Deck 24: Monetary Policy Transmission Mechanisms

Question 1

Real interest rates were low during the early years of the Great Depression.

Answer 1

False

Question 2

Friedman and Schwartz used timing evidence to argue that changes in the money supply affected velocity.

Answer 2

False

Question 3

Historical evidence from the Great Depression shows that money was neutral.

Answer 3

False

Question 4

The argument that smoking marijuana reduces life span has an omitted variable in that it ignores that cancer patients often smoke.

Question 5

A weakness of structural models is that they are relatively complicated.

Question 6

The IS-LM model focuses on the household wealth effect as a transmission mechanism for monetary policy.

Question 7

A structural model describes the causal links between variables.

Question 8

Real rates were higher than nominal rates early in the early years of the Great Depression.

Question 9

Nominal interest rates are a better indicator of the state of credit markets than real rates.

Question 10

X causes Y; therefore, X is correlated with Y, but the converse is not true.

Question 11

A reduced form model explicitly describes the transmission mechanisms between variables.

Question 12

The wealth effect of monetary policy focuses on the effect of money supply changes on the value of stocks and houses.

Question 13

EMP can affect output through an increase in bank deposits.

Question 14

Historical evidence shows that changes in the money supply did affect output during the Great Depression.

Question 15

Arguments based on structural models are less likely to have omitted variable problems.

Question 16

Reduced form models do a better job than structural models at identifying the direction of causation.

Question 17

The quantity theory of money is an example of a reduced form model.

Question 18

Economists turn to history for natural experiments.

Question 19

Early Keynesians found little evidence that monetary policy had little effect on business investment.

Question 20

"There are more police in high crime areas; therefore, police presence increases the probability crimes will be committed." This argument is based on a structural model.

Question 21

Timing and historical evidence give conflicting evidence concerning the effects of changes in the money supply during the Great Depression.

Question 22

Real-business-cycle theorists have argued that changes in the money supply do not affect output.

Question 23

The TAF is an example of EMP.

Question 24

"The Red Cross causes earthquakes since they are always found on the scene." This argument is flawed due to

A) reverse causation.
B) omitted variables.
C) exogenous variables.
D) all of the above.

Question 25

Those who think the credit channel is important for monetary policy will tend to favor strict adherence to a Taylor Rule.

Question 26

Homeowners are more likely to have health insurance, but arguing that home ownership causes people to buy insurance is probably incorrect. The wealth needed for both activities is a(n) _____ variable in this argument.

A) exogenous
B) omitted
C) structural
D) none of the above

Question 27

Timing evidence strengthens researchers' belief in causation.

Question 28

Conclusions from statistical evidence can be sensitive to the choice of data.

Question 29

The credit view of the effects of monetary policy always depends on how lending affects investment.

Question 30

The accounting scandals around the Enron collapse increased asymmetric information in financial markets.

Question 31

Only statistical and historical evidence strengthen researchers' belief in causation.

Question 32

EMP can expand lending due to an increase in the net worth of firms and an increase in asymmetric information issues.

Question 33

The effect of EMP on firm cash flow affects the economy primarily through consumption.

Question 34

The credit view emphasizes the role of bank lending as a transmission for monetary policy.

Question 35

Timing evidence detailed in showed that the money only affected prices, not real GDP.

Question 36

Real interest rates have a greater impact on investment the nominal rates.

Question 37

Japan allowed real interest rates to rise above nominal rates during the 1990s.

Question 38

The effect of EMP on the unanticipated level of prices affects the economy primarily through consumption.

Question 39

The quantity theory of money is an example of a

A) structural model.
B) reduced form model.
C) both of the above.
D) neither of the above.

Question 40

The effect of EMP on Tobin's q affects the economy primarily through firm investment.

Question 41

The market value of a company divided by the cost of its physical capital is called

A) net worth.
B) Tobin's q.
C) cash flow.
D) none of the above.

Question 42

A Monetary History of the United States purported to show that

A) monetary policy during the Great Depression had been easy.
B) Keynesians were wrong about the Great Depression.
C) both a and b.
D) none of the above.

Question 43

If a firm's q value is low, they would be more likely to

A) sell their own stock.
B) buy bonds.
C) invest in new projects.
D) all of the above.

Question 44

Monetary policy can affect the economy through

A) household wealth.
B) investment.
C) credit markets.
D) all of the above.

Question 45

To avoid deflation, a central bank should

A) decrease the money supply.
B) decrease inflation.
C) keep real interest rates below nominal rates.
D) all of the above

Question 46

Which of the following is a transmission mechanism of monetary policy that does NOT operate through investment?

A) home prices
B) interest rates
C) net worth of firms
D) They all affect investment.

Question 47

Mitigating asymmetric information problems is an important part of which of the following channels for expansionary monetary policy?

A) bank deposits
B) firm net worth
C) firm cash flow
D) all of the above

Question 48

Which of the following was the most compelling type of evidence that money supply changes affected GDP during the Great Depression?

A) timing evidence
B) statistical evidence
C) historical evidence
D) all of the above

Question 49

Monetary policy can impact bank lending through changes in

A) interest rates.
B) deposits.
C) net worth of banks.
D) all of the above.

Question 50

Natural experiments allow researchers to isolate the effect of a(n) _____ variable.

A) exogenous
B) endogenous
C) omitted
D) correlation

Question 51

Timing evidence showed that a fall in _____ caused a fall in

A) the money supply, output.
B) prices, output.
C) output put, money supply.
C) none of the above.

Question 52

Monetarists advanced what type of evidence of money non-neutrality during the Great Depression?

A) timing evidence
B) statistical evidence
C) historical evidence
D) all of the above

Question 53

When a central bank increases the money supply,

A) interest rates fall.
B) firm q values rise.
C) firm cash flows rise.
D) all of the above.

Question 54

The transmission mechanism for monetary policy involving the net worth of firms is part of the _____ of money supply changes.

A) wealth effect
B) credit view
C) real interest rate effect
D) none of the above

Question 55

Asymmetric information is important for which of the following channels for monetary policy?

A) Tobin's q
B) consumption
C) credit
D) all of the above

Question 56

Because of _____, real interest rates were _____ than the nominal rates, early in the Great Depression.

A) inflation, higher
B) inflation, lower
C) deflation, higher
D) deflation, lower

Question 57

The transmission mechanisms for monetary policy are

A) structural models.
B) reduced form models.
C) both of the above.
D) neither of the above.

Question 58

Mitigating asymmetric information problems is NOT an important part of which of the following channels for expansionary monetary policy?

A) net exports
B) home prices
C) firm cash flow
D) all of the above

Question 59

Which of the following is increased by EMP?

A) interest rates
B) Tobin's q
C) asymmetric information problems
D) all of the above

Question 60

Which is the most important variable monetary policy that has an impact on investment?

A) real interest rates
B) nominal interest rates
C) inflation
D) home prices

Question 61

"There are more fights in bars, so hostility causes drinking." What is the flaw in this argument?

Question 62

Historical evidence is the most convincing because

A) it provides the best sort of evidence for causation.
B) it shows that MS sometimes changes exogenously.
C) both a and b.
D) none of the above.

Question 63

What mistake of the Fed during the Great Depression did the Bank of Japan repeat in the 1990s?

Question 64

What other factors should policy makers consider more than just short-term interest rates?

Question 65

Explain how the net worth of banks is involved as a transmission mechanism for monetary policy.

Question 66

What would constitute a natural experiment for an increase in the money supply under the gold standard?

Question 67

What is the difference between reduced form and structural models in terms of transmission mechanisms?

Question 68

What is Tobin's q value for a firm?

Question 69

How would allowing "zombie" banks to operate interfere with the transmission mechanisms of expansionary monetary policy?

Question 70

Explain two ways that firms could be affected by monetary policy.

Question 71

Why does a fall in the interest rate increase a firm's q value?

Question 72

The accounting scandals in 2001 counteracted the expansionary monetary policy at that time primarily through their effect on

A) asymmetric information.
B) bank deposits.
C) net exports.
D) all of the above.

Question 73

The price of stocks could be part of monetary policy transmission mechanisms involving both consumers and firms. Explain.

Question 74

EMP causes a country's currency to appreciate, which is part of the _____ for monetary policy.

A) interest rate
B) wealth
C) credit
D) fiscal

Question 75

"Students who own cars in high school tend to have higher SAT scores; therefore, owning a car makes you smarter." What is the flaw in this argument?