The financial crisis of 2008 was attributed to macroeconomic effects of the burs

Question

The financial crisis of 2008 was attributed to macroeconomic effects of the burst of the housing bubble. Some commentators claim that intrest rates during the period leading to the bubble were too low. The central banks's expansionary monetary policy artificially lowered intrest rates and increased demand. With low borowing costs, money was pumped into housing and other sectors leading to an unsustainable increase in prices.

Which of the following, if true, would weaken the claim that low intrest rates fueled the housing bubble in the U.S.?

ONLY ONE ANSWER

A. To prevent bank-runs, bank deposits are insured by a government agency.

B. Recent economic research shows that the short-term nominal intrest rate has been delinked from the long-term real intrest rate.

C. The corporate tax rate was also high during the same period.

D. The ambit of government-sponsored health care was recently widened leading to an increase in projected government expenditure.

E. Prior to the crisis, household debt as a proportion of income was at its highest level in 18 years.

Explanation / Answer

D. The ambit of government-sponsored health care was recently widened leading to an increase in projected government expenditure – Note that when the government expenditure is increased, the IS curve shifts to the right, raising the interest rate. The other four factors decreases the short term interest rate so they do not enfeeble the claim.

Hence the answer should be D

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