Deck 25: Transmission Mechanisms of Monetary Policy

Question 1

An expansionary monetary policy lowers the real interest rate,causing the domestic currency to ________,thereby ________ net exports.

A)appreciate; raising
B)appreciate; lowering
C)depreciate; raising
D)depreciate; lowering

Answer 1

depreciate; raising

Question 2

According to the traditional interest-rate channel,expansionary monetary policy lowers the real interest rate,thereby raising expenditure on

A)business fixed investment.
B)government expenditure.
C)consumer nondurables.
D)net exports.

Answer 2

business fixed investment.

Question 3

According to Tobin's q theory,when equity prices are low the market price of existing capital is ________ relative to new capital,so expenditure on fixed investment is ________.

A)cheap; low
B)dear ; low
C)cheap; high
D)dear; high

Answer 3

cheap; low

Question 4

Tobin's q is defined as the market value of firms ________ the replacement cost of capital.

A)times
B)minus
C)plus
D)divided by

Question 5

If the aggregate price level adjusts slowly over time,then an expansionary monetary policy lowers

A)only the short-term nominal interest rate.
B)only the short-term real interest rate.
C)both the short-term nominal and real interest rates.
D)the short-term nominal,the short-term real,and the long-term real interest rates.

Question 6

A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.

A)lowering real; decreasing
B)lowering real; increasing
C)raising nominal; increasing
D)raising real; increasing

Question 7

According to Tobin's q theory,when q is ________,firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital.

A)low; low
B)low; high
C)high; low
D)high; high

Question 8

If monetary policy can influence ________ prices and conditions in ________ markets,then it can affect spending through channels other than the traditional interest-rate channel.

A)asset; labor
B)asset; credit
C)commodity; labor
D)commodity; credit

Question 9

During the Great Depression,Tobin's q

A)rose dramatically,as did real interest rates.
B)fell to unprecedentedly low levels.
C)stayed fairly constant,in contrast to most other economic measures.
D)rose only slightly,in spite of Hoover's attempts to prop it up.

Question 10

A contractionary monetary policy raises the real interest rate,causing the domestic currency to ________,thereby ________ net exports.

A)appreciate; raising
B)appreciate; lowering
C)depreciate; raising
D)depreciate; lowering

Question 11

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the

A)traditional interest-rate channel.
B)Tobins' q theory.
C)wealth effects.
D)cash flow channel.

Question 12

According to Tobin's q theory,________ policy can affect ________ spending through its effect on the prices of common stock.

A)fiscal; consumption
B)fiscal; investment
C)monetary; consumption
D)monetary; investment

Question 13

According to Tobin's q theory,if q is ________,new plant and equipment capital is ________ relative to the market value of business firms,so companies can buy a lot of new investment goods with only a ________ issue of stock.

A)high; dear; large
B)high; cheap; large
C)high; cheap; small
D)low; cheap; large
E)low; cheap; small

Question 14

According to Tobin's q theory,when equity prices are high the market price of existing capital is ________ relative to new capital,so expenditure on fixed investment is ________.

A)cheap; low
B)dear ; low
C)cheap; high
D)dear; high

Question 15

Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior.

A)nominal; more; real
B)real; less; nominal
C)real; more; nominal
D)market; more; real

Question 16

An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar.

A)lowering nominal; decreasing
B)lowering real; decreasing
C)raising nominal; increasing
D)raising real; increasing

Question 17

Since Regulation Q has been abolished,there have been doubts raised about the size of the effect of the ________ channel.

A)balance sheet
B)bank lending
C)cash flow
D)unanticipated price level

Question 18

Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 19

In the late 1990s,the stock market bubble ________ the value of Tobin's q,and caused ________ in business equipment.

A)increased; underinvestment
B)increased; overinvestment
C)decreased; underinvestment
D)decreased; overinvestment

Question 20

Tobin's q theory suggests that monetary policy may affect investment spending through its impact on

A)stock prices.
B)interest rates.
C)bond prices.
D)cash flow.

Question 21

An expansionary monetary policy raises firms' cash flows by ________ interest rates.

A)lowering real
B)lowering nominal
C)raising real
D)raising nominal

Question 22

According to the household liquidity effect,an expansionary monetary policy causes a ________ in the value of households' financial assets,causing consumer durable expenditure to ________.

A)decline; rise
B)rise; rise
C)rise; fall
D)decline; fall

Question 23

Because of the presence of asymmetric information problems in credit markets,an expansionary monetary policy causes a ________ in net worth,which ________ the adverse selection problem,thereby ________ increased lending to finance investment spending.

A)decline; increases; encouraging
B)rise; increases; discouraging
C)rise; reduces; encouraging
D)decline; reduces; discouraging

Question 24

Due to asymmetric information in credit markets,monetary policy may affect economic activity through the balance sheet channel,where an increase in the money supply

A)raises stock prices,lowering the cost of new capital relative to firms' market value,thus increasing investment spending.
B)raises firms' net worth,decreasing adverse selection and moral hazard problems,thus increasing banks' willingness to lend to finance investment spending.
C)raises the level of bank reserves,deposits,and bank loans,thereby raising spending by those individuals who do not have access to credit markets.
D)lowers the value of the dollar,increasing net exports and aggregate demand.

Question 25

Discuss three channels by which monetary policy affects stock prices and aggregate spending.

Question 26

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.Which of the following is not one of these lessons?

A)Rising interest rates indicate a tightening of monetary policy,whereas falling interest rates indicate an easing of monetary policy.
B)Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C)Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy,thus providing a rationale for price stability as the primary long-run goal for monetary policy.
D)Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

Question 27

An expansionary monetary policy may cause asset prices to rise,thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise.This monetary transmission mechanism is referred to as

A)the household liquidity effect.
B)the wealth effect.
C)Tobin's q theory.
D)the cash flow effect.

Question 28

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.These lessons include:

A)Rising interest rates indicate a tightening of monetary policy,whereas falling interest rates indicate an easing of monetary policy.
B)Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C)Avoiding fluctuations in the level of unemployment is an important objective of monetary policy,thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
D)Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms.

Question 29

In the late 1990s and early 2000s,the Japanese economy has experienced

A)easy monetary policy as indicated by falling nominal interest rates.
B)easy monetary policy as indicated by short-term interest rates near zero.
C)tight monetary policy as indicated by falling asset prices.
D)tight monetary policy as indicated by short-term interest rates near zero.

Question 30

Explain the traditional interest-rate channel for expansionary monetary policy.Explain how a tight monetary policy affects the economy through this channel.

Question 31

A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard.

A)raises; higher
B)raises; lower
C)reduces; higher
D)reduces; lower

Question 32

The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 33

According to the household liquidity effect,higher stock prices lead to increased consumption expenditures because consumers

A)feel more secure about their financial position.
B)want to sell stocks and spend the proceeds before stock prices fall.
C)believe that their wages will increase due to increased profitability of firms.
D)can now afford more expensive imports.

Question 34

Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.

Question 35

Recent Japanese experience has been characterized by tight monetary policy,as indicated by

A)falling interest rates.
B)short-term interest rates near zero.
C)falling asset prices.
D)low real interest rates.

Question 36

If a contractionary monetary policy lowers the price level by more than expected,it raises the real value of consumer debt.This reduces consumer expenditure through

A)the bank lending channel.
B)Tobin's q.
C)the traditional interest-rate channel.
D)the household liquidity effect.