Question 1

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

Accepted Answer

The household liquidity effect is the main channel through which a contractionary monetary policy affects consumer expenditure in the long term. As the price level decreases more than expected, the real value of consumer debt increases, reducing household liquidity and their ability to spend. This channel is different from the traditional interest-rate channel, which operates through changes in short-term interest rates affecting borrowing costs. Tobin's q is a measure of the stock market's valuation of firms, and is not directly related to consumer expenditure. The bank lending channel is also not relevant for this scenario, as it refers to changes in bank lending due to changes in monetary policy actions.

Question 2

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

Accepted Answer

According to Franco Modigliani, an expansionary monetary policy can cause stock market prices to increase as an increase in the money supply leads to more liquidity in the market, making it easier for investors to buy stocks. This increase in wealth can lead to increased consumption as people feel more confident in spending money.

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 ________.

Accepted Answer

According to Tobin's q theory, when equity prices are low, the market price of existing capital is cheap relative to new capital, so expenditure on fixed investment is also low. Therefore, the best choice is A, cheap and low.

Question 4

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 ________.

Accepted Answer

The answer of According to Tobin's q theory,when equity prices...

Question 5

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 ________.

Accepted Answer

In a period of deflation, low nominal interest rates indicate that the cost of borrowing is low and that monetary policy is generally easy. This is because the central bank is likely to decrease interest rates in order to stimulate borrowing and spending, and to counteract the deflationary pressures in the economy. Therefore, answer B is correct, as it correctly identifies that low nominal interest rates indicate that borrowing costs are low and that monetary policy is easy. Answers A, C, and D are incorrect because they incorrectly identify either the level of nominal interest rates or the stance of monetary policy in a period of deflation.

Question 6

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

Accepted Answer

An expansionary monetary policy usually involves lowering nominal interest rates, which then results in lower real interest rates. The lower interest rates make borrowing cheaper for businesses and households, increasing their purchasing power and overall spending. This, in turn, raises firms' cash flows.

Question 7

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

Accepted Answer

Regulation Q placed a ceiling on the interest rates banks could pay on deposits. Its abolition in 2011 increased the competition for deposits and lowered the cost of funding for banks, which was expected to increase bank lending. Therefore, the doubts raised have been regarding the size of the effect of the bank lending channel.

Question 8

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

Accepted Answer

During a stock market bubble, the value of Tobin's q (a ratio comparing the market value of a company to the replacement cost of its assets) increases because stock prices rise faster than the underlying assets of the company. This, in turn, can cause overinvestment as companies see their stock prices rise and feel pressured to invest more in order to keep up with the market.

Question 9

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

Accepted Answer

The answer of An expansionary monetary policy may cause asset...

Question 10

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.

Accepted Answer

An expansionary monetary policy causes a rise in net worth, which reduces the adverse selection problem and encourages increased lending to finance investment spending. This is because an expansionary monetary policy increases the money supply, making it easier for borrowers to access credit. However, asymmetric information problems can lead to adverse selection, where borrowers with higher risks are more likely to seek and obtain credit, leading to potential defaults and losses for lenders. By reducing the adverse selection problem through a rise in net worth, the expansionary monetary policy encourages lenders to increase lending to creditworthy borrowers, thereby promoting investment spending.

Question 11

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

Accepted Answer

An expansionary monetary policy typically leads to an increase in the value of households' financial assets as interest rates fall and asset prices rise. This increase in asset values makes households feel wealthier, which in turn encourages them to spend more, including on consumer durables.

Question 12

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

Accepted Answer

Corporate scandals involving Enron and Arthur Andersen increased adverse selection and moral hazard in the market, as investors became more cautious and skeptical about the reliability and accuracy of financial statements and disclosures. This led to a decrease in investment and aggregate spending as investors were more hesitant to invest in companies and the market, leading to a decrease in economic activity. The other options do not directly relate to the impact of corporate scandals on investment and aggregate spending.

Question 13

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

Accepted Answer

The household liquidity effect suggests that when stock prices rise, households feel wealthier and more financially secure, which increases their willingness to spend, leading to increased consumption expenditures. Option B is incorrect because the theory suggests that higher stock prices are a signal of a strong economy, which means households would not expect stock prices to fall in the near future. Option C is also incorrect because the theory focuses on consumption expenditures, not wage increases. Option D is irrelevant to the theory.

Question 14

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.

Accepted Answer

When q is low, it means that the market value of firms is lower than the replacement cost of their assets. In this case, firms will not invest in new investment goods because they will not be able to earn a sufficient return on their investment. Therefore, firms will not purchase new investment goods when q is low and the market value of firms is low relative to the cost of capital.

Question 15

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.

Accepted Answer

According to Tobin's q theory, if q is high, it means that the market value of firms is high relative to the replacement cost of their capital. Therefore, companies can buy a lot of new investment goods with only a small issue of stock, because each share of stock is worth more.

Question 16

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

Accepted Answer

A rise in stock prices increases the net worth of firms, which leads to higher investment spending. This is because the reduction in moral hazard (the risk that managers will take on riskier projects that benefit themselves rather than the firm's shareholders) due to higher net worth encourages firms to undertake more profitable investment projects.

Question 17

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.

Accepted Answer

In a period of deflation, nominal interest rates tend to be low, but this does not necessarily mean that the cost of borrowing is also low, as the real interest rate (adjusted for inflation) could actually be high. Additionally, monetary policy may not be easy even with low nominal interest rates, as the central bank may struggle to stimulate inflation and economic growth in a deflationary period.

Question 18

During the Great Depression,Tobin's q

Accepted Answer

Tobin's q fell to unprecedentedly low levels during the Great Depression, indicating a severe downturn in investment opportunities.

Question 19

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

Accepted Answer

Tobin's q theory states that the ratio of the market value of a company to its replacement cost of assets affects investment spending. Monetary policy can affect investment spending by its impact on the prices of common stock. Increasing the money supply can lead to higher stock prices, which increases the value of firms and can incentivize investment spending.

Question 20

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

Accepted Answer

The balance sheet channel operates through changes in the net worth of firms. An increase in the money supply raises firms' net worth, decreasing adverse selection and moral hazard problems. This increases banks' willingness to lend to finance investment spending.

Quiz 23: Transmission Mechanisms of Monetary Policy: The Evidence

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

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

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 .

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 .

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 .

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

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

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

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

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.

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

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

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

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.

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

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.

During the Great Depression,Tobin's q

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

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