Deck 23: Modern Monetary Policy and the Challenges Facing Central Bankers

Question 1

The Federal Reserve's surveys of bank loan officers contain questions about:

A) the interest rates being charged.
B) the supply of and demand for loans.
C) the quantity and quality of loans.
D) all of the answers given are correct.

Answer 1

D

Question 2

The Federal Reserve surveys lending officers regularly to:

A) determine the interest rates they charge.
B) get a feel for the supply and demand for loans.
C) get a feel for the quantity and quality of loans.
D) all of the answers given are correct.

Answer 2

D

Question 3

The additional capital requirements put in place following the banking crisis of the 1980s led to a:

A) quick rebound in the willingness and ability of banks to make loans.
B) further slowdown in bank lending.
C) period of rapid economic growth in the early 1990s.
D) prolonged economic slowdown lasting much of the 1990s.

Answer 3

B

Question 4

The interest-rate channel of monetary policy transmission appears to be:

A) weak because the investment component of total spending isn't very sensitive to interest rates.
B) weak because the investment component of total spending is very sensitive to interest rates.
C) strong because the investment component of total spending isn't very sensitive to interest rates.
D) strong because the investment component of total spending is very sensitive to interest rates.

Question 5

The Japanese experience of the 1990s shows:

A) monetary policy is always more effective than fiscal policy.
B) monetary policy always works.
C) sometimes monetary policy does not work.
D) central bankers should not try to counter the business cycle.

Question 6

The impact of monetary policy on the exchange rate and net exports is best described as:

A) the strongest of all the parts of the transmission mechanism.
B) powerful, but lagging.
C) difficult to forecast.
D) nonexistent.

Question 7

Changing short-term interest rates have a(n):

A) strong and immediate impact on household purchase decisions.
B) no impact on household purchasing decisions.
C) somewhat modest impact on household purchasing decisions.
D) none of the answers provided is correct.

Question 8

The monetary policy transmission mechanism refers to the concept that monetary policy:

A) always seems to work the way central bankers think it will.
B) works quickly.
C) only works through changes consumption and investment.
D) affects the economy in potentially many ways.

Question 9

Which of the following statements is most correct?

A) High real interest rates cause recessions.
B) Central bankers raise real interest rates to cause recessions.
C) There is no evidence that high real interest rates are followed by lower levels of growth.
D) There is evidence that high real interest rates are followed by lower levels of growth.

Question 10

An open market purchase of securities by the central bank from banks usually will:

A) increase the banks' revenue even if the bank does nothing with the reserves.
B) induce the banks to make more loans since their revenue will decrease if they do nothing.
C) decrease the amount of deposits in the banking system.
D) decrease the banks' willingness and ability to make loans.

Question 11

The direct impact on spending of short-term interest rate changes by central banks is:

A) definitely the strongest of all transmission mechanisms.
B) not that powerful.
C) only effective for consumption but not investment.
D) only effective for net exports but not for investment and consumption.

Question 12

An easing of monetary policy should:

A) increase spending by households and businesses and increase net exports.
B) raise net exports but lower spending by households and businesses.
C) decrease spending by households and businesses as well as net exports.
D) increase investment and household spending but lower net exports.

Question 13

An open market sale of securities by the central bank to banks usually will:

A) diminish the inclination of banks to make loans.
B) induce the banks to make more loans since their revenue will decrease if they do nothing.
C) increase the amount of deposits in the banking system.
D) increase the banks' willingness and ability to make loans.

Question 14

All of the following could represent the transmission of monetary policy, except:

A) households altering their spending on durable goods.
B) income tax rates changing.
C) firms altering their growth plans.
D) net exports changing.

Question 15

The bank-lending channel of monetary policy focuses on:

A) the interest rate banks charge their largest customer.
B) the banks' willingness and ability to lend.
C) how central bank policy influences the solvency of banks.
D) the deposit insurance premiums banks will end up paying.

Question 16

Which of the following traditional channels of monetary policy transmission can be described as powerful?

A) The interest-rate channel
B) The exchange-rate channel
C) Both the interest-rate channel and the exchange-rate channel can be described as very powerful
D) Neither the interest-rate channel nor the exchange-rate channel can be described as very powerful

Question 17

With respect to consumer behavior, the interest-rate channel of monetary policy transmission appears to be:

A) weak because people's decisions to purchase cars or houses depend more on short-term rates rather than long-term rates.
B) weak because people's decisions to purchase cars or houses depend more on long-term rates rather than short-term rates.
C) strong because people's decisions to purchase cars or houses depend on the short-term rates that policymakers can change.
D) strong because it affects both spending and saving decisions.

Question 18

During the financial crisis of 2007-2009 which of the following countries experienced a decline in real GDP roughly twice that of the United States?

A) Canada
B) United Kingdom
C) Japan
D) Turkey

Question 19

The Federal Reserve's surveys of bank loan officers can help the Fed determine whether:

A) a drop in the quantity of loans granted resulted from fewer applications or a tightening of credit standards.
B) an increase in the quantity of loans granted resulted from fewer applications or a tightening of credit standards.
C) climbing interest-rate spreads are the result of more borrowers or fewer loans being granted.
D) an increase in the quantity of new loans was due to a decrease in supply or an increase in demand.

Question 20

Decreases in the real interest rate will result in a(n):

A) increase in net exports because it will lead to a depreciation of the dollar.
B) decrease in net exports because it will lead to a depreciation of the dollar.
C) increase in net exports because it will lead to an appreciation of the dollar.
D) decrease in net exports because it will lead to an appreciation of the dollar.

Question 21

Higher home values can increase output in the economy if:

A) people take some of the equity out of their homes and spend it on a vacation.
B) people sell their existing home and build a new one.
C) people finance their child's college education by securing a second mortgage on their now higher-valued home.
D) all of the answers given are correct.

Question 22

If central bankers raise the interest rate, the asset-price channel of monetary policy implies:

A) stock prices will decrease.
B) stock prices will remain the same but bond prices will increase.
C) bond prices will remain flat.
D) stock prices will increase and bond prices will remain flat.

Question 23

Stock prices may rise from a reduction in interest rates because:

A) the present value of future earnings will increase.
B) stockholders will expect lower future earnings.
C) financial market participants are less optimistic about future earnings.
D) the present value of future earnings will decrease.

Question 24

Which of the following statements would you say best reflects monetary policy?

A) It is a hard and fast science.
B) Its impact is impossible to predict.
C) It is a lot like gambling because the outcomes are most of the time uncertain.
D) There is certainly some science involved, a lot of understanding that is needed, but a lot of uncertainty still remains.

Question 25

For a firm, a decrease in the interest rate resulting from monetary policy can:

A) decrease the value of its assets.
B) decrease the cost of its liabilities.
C) decrease its net worth.
D) all of the answers given are correct.

Question 26

Each of the following can contribute to the change in the supply of loans resulting from an interest rate change, except:

A) changes in the percentage of loan payment to income.
B) changes in the potential of moral hazard.
C) changes in borrowers' net worth.
D) increases in the demand for loans.

Question 27

Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant:

A) Firm B's net worth will increase more than Firm A's.
B) Firm A's net worth will increase more than Firm B's.
C) Neither firm's net worth will change.
D) The net worth of both firms will increase and by the same amount.

Question 28

If a borrower's net worth increases:

A) the likelihood of moral hazard also increases.
B) the borrowers are likely to want to take less risk.
C) the moral hazard risk for the potential lenders decreases.
D) the supply of loans decreases.

Question 29

The relationship between interest rates and stock prices is referred to as:

A) the interest-rate mechanism of monetary policy.
B) the investment-spending mechanism of monetary policy.
C) the wealth-creating mechanism of monetary policy.
D) the asset-price channel of monetary policy.

Question 30

Each of the following is a transmission channel of monetary policy, except:

A) the balance-sheet channel.
B) the tax-impact channel.
C) the asset-price channel.
D) the exchange-rate channel.

Question 31

All but which of the following is a reason policymakers are concerned about the strength of the rebound from the 2007-2009 financial crisis:

A) banks would make credit expensive and difficult to obtain.
B) investors would be cautious about buying securitized assets.
C) households would prefer to save more and borrow less.
D) the pace of technological change would slow.

Question 32

The relationship between real estate markets and interest rates is:

A) nonexistent.
B) inverse; higher interest rates drive down real estate prices and vice versa.
C) complex; cuts in the short-term interest rate lead to increases in long-term rates and higher real estate prices.
D) direct; high interest rates lead to high real estate values as people abandon other financial assets.

Question 33

The importance of the bank-lending channel of monetary policy transmission:

A) becomes more important the more important banks are as a source of funds for firms and individuals.
B) is likely to become more important with the growth of loan brokers and asset-backed securities.
C) has become more important as technology has solved the problems of information and moral hazard.
D) none of the answers given is correct.

Question 34

The balance-sheet channel of monetary policy works because it can:

A) increase a borrower's asset value but not the burden of his/her liabilities.
B) change the value of a borrower's assets and liabilities, but it can't change a borrower's net worth.
C) increase a borrower's assets and reduce the cost of his/her liabilities.
D) none of the answers given is correct.

Question 35

To compensate for the collapse of intermediation and the fragility of financial markets during the 2007-2009 financial crisis, central banks deployed all but which of the following unconventional tools:

A) Forward guidance
B) Lowering interbank lending interest rate targets
C) Quantitative easing
D) Targeted asset purchases

Question 36

Stock prices rise:

A) usually six to twelve months after interest rates are reduced.
B) immediately after interest rates are increased.
C) in anticipation of an interest rate reduction.
D) only after people are convinced the central bank interest rate cut is permanent.

Question 37

Increases in a borrower's net worth:

A) reduces the problem of moral hazard.
B) lowers the information costs of lending.
C) reduces the problem of adverse selection.
D) all of the answers given are correct.

Question 38

The challenges facing policymakers today include each of the following, except:

A) the economy's sustainable growth rate is highly stable.
B) nominal interest rates cannot fall below the effective lower bound (somewhat below zero).
C) stock and property values are subject to booms and busts.
D) the structure of the economy and financial system continues to evolve.

Question 39

As interest rates rise the supply of loans may decrease because:

A) borrowers net worth rises.
B) demand for loans falls.
C) lenders are increasingly on the lookout for adverse selection.
D) all of the answers given are correct.

Question 40

Higher stock prices can lead to greater investment spending by firms because:

A) the cost of external financing is lower.
B) the market value of a firm is now less than the replacement cost of the firm.
C) the firm gets 100 percent of the increase in the stock value.
D) the cost of internal financing is lower and the firm also gets 100 percent of the increase in the stock value.

Question 41

If the target federal funds rate reaches the lower bound:

A) the FOMC would run out of policy options.
B) monetary policy would no longer be of use.
C) the FOMC would turn to unconventional measures, such as forward guidance.
D) the FOMC would simply reset the target.

Question 42

Equity and property price bubbles are commonly associated with periods when:

A) financial assets are undervalued.
B) financial asset prices reflect the book value of companies.
C) financial asset prices are well above what seems to be a reasonable present value estimate of earnings.
D) the earnings that companies report are overstated.

Question 43

One reason most central bankers do not set an inflation target of zero is:

A) it is almost impossible to achieve.
B) they believe it would cause price volatility.
C) the central bank could hit the lower bound.
D) none of the answers given is correct.

Question 44

Between September 2007 and December 2008, the FOMC reduced the target federal funds rate 5.25 percentage points toward zero. A reason for this was that the FOMC:

A) was acting preemptively.
B) feared over stimulating the economy.
C) was taking a wait and see approach to previous cuts.
D) was feeling political pressure to act.

Question 45

Firms have a harder time getting loans during periods of deflation because:

A) deflation aggravates information problems in ways dissimilar to inflation.
B) for a firm seeking a loan, deflation increases the real amount of their liabilities without increasing the real value of their assets.
C) deflation decreases the net worth of firms.
D) all of the answers given are correct.

Question 46

If the target federal funds rate reaches the lower bound the FOMC:

A) must stop purchasing securities since they cannot lower nominal rates below the lower bound.
B) would likely shift their focus to purchasing longer-term securities.
C) would likely raise the required reserve rate.
D) would likely raise the discount rate.

Question 47

One of the limiting factors for using monetary policy is:

A) the central banks are limited in their ability to print money.
B) central banks are limited in their ability to make loans.
C) there is a lower nominal-interest-rate bound of zero.
D) the real interest rate cannot fall below zero.

Question 48

Some people who believe monetary policymakers should not address equity and property price bubbles argue their position based on:

A) their belief that government should stay out of private matters.
B) the policymakers lack experience with financial markets.
C) price bubbles are virtually impossible to identify when they are developing.
D) all of the answers given are correct.

Question 49

If a zero-coupon bond sells for par, the nominal interest rate on that bond is:

A) 100 percent.
B) negative.
C) zero.
D) infinity.

Question 50

All but which of the following could be adjusted as a means of deflating asset price bubbles:

A) tariffs
B) capital requirements
C) capital surcharges
D) fees for insuring the capital of banks

Question 51

The fact that investors can always hold cash creates:

A) a problem for monetary policymakers when the short-term interest rates approach zero.
B) an opportunity for the U.S. treasury to issue bonds that actually have negative nominal interest rates.
C) an upward bound on nominal interest rates.
D) negative nominal interest rates.

Question 52

Policymakers are often reluctant to turn to unconventional monetary policy measures because:

A) they are uncertain of the quantitative impact of using them.
B) such policies are potentially too powerful.
C) such policies require Congressional approval and Congress is often slow to act.
D) such policies require coordination with the central bankers of foreign countries.

Question 53

Bonds must have yields above the effective lower bound because:

A) the U.S. treasury guarantees all bonds to have a positive yield.
B) the banking technology does not exist to deal with negative yields.
C) people can always hold cash.
D) all of the answers given are correct.

Question 54

A way for policymakers to avoid the problems that deflation can present and still meet their objective of price stability is to:

A) set a target of zero inflation.
B) keep the monetary base fixed.
C) set a higher inflation target.
D) target a nominal interest rate of zero.

Question 55

Suppose that the overnight interest rate falls to the lower bound and output is below potential output.
A central bank could:a. seek to reduce expectations of future policy rates.
B) use its balance sheet to expand the monetary base.
C) purchase securities of different maturities to affect their market prices and rates.
D) all of the answers given are correct.

Question 56

When equity and property prices collapse (bust), bank balance sheets are impaired because:

A) banks hold a lot of corporate stocks.
B) banks own a lot of property outright.
C) the collateral that is backing many of the loans banks have made is now worth less.
D) banks hold a lot of corporate stocks and they also own a lot of property outright.

Question 57

The importance of the bank lending transmission mechanism of monetary policy:

A) has increased over the past thirty years.
B) has decreased over the past thirty years.
C) should continue to grow in importance.
D) has always been the weakest of all of the mechanisms.

Question 58

Over the past thirty years, bank loans as a percentage of total credit:

A) increased from less than sixty percent to over 90 percent.
B) stayed fairly constant at around eighty percent.
C) decreased from accounting for virtually all of the credit to less than sixty percent.
D) dropped from seventy five percent to less than thirty percent.

Question 59

Monetary policymakers could keep equity and property price bubbles from developing by:

A) raising their interest rate target when they suspect a bubble.
B) lowering their interest rate target when they suspect a bubble.
C) expanding the money supply in the economy.
D) purchasing U.S. treasury securities to drive up their prices.

Question 60

When central bankers are acting preemptively they are:

A) letting markets work and taking a wait and see approach.
B) aggressively trying to hit a zero inflation target.
C) usually focused on reducing expansionary gaps.
D) taking bold steps to stabilize the economy.

Question 61

Lower interest rates can lead to higher home prices, and this can lead to increased household spending since homeowners can spend this additional equity. If you were a lender, is there any danger in making loans to homeowners for this new equity or are these really risk-free loans since they are secured by the equity in the house?

Question 62

Which of the following statements is most correct?

A) The use of monetary policy in the U.S. has not changed much since the creation of the Fed.
B) The quantitative impact on output of altering the target federal funds rate has been quite stable.
C) Monetary policymakers operate in an environment with very little uncertainty.
D) Monetary policymakers operate in an environment where change is quite common.

Question 63

Discuss why the interest-rate transmission mechanism of monetary policy isn't as strong as most people may think it might be.

Question 64

How did financial regulation affect bank lending in the 1980s?

Question 65

Identify at least three effects that could result when the central bank changes its balance sheet that can impact the economy.

Question 66

The movement away from bank lending towards asset-backed securities has:

A) increased the importance of the bank-lending channel of monetary policy.
B) eliminated the bank-lending channel as a mechanism for monetary policy.
C) decreased the importance of the bank-lending channel.
D) led the FOMC to abandon interest-rate targets.

Question 67

Each of the following is a transmission channel of monetary policy, except:

A) the household net worth channel.
B) the Treasury Securities channel.
C) the asset-price channel.
D) the exchange-rate channel.

Question 68

Will an open market sale by the Federal Reserve increase banks' willingness to make loans? Explain.

Question 69

Increases in the real interest rate will result in a(n):

A) increase in net exports because it will lead to a depreciation of the dollar.
B) decrease in net exports because it will lead to a depreciation of the dollar.
C) increase in net exports because it will lead to an appreciation of the dollar.
D) decrease in net exports because it will lead to an appreciation of the dollar.

Question 70

Stock prices may rise from a reduction in interest rates because:

A) consumer and business confidence about future growth improves.
B) stockholders will expect lower future earnings.
C) financial market participants are less optimistic about future earnings.
D) the present value of future earnings will decrease.

Question 71

The driving force in the balance-sheet channel of monetary policy mechanism is which of the following?

A) Information
B) Timing
C) Asset diversity
D) Bank net worth

Question 72

Bonds cannot have yields below the effective lower bound because:

A) the U.S. treasury guarantees all bonds to have a positive yield.
B) the banking technology does not exist to deal with negative yields.
C) people can always hold cash.
D) all of the answers given are correct.

Question 73

Inflation can reduce the true cost of debt, and policymakers lower interest rates to encourage borrowing. Is it a good idea then to always take advantage of lower interest rates to borrow and rely on inflation to reduce the cost of debt and to increase your ability to repay the loan?

Question 74

Instruments that have been securitized include:

A) mortgage-backed securities held by government-sponsored enterprises.
B) car loans and student loans.
C) credit card debt.
D) all of the answers given are correct.

Question 75

Explain how an easing of monetary policy works through the exchange rate and what potential impact on the economy this would have.

Question 76

The movement away from bank lending towards asset-backed securities:

A) has increased the importance of the bank-lending channel of monetary policy.
B) has eliminated the bank-lending channel as a mechanism for monetary policy.
C) has not affected the importance of the bank-lending channel.
D) will require the FOMC to rethink the quantitative impact of changing the target federal funds rate.

Question 77

Why might the supply of loans increase as interest rates fall?

Question 78

The name balance-sheet channel of monetary policy implies that monetary policy has to impact categories on a firm's balance sheet. Explain how the balance sheet of a firm will be impacted by an increase in interest rates.

Question 79

One impact of the 2007-2009 financial crisis was to heighten the challenges faced by monetary policymakers. All but which of the following was grew more prominent as a result of the crisis?

A) Stock and property values have a tendency to go through boom and bust cycles.
B) The nation's current account deficit keeps widening.
C) Policymakers options are limited since the nominal interest rate cannot fall below the effective lower bound.
D) The structures of the economy and financial system are constantly evolving.

Question 80

In theory, lower real interest rates will tend to cause all but which of the following to increase?

A) Consumption spending
B) Investment spending
C) Net exports
D) Government spending