Question 1

From 1929 to 1933 expenditures on fixed investment, consumer durable goods, and housing all declined in constant dollars by at least
A)5%.
B)10%.
C)25%.
D)50%.

Accepted Answer

During the Great Depression, from 1929 to 1933, expenditures on fixed investment, consumer durable goods, and housing declined significantly, with reductions often exceeding 50% in constant dollars.

Question 2

The strength of housing markets in many countries in the 2000s was attributed to
A)low interest rates worldwide.
B)coordinated cross-national planning restrictions.
C)tighter monetary policy by most major central banks.
D)purely domestic factors.

Accepted Answer

Low interest rates worldwide helped to stimulate demand for both owner-occupied and investment properties. This created a cycle of rising prices and increased lending, which in turn further fueled demand and price growth.

Question 3

When households and businesses have to sell illiquid assets to meet current obligations, they are said to be experiencing
A)disintermediation.
B)financial distress.
C)moral hazard.
D)adverse selection.

Accepted Answer

Financial distress refers to a situation where households and businesses are forced to sell illiquid assets (such as property or long-term investments) to meet current obligations due to financial difficulties. This can lead to losses and decreased net worth, potentially worsening their financial situation. Disintermediation, moral hazard, and adverse selection refer to different concepts related to financial behavior and risk.

Question 4

If the bank lending channel is correct, a credit crunch in bank lending should
A)lower interest rates.
B)be felt disproportionately by borrowers for whom transactions costs of nonbank finance are the highest.
C)increase the money supply.
D)lead to disintermediation.

Accepted Answer

The bank lending channel theory suggests that changes in bank lending can have an impact on the availability of credit for borrowers, particularly those with higher transactions costs associated with obtaining nonbank finance. Therefore, a credit crunch in bank lending would be felt disproportionately by these borrowers. The other choices listed are not consistent with the bank lending channel theory.

Question 5

A general unwillingness of banks to lend
A)results in monetary policy being ineffectual in the bank lending channel.
B)results in monetary policy being ineffectual in the balance sheet channel.
C)results in monetary policy being ineffectual in the money channel.
D)does not result in monetary being ineffectual in the bank lending, balance sheet, or money channels.

Accepted Answer

The answer of A general unwillingness of banks to lend
A)results...

Question 6

The finding that bank loans decline and the volume of commercial paper issued increases when the Fed contracts the level of bank reserves appears to indicate that
A)the impact of contractionary monetary policy comes mainly from its effect on interest rates.
B)during these episodes borrowers who are able to do so switch toward nonbank sources of financing.
C)changes in credit demand must be responsible.
D)during these episodes savers must convert bank deposits into commercial paper purchases.

Accepted Answer

When the Fed contracts the level of bank reserves, it becomes more difficult for banks to lend out money, so bank loans decline. However, the volume of commercial paper issued increases, indicating that borrowers are turning to nonbank sources of financing. This suggests that the impact of contractionary monetary policy comes not just from its effect on interest rates, but also from changes in the availability and accessibility of credit. Therefore, choice B is the best option.

Question 7

Which of the following statements is correct?
A)The bank lending channel does not reject the idea that monetary policy can affect output by changing interest rates.
B)The bank lending channel argues that monetary policy affects output only through its effect on banks' portfolio decisions regarding loans and securities.
C)The bank lending channel argues that monetary policy affects output only through its effect on the public's portfolio decisions regarding money and nonmoney assets.
D)The bank lending channel has been unable to explain the movements in bank lending observed in the 1980s and 1990s.

Accepted Answer

The bank lending channel suggests that monetary policy can affect output by influencing banks' ability to lend, which is consistent with the idea that monetary policy can affect output by changing interest rates.

Question 8

Since World War II, contractionary monetary policy changes have had
A)a larger impact on the output of small manufacturing firms than on the output of large manufacturing firms.
B)a larger impact on the output of large manufacturing firms than on the output of small manufacturing firms.
C)about the same negative impact on the output of both large and small manufacturing firms.
D)about the same positive impact on the output of large and small manufacturing firms.

Accepted Answer

Contractionary monetary policy, which typically involves increasing interest rates to reduce inflation, can have a more significant impact on small manufacturing firms than on large ones. This is because small firms often have less access to capital and are more sensitive to changes in borrowing costs. Large firms, on the other hand, may have more resources and diversified financing options to weather the effects of higher interest rates.

Question 9

In the balance sheet channel, an expansionary monetary policy will shift to the right
A)only the money supply line.
B)only the money supply line and the aggregate demand curve.
C)only the money supply line and the money demand curve.
D)the money supply line, the money demand curve, and the aggregate demand curve.

Accepted Answer

The answer of In the balance sheet channel, an expansionary...

Question 10

To determine whether a home is affordable, most homebuyers focus on
A)the price of the home.
B)cost of servicing the mortgage compared to take-home pay.
C)interest rates.
D)how much the home price has changed in recent years.

Accepted Answer

While the price of the home is important, it is not the only factor to consider when determining affordability. The cost of servicing the mortgage compared to take-home pay is a better indicator of whether a home is affordable or not, as it takes into account the individual's financial situation and ability to make mortgage payments. Interest rates and how much the home price has changed in recent years can also impact affordability, but they are not the most important factors to consider.

Question 11

An increase in the money supply can reduce the probability of financial distress by
A)directly increasing the funds available to households and businesses.
B)lowering the prices of U.S. Treasury securities.
C)allowing the federal government to reduce its budget deficit.
D)raising stock prices and the value of liquid financial assets.

Accepted Answer

The answer of An increase in the money supply can...

Question 12

In the balance sheet channel, an expansionary monetary policy
A)will lead to a greater increase in output than in the money channel.
B)will not affect the real interest rate.
C)will result in increased spending only for firms and households dependent for credit on bank loans.
D)will lead to a larger budget deficit than in the money channel.

Accepted Answer

In the balance sheet channel, an expansionary monetary policy works by increasing the value of assets held by financial intermediaries, thereby improving their balance sheets and increasing their willingness to lend. This can lead to a greater increase in output because it also encourages borrowing and spending by firms and households that are not dependent on bank loans. In contrast, in the money channel, the focus is on changing interest rates and the quantity of money, which may have a more limited impact on the overall level of economic activity.

Question 13

Which of the following pieces of advice is an advocate of the bank lending channel most likely to give to officials in an emerging market economy?
A)Focus on the development of financial markets because they will be the chief sources of funds to business.
B)Make sure that financial institutions are developed along with financial markets.
C)Keep interest rates low to enable young, growing enterprises to borrow in financial markets.
D)Use credit controls to deal with excessive bank lending.

Accepted Answer

An advocate of the bank lending channel is likely to emphasize the importance of developing both financial markets and financial institutions. This will help ensure that businesses have access to a range of funding sources, including bank loans. Option A may not be sufficient as banks still remain important lenders in emerging markets. Option C may pose a risk of inflation if not balanced properly, and option D may not be an ideal solution as credit controls may limit credit availability for growing enterprises.

Question 14

Bank lending channel advocates are skeptical of Milton Friedman and Anna Schwartz's explanation of the role of banking panics in explaining the Great Depression, because they believe Friedman and Schwartz failed to take into account the effect of the banking panics on
A)the supply of money.
B)interest rates.
C)the availability of bank loans.
D)consumer confidence.

Accepted Answer

Bank lending channel advocates believe that banking panics affected the availability of bank loans, as individuals and businesses became reluctant to borrow from banks that were perceived to be at risk of defaulting. This reduction in the supply of credit could have contributed to the severity and duration of the Great Depression.

Question 15

Because the Carter credit controls of 1980 were unexpected and imposed by the government, we can conclude that
A)the subsequent decline in demand for bank loans most likely caused the 1980 recession.
B)the subsequent decline in bank loans was the result of a shift in bank loan supply that was independent of any shift in bank loan demand.
C)the subsequent decline in the supply of bank loans was most likely caused by the 1980 recession.
D)the controls led to an increase in the demand for money.

Accepted Answer

The Carter credit controls of 1980, being unexpected and government-imposed, directly affected the supply side of bank loans by restricting how much banks could lend, rather than affecting the demand side from borrowers. This means the decline in bank loans was due to a shift in the supply of bank loans, not because of a change in how much borrowers wanted to take out loans.

Question 16

The decline in the price level following the 1929 stock market crash may have reduced household spending on durable goods and houses because the decline
A)resulted in higher nominal interest rates.
B)led the government to increase its spending, which crowded out spending by households.
C)increased the real value of outstanding household debt.
D)led to an offsetting decline in nominal wages.

Accepted Answer

A decline in the price level increases the real value of outstanding household debt, making it harder for households to afford new purchases such as durable goods and houses.

Question 17

A decline in bank lending during a recession
A)indicates that a credit crunch is occurring.
B)indicates that the demand for bank loans has declined.
C)will generally result in higher real interest rates.
D)might be the result of a credit crunch or a decline in the demand for bank loans.

Accepted Answer

A decline in bank lending during a recession could be caused by a credit crunch, which is a sudden reduction in the availability of credit due to a lack of confidence in borrowers' ability to repay loans. It could also be due to a decline in the demand for bank loans as individuals and businesses may be hesitant to take on additional debt during a recession. Therefore, option D is the best choice as it covers both possible reasons.

Question 18

Monetary policy can have substantial effects on the economy even when nominal interest rates are very low
A)since real rates are what affects borrowing and spending decisions.
B)by improving borrower and bank balance sheets.
C)by reducing transactions costs.
D)only when the policy is substantial.

Accepted Answer

The answer of Monetary policy can have substantial effects on...

Question 19

In the balance sheet channel, when households have high levels of liquid assets relative to their liabilities, they are more willing to invest in consumer durable goods or housing because
A)they estimate the likelihood of financial distress to be low.
B)they are able to borrow at lower interest rates.
C)they can make these purchases without having to borrow.
D)they are likely to be middle-aged, when most purchases of consumer durable goods and houses are made.

Accepted Answer

When households have high levels of liquid assets relative to their liabilities, they perceive a lower risk of financial distress, making them more willing to invest in consumer durable goods or housing.

Question 20

In the balance sheet channel, an expansionary monetary policy will in the short run
A)increase the real interest rate.
B)decrease the real interest rate.
C)leave the real interest rate unaffected.
D)have an ambiguous effect on the real interest rate.

Accepted Answer

The answer of In the balance sheet channel, an expansionary...

Quiz 27: Information Problems and Channels for Monetary Policy

From 1929 to 1933 expenditures on fixed investment, consumer durable goods, and housing all declined in constant dollars by at least

The strength of housing markets in many countries in the 2000s was attributed to

When households and businesses have to sell illiquid assets to meet current obligations, they are said to be experiencing

If the bank lending channel is correct, a credit crunch in bank lending should

A general unwillingness of banks to lend

The finding that bank loans decline and the volume of commercial paper issued increases when the Fed contracts the level of bank reserves appears to indicate that

Which of the following statements is correct?

Since World War II, contractionary monetary policy changes have had

In the balance sheet channel, an expansionary monetary policy will shift to the right

To determine whether a home is affordable, most homebuyers focus on

An increase in the money supply can reduce the probability of financial distress by

In the balance sheet channel, an expansionary monetary policy

Which of the following pieces of advice is an advocate of the bank lending channel most likely to give to officials in an emerging market economy?

Bank lending channel advocates are skeptical of Milton Friedman and Anna Schwartz's explanation of the role of banking panics in explaining the Great Depression, because they believe Friedman and Schwartz failed to take into account the effect of the banking panics on

Because the Carter credit controls of 1980 were unexpected and imposed by the government, we can conclude that

The decline in the price level following the 1929 stock market crash may have reduced household spending on durable goods and houses because the decline

A decline in bank lending during a recession

Monetary policy can have substantial effects on the economy even when nominal interest rates are very low

In the balance sheet channel, when households have high levels of liquid assets relative to their liabilities, they are more willing to invest in consumer durable goods or housing because

In the balance sheet channel, an expansionary monetary policy will in the short run