1. Figure 1 shows the effective federal funds rate and the 30-year fixed rate mortgage in the United States. 20 18 16 Interest rate, monthly average percent 10 9 4 2 0 01.01.1981 01.12.1981 01.11.1982 01.10.1983 01.09.1984 01.08.1985 01.07.1986 01.06.1987 01.05.1988 01.04.1989 01.03.1990 01.02.1991 01.01.1992 01.12.1992 01.11.1993 01.10.1994 01.09.1995 01.08.1996 01.07.1997 01.06.1998 6661 SOTO 000Z TOTO 01.03.2001 01.02.2002 01.01.2003 01.12.2003 POOZ TITO 01.10.2005 01.09.2006 01.08.2007 01.07.2008 01.06.2009 01.05.2010 01.04.2011 01.03.2012 01.02.2013 01.01.2014 01.12.2014 01.11.2015 01.10.2016 01.09.2017 01.08.2018 01.07.2019 01.06.2020 -Effective federal funds rate 30-year fixed rate mortgage Figure 1 (a) How does the credit spread between the effective federal funds rate and the 30-year fixed rate mortgage change over time in the United States? [5 marks] (b) Discuss the possible reasons for your answer in (a) above. [5 marks] (c) Explain how information problems lead banks to lend too little to some customers and too much to others? [15 marks] (d) Briefly explain why did rising house prices prior to 2007-2009 make retail banks more willing to provide mortgages for low income earners with poor credit histories. [5 marks] 1. Figure 1 shows the effective federal funds rate and the 30-year fixed rate mortgage in the United States. 20 18 16 Interest rate, monthly average percent 10 9 4 2 0 01.01.1981 01.12.1981 01.11.1982 01.10.1983 01.09.1984 01.08.1985 01.07.1986 01.06.1987 01.05.1988 01.04.1989 01.03.1990 01.02.1991 01.01.1992 01.12.1992 01.11.1993 01.10.1994 01.09.1995 01.08.1996 01.07.1997 01.06.1998 6661 SOTO 000Z TOTO 01.03.2001 01.02.2002 01.01.2003 01.12.2003 POOZ TITO 01.10.2005 01.09.2006 01.08.2007 01.07.2008 01.06.2009 01.05.2010 01.04.2011 01.03.2012 01.02.2013 01.01.2014 01.12.2014 01.11.2015 01.10.2016 01.09.2017 01.08.2018 01.07.2019 01.06.2020 -Effective federal funds rate 30-year fixed rate mortgage Figure 1 (a) How does the credit spread between the effective federal funds rate and the 30-year fixed rate mortgage change over time in the United States? [5 marks] (b) Discuss the possible reasons for your answer in (a) above. [5 marks] (c) Explain how information problems lead banks to lend too little to some customers and too much to others? [15 marks] (d) Briefly explain why did rising house prices prior to 2007-2009 make retail banks more willing to provide mortgages for low income earners with poor credit histories. [5 marks]
