Question

When the government enacts policies that lead to lower mortgage lending standards and lower interest rates, their actions can indirectly lead to higher home prices.
A. True
B. False

Answer 1

Answer:

A. True

Explanation:

When the government enacts policies that lead to lower mortgage lending standards and lower interest rates, their actions can indirectly lead to higher home prices. This is because the lower interest rates and lower quality mortgage lending will boost housing credit demand which can lead to higher prices of houses due to increase in their demand.

The lower quality lending (sub-prime lending) and lower interest rates can thereby lead to an real estate bubble in the economy. This bubble when it bursts can cause a financial recession in the economy. Thus, the government should be very careful while supporting loose credit policies.