
20
00
19
95
19
90
19
85
19
80
500
Year
a. What caused the drop in new housing starts in 1984–1991?
b. What caused the drop in new housing starts in 2006–2009?
c. How could better regulation of financial institutions have prevented these two
instances?
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Solution
16.
a. The drop in new housing starts in 1984–1991 was caused by the unavailability of
easy mortgage financing resulting from the Savings and Loans (S&L) crisis. S&Ls
had invested in overly risky real estate assets, and many of them failed. As the government closed over 1,000 S&Ls, mortgages became less easily available, and new
housing starts dropped dramatically.
b. The drop in new housing starts in 2006–2009 was caused by the unavailability of
easy mortgage financing that precipitated the 2008 financial crisis. When many
homeowners who had financed their homes at subprime lending rates defaulted on
their mortgages, those financial institutions that had invested in securitized subprime loans got into financial trouble and restricted—or stopped—lending.
c. Better regulation of the S&Ls could have prevented them from investing in risky
real estate assets, preventing their collapse. Similarly, better regulation of financial
institutions that purchased securitized subprime loans could have prevented those
institutions from failing.
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