Deck 23: Transmission Mechanisms of Monetary Policy: The Evidence

Question 1

Which of the following is not an advantage of a correctly specified structural model?

A)Structural models may help us to more accurately predict the effect that monetary policy has on economic activity.
B)A structural model provides more pieces of evidence about monetary policy's effect on economic activity.
C)Structural models may allow economists to more accurately predict the impact institutional changes have on the link between monetary policy and income.
D)A structural model imposes no restrictions on the way monetary policy affects the economy.

Answer 1

A structural model imposes no restrictions on the way monetary policy affects the economy.

Question 2

Monetarists' preference for reduced-form models is based on their belief that

A)reverse causation is a problem.
B)structural models may understate money's effect on economic activity.
C)money supply changes are always endogenous.
D)monetary policy affects only investment spending.

Answer 2

structural models may understate money's effect on economic activity.

Question 3

Evidence that is based on a variable having its effect on another variable through channels rather than a direct effect is known as

A)indirect-model evidence.
B)organizational-model evidence.
C)reduced-form evidence.
D)structural-model evidence.

Answer 3

structural-model evidence.

Question 4

The monetarist reduced-form evidence does not specify the working of the economy and thus is considered to be a

A)scientific model.
B)open model.
C)black box.
D)black hole.

Question 5

The ________ held the view that monetary policy does not matter at all for movements in aggregate output.

A)new Keynesian economists
B)early Keynesians
C)early monetarists
D)early classical economists

Question 6

Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is

A)reduced-form evidence.
B)organizational-model evidence.
C)direct-model evidence.
D)structural-model evidence.

Question 7

Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a

A)structural model.
B)reduced-form model.
C)black-box model.
D)scientific model.

Question 8

Reverse causation between money and aggregate output is likely to be a problem when a central bank targets

A)a monetary aggregate.
B)an interest rate.
C)the exchange rate.
D)the inflation rate.

Question 9

Monetarists directly study the link between money and economic activity using

A)structural models.
B)reduced-form models.
C)scientific models.
D)experimental models.

Question 10

Monetarists claim that ________ models ignore important transmission mechanisms and therefore ________ the importance of the effects of monetary policy on the economy.

A)structural; overstate
B)reduced-form; overstate
C)reduced-form; understate
D)structural; understate

Question 11

The monetarists complained that early Keynesian structural models tended to ignore the impact of monetary policy changes on

A)interest rates.
B)investment spending.
C)consumption spending.
D)capital goods spending.

Question 12

With regard to aggregate demand,early Keynesians tended to believe that

A)monetary policy mattered most.
B)monetary policy was all that mattered.
C)monetary policy mattered.
D)monetary policy did not matter.

Question 13

Monetarists contend that the channels of monetary influence in Keynesian structural models are too ________ defined,________ the importance of monetary policy.

A)broadly; exaggerating
B)broadly; understating
C)narrowly; understating
D)narrowly; exaggerating

Question 14

Monetarists assert that monetary policy may affect aggregate demand through

A)only an interest rate channel.
B)only an exchange rate channel.
C)only two channels: interest rates and exchange rates.
D)many channels.

Question 15

The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions.Monetarists tend to focus on

A)structural-model evidence,while Keynesians focus on reduced-form evidence.
B)reduced-form evidence,while Keynesians focus on structural-model evidence.
C)reduced-form evidence,while Keynesians focus on direct-model evidence.
D)structural-model evidence,while Keynesians focus on direct-model evidence.

Question 16

The channels through which monetary policy affects economic activity are called the ________ of monetary policy.

A)transmission mechanisms
B)flow mechanisms
C)distribution mechanisms
D)allocational mechanisms

Question 17

On the evening news you hear of a scientific study that directly links premature births to cigarette smoking.This is an example of

A)direct-model evidence.
B)informed voter-model evidence.
C)structural-model evidence.
D)reduced-form evidence.

Question 18

If the particular channels through which changes in the money supply affect aggregate income are diverse and continually changing,the best evidence of monetary policy's effect is likely to come from

A)reduced-form models.
B)structural models.
C)median-voter models.
D)indirect models.

Question 19

When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing

A)structural-model evidence.
B)reduced-form evidence.
C)indirect-model evidence.
D)black-box evidence.

Question 20

A model that is composed of many equations that show the channels through which monetary and fiscal policy affect aggregate output and spending is called a

A)reduced-form model.
B)median-voter model.
C)informed median-voter model.
D)structural model.

Question 21

Early Keynesians believed that ________ interest rates during the Great Depression indicated that monetary policy was ________.

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

Question 22

Friedman and Schwartz found that the rate of money growth fell prior to business cycle downturns in

A)about three out of every four instances.
B)four out of every five instances.
C)about two out of every three instances.
D)every instance studied.

Question 23

By the standard of low-grade bonds,interest rates were ________ and monetary policy was ________ during the Great Depression.

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

Question 24

In response to the early Keynesians,monetarists contended that

A)monetary policy during the Great Depression was not easy.
B)bank failures during the Great Depression were not the cause of the decline in the money supply.
C)evidence from the Great Depression demonstrated the ineffectiveness of monetary policy.
D)there is a weak link between interest rates and investment spending.

Question 25

Movements of real interest rates indicate that,contrary to the early Keynesians' beliefs,________ policy was ________ during the Great Depression.

A)fiscal; tight
B)fiscal; easy
C)monetary; tight
D)monetary; easy

Question 26

Early Keynesians believed that ________ interest rates during the Great Depression indicated that monetary policy had been ________.

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

Question 27

In a study published in 1963,Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period,

A)the growth rate of the money supply decreased before output decreased.
B)interest rates decreased before output decreased.
C)the growth rate of federal government spending decreased before output decreased.
D)the growth rate of state and local government spending decreased before output decreased.

Question 28

During the Great Depression,real interest rates

A)rose to unprecedentedly high levels.
B)rose only slightly above the long-run trend.
C)fell to unprecedentedly low levels.
D)fell only slightly below the long-run trend.

Question 29

In a study published in 1963,Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period,the growth rate of the ________ decreased before ________ decreased.

A)money supply; interest rates
B)money supply; output
C)budget deficit; interest rates
D)budget deficit; output

Question 30

Early Keynesians felt that ________ policy was ________,so they stressed the importance of ________ policy.

A)fiscal; ineffective; monetary
B)monetary; ineffective; fiscal
C)monetary; potent; monetary
D)fiscal; too potent; monetary

Question 31

Because ________ evidence is of a ________ nature,there is always the possibility of reverse causation,in which output growth causes money growth.

A)historical; structural
B)statistical; structural
C)timing; structural
D)timing; reduced-form

Question 32

Early Keynesians concluded that changes in monetary policy had no impact on aggregate output because early empirical studies found no linkage between movements in ________ and ________.

A)nominal interest rates; investment spending
B)real interest rates; investment spending
C)money supply; aggregate output
D)investment spending; aggregate output

Question 33

Early Keynesians believed that low ________ during the Great Depression indicated that ________ policy was easy.

A)money growth; fiscal
B)money growth; monetary
C)interest rates; fiscal
D)interest rates; monetary

Question 34

Periods of price deflation,such as the Great Depression,are characterized by

A)low nominal rates but high real rates of interest.
B)low nominal and real interest rates.
C)real rates of interest lower than the nominal rate of interest.
D)high nominal and real rates of interest.

Question 35

Milton Friedman and Anna Schwartz showed that monetary policy during the Great Depression had

A)been quite inflationary.
B)never been more contractionary.
C)been more expansionary than in the 1920s.
D)been essentially neutral.

Question 36

In the early 1960s,monetarists used reduced-form timing,statistical,and historical evidence to show that

A)fiscal policy had a strong impact on economic activity.
B)monetary policy had a strong impact on economic activity.
C)monetary policy had a weak impact on economic activity.
D)neither monetary nor fiscal policy had a strong impact on economic activity.

Question 37

Movements of ________ interest rates indicate that,contrary to the early Keynesians' beliefs,monetary policy was ________ during the Great Depression.

A)nominal; tight
B)nominal; easy
C)real; tight
D)real; easy

Question 38

Timing evidence is valid only if it is known that the first event is

A)endogenous.
B)exogenous.
C)a leading indicator of the second event.
D)a lagging indicator of the second event.

Question 39

Early Keynesians viewed monetary policy as influencing aggregate demand solely through its impact on ________ interest rates,which,in turn,affect ________ spending.

A)nominal; consumer
B)nominal; investment
C)real; consumer
D)real; investment

Question 40

Monetarists contend that

A)monetary policy affects aggregate demand solely through investment.
B)monetary policy may affect aggregate demand through many channels.
C)a weak link between nominal interest rates and investment spending implies monetary policy ineffectiveness.
D)monetary policy affects aggregate demand solely through consumption.

Question 41

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 42

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 43

The monetarist statistical evidence examines the correlations between both ________ and ________ with ________.

A)money; aggregate spending; the unemployment rate
B)money; autonomous expenditures; the unemployment rate
C)money; consumption spending; aggregate spending
D)money; autonomous expenditures; aggregate spending

Question 44

If the movements of the level of the money supply and real output are perfectly coordinated the growth rate of money

A)will lead the level of real output.
B)will move in synchronization with the level of real output.
C)will lag the level of real output.
D)can either lead or lag the level of real output.

Question 45

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 46

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 47

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

Question 48

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 49

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.

Question 50

The monetarist ________ evidence in which declines in money growth are followed by recessions provides the strongest support for their position that monetary policy matters.

A)statistical
B)historical
C)timing
D)structural

Question 51

A criticism of the monetarist autonomous spending variable is that

A)some types of autonomous spending do not affect aggregate demand.
B)some types of autonomous spending affect aggregate demand before the spending occurs.Some types of autonomous spending affect aggregate demand when they occur.
C)some types of autonomous spending affect aggregate demand only long after they occur.
D)Keynesians do not think that autonomous spending affects aggregate demand.

Question 52

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 53

One of the best examples of an episode in which a change in monetary policy appears to have been an exogenous event is the ________ in reserve requirements in ________.

A)increase; 1936-1937
B)decrease; 1936-1937
C)decrease; 1818-1819
D)increase; 1818-1819

Question 54

As a result of recent empirical research,there has been a convergence of Keynesian and monetarist opinion to the view that

A)money is all that matters.
B)money does matter.
C)money does not matter.
D)fiscal policy is all that matters.

Question 55

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 56

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 57

The monetarist position on the importance of monetary policy is probably best supported by ________ evidence.

A)timing
B)statistical
C)historical
D)structural

Question 58

Real business cycle theorists are critical of monetarist reduced-form evidence because they believe

A)money is the most important cause of changes in aggregate demand.
B)there is reverse causation from the business cycle to money.
C)there is reverse causation from money to the business cycle.
D)business cycles do not exist.

Question 59

Real business cycle theory states that the most important cause of business cycles is

A)shocks to the money supply.
B)interest rate shocks.
C)Federal Reserve policy decisions.
D)shocks to tastes and technology.

Question 60

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 61

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.

Question 62

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 63

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

Question 64

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 65

In a period of deflation,when there is a declining price level,low nominal interest rates do not necessarily indicate that the cost of borrowing is ________ or that monetary policy is ________.

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

Question 66

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

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

Question 67

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 68

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 69

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 70

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 71

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 72

Corporate scandals involving Enron and Arthur Andersen reduced investment and aggregate spending because these scandals

A)forced the Fed to raise interest rates.
B)caused appreciation of the dollar.
C)worsened adverse selection and moral hazard.
D)caused bank failures.

Question 73

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 74

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 75

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 76

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 77

In a period of deflation,when there is a declining price level,________ nominal interest rates do not necessarily indicate that the cost of borrowing is ________ or that monetary policy is easy.

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

Question 78

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 79

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 80

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.