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

Question 1

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

Answer 1

A

Question 2

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

Answer 2

C

Question 3

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

Answer 3

B

Question 4

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 5

The Federal Reserve's surveys of bank loan officers contain questions about both the demand for and the supply of loans.On the supply side, the questions have to do with all of the following except:

A)The interest rates being charged
B)The difficulty borrowers face in getting a loan
C)The quantity and quality of loan applications
D)All of the answers given refer to the questions on the supply side of the survey

Question 6

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 7

Research has revealed that the investment component of total spending is:

A)The key transmission channel for monetary policy
B)Not very sensitive to interest rates
C)Highly sensitive to interest rates
D)The key transmission channel for monetary policy and highly sensitive to interest rates

Question 8

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)Modest
C)Unpredictable
D)Nonexistent

Question 9

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

Question 10

Which of the following statements is most correct?

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

Question 11

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

Question 12

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 on short-term rates rather than long-term rates
B)Weak because people's decisions to purchase cars or houses depend 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 13

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 14

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 15

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 16

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

A)Strong and significant impact on household purchase decisions
B)Almost negligible impact on household purchasing decisions
C)Somewhat modest impact on household purchasing decisions if short-run interest rates impact long-term rates
D)None of the answers provided are correct

Question 17

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 18

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 19

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 20

All of the following would 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 21

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 22

In 1980, President Carter authorized the Federal Reserve to impose a series of credit controls.These were put in place to:

A)Stem the large number of bank failures
B)Reduce inflation
C)Reduce aggregate demand
D)Reduce inflation by reducing aggregate demand

Question 23

The correlation between interest rates and stock prices is:

A)Direct
B)Inverse
C)There is no relationship
D)Direct, but only if interest rates rise

Question 24

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 25

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 26

If a borrower's net worth increases:

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

Question 27

Given a firm's liabilities, an increase in interest rates reduces the firm's net worth because:

A)Profits will be lower due to higher interest costs
B)Asset values will increase
C)The principal amount of the loans will increase
D)All of the answers given are correct

Question 28

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 29

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 30

The technological changes that seem to be occurring in lending:

A)Will not impact the transmission mechanisms of monetary policy
B)Can reduce the importance of the bank lending channel
C)Will increase the supply of loans because they eliminate the problems of adverse selection and moral hazard
D)Will increase the demand for loans because they eliminate the problems of adverse selection and moral hazard

Question 31

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 32

If interest rates increase, the supply of loans is likely to:

A)Decrease
B)Not change
C)Increase since lenders are likely to earn more
D)Change by the same amount as demand

Question 33

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 34

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 35

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 36

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

Question 37

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 38

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 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

An open market sale of securities by the central bank to banks 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)Increase the amount of deposits in the banking system
D)Increase the banks' willingness and ability to make loans

Question 41

Monetary policy reached its limits of influence in Japan in the late 1990s due to the fact that:

A)The yen was seen as overvalued
B)The overnight interest rate had been reduced to a nominal rate of zero
C)People no longer had confidence in the yen
D)The Japanese central bank had their power revoked

Question 42

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

A)It is a hard and fast science
B)It requires a lot of guessing
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 43

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 zero
C)Stock and property values are cyclical
D)The structure of the economy and financial system continues to evolve

Question 44

Comparing the banking systems of Japan and the U.S.during the 1990s and early 2000s, one would be likely to say that:

A)The U.S.banking system is much shakier than the Japanese banking system
B)Japanese banks are certainly more tightly regulated from an accounting perspective
C)The U.S.banking system is much stronger than the Japanese banking system
D)Monetary policy worked far better in the Japanese banking system during this time frame

Question 45

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 46

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 47

During most of the 1970s, officials at the Fed:

A)Overestimated inflation and underestimated the growth rate of potential GDP
B)Overestimated the growth rate of potential GDP and underestimated inflation
C)Underestimated both the growth rate of output and inflation
D)Overestimated both the growth rate of potential GDP and inflation

Question 48

Monetary policy in Japan during the 1990s was:

A)Highly effective at stemming the recession that occurred
B)Not used, policymakers preferring fiscal policy
C)For the most part short-circuited by poor financial institution regulation
D)Responsible for the recession

Question 49

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 50

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)Policy duration commitments
B)Lowering interbank lending interest rate targets
C)Quantitative easing
D)Credit easing

Question 51

The high rates of inflation that were experienced in the 1970s could partly be blamed on:

A)The assumption the economy would continue to grow at the rates that the economy experienced in the 1960s
B)The Viet Nam war
C)High oil prices
D)All of the answers given are correct

Question 52

Bonds must have positive yields 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 53

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

A)Interest rates
B)Capital requirements
C)Capital surcharges
D)Fees for insuring the capital of banks

Question 54

If an economy is experiencing deflation and the nominal interest rate is zero:

A)Monetary policy would be the tool of choice for stabilization
B)Monetary policy is likely ineffective
C)Real interest rates will decrease
D)Aggregate demand is likely to decrease

Question 55

If an economy is experiencing deflation and the nominal interest rate is zero:

A)Monetary policy is likely effective
B)Fiscal policy would likely be the tool of choice for stabilization
C)Real interest rates will decrease
D)Aggregate demand is likely to increase

Question 56

The high rates of inflation that were experienced in the 1970s could partly be blamed on all of the following except:

A)The assumption the economy would continue to grow at the rates that the economy experienced in the 1960s
B)The Viet Nam war
C)High oil prices
D)Slow growth rates of potential GDP during the 1970s

Question 57

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

A)The cost of internal 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 58

All but which of the following is a reason policy makers 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 59

During the 1990s, the Japanese recession did not respond to the continual interest rate reductions implemented by monetary policymakers.Which of the following contributing to this lack of response?

A)Many banks that continued to make loans were actually insolvent
B)The Japanese stock market collapsed
C)Property values fell dramatically
D)All of the answers given are correct

Question 60

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 61

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 62

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)Set an inflation target well above 5 percent
C)Set an inflation target of two to three percent
D)Target a nominal interest rate of zero

Question 63

Between January and November of 2001, the FOMC reduced the target federal funds rate from 6½ to 1¾.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 64

Equity and property price bubbles develop 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 65

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 push the economy into recovery and thus avoid the problems associated with deflation

Question 66

If the target federal funds rate reaches zero:

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 purchasing long-term securities
D)The FOMC would simply reset the target

Question 67

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 68

Deflation:

A)Is always a problem
B)Is not a problem unless it moves output below potential output
C)Is not a problem unless it moves output so low that policymakers can't bring it back up
D)Is beneficial to an economy during times of economic expansion

Question 69

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 70

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 71

Suppose that the overnight interest rate falls to zero and output is below potential output.A central bank could:

A)Shift to targeting longer-term 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 72

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 deflation
C)It would hit the zero nominal-interest-rate bound
D)None of the answers given is correct

Question 73

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 74

Over the past twenty-five 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 fifty percent

Question 75

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

A)They are uncertain of the quantitative experiences 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 76

If the target federal funds rate reaches zero the FOMC:

A)Must stop purchasing securities since they cannot lower nominal rates below zero
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 77

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

A)Has increased over the past twenty years
B)Has decreased over the past twenty years
C)Should continue to grow in importance
D)Has always been the weakest of all of the mechanisms

Question 78

Asset-backed securities 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 79

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 80

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