Deck 27: Transmission Mechanisms of Monetary Policy

Question 1

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

Answer 1

D

Question 2

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

Answer 2

A

Question 3

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

Answer 3

C

Question 4

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) expensive ; low
C) cheap; high
D) expensive; high

Question 5

The ________ proposes that two types of monetary transmission channels arise as a result of problems in credit markets

A) interest rate channel
B) asset price channel
C) credit view
D) Tobin q theory

Question 6

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 7

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 8

According to the traditional interest-rate channel,expansionary monetary policy lowers the real interest rate,thereby raising expenditure on ________.

A) business investment decisions
B) government expenditure
C) consumer nondurables
D) net exports

Question 9

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 10

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 11

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 12

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 13

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 14

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 15

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) expensive; low
C) cheap; high
D) expensive; high

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.

A) raises; higher
B) raises; lower
C) reduces; higher
D) reduces; lower

Question 17

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 18

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 19

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 20

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; expensive; large
B) high; cheap; large
C) high; cheap; small
D) low; cheap; large
E) low; cheap; small

Question 21

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.These lessons include:

A) It is dangerous always to associate the easing or tightening of monetary policy with a fall or a rise in short-term interest rates.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
D) Only A and B of the above.

Question 22

Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.

Question 23

Discuss three channels by which monetary policy affects stock prices and aggregate spending.

Question 24

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 25

Explain the traditional interest-rate channel for expansionary monetary policy.Explain how a tight monetary policy affects the economy through this channel.

Question 26

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 27

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 28

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

Question 29

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.Which of the following is not one of these lessons?

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy.
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

Question 30

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.These lessons include:

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
D) Only A and B of the above.

Question 31

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 32

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 33

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 34

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

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

Question 35

In the late 1990s and early 2000s,the Japanese economy has experienced ________.

A) easy monetary policy as indicated by falling nominal interest rates
B) easy monetary policy as indicated by short-term interest rates near zero
C) tight monetary policy as indicated by falling asset prices
D) tight monetary policy as indicated by short-term interest rates near zero

Question 36

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.These lessons include:

A) Monetary policy can be highly effective in reviving a weak economy so long as short-term interest rates are not too close to zero.
B) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
C) Other asset prices beside those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
D) Only A and B of the above.

Question 37

The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 38

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy.These lessons include:

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms.

Question 39

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 40

Recent Japanese experience has been characterized by tight monetary policy,as indicated by ________.

A) falling interest rates
B) short-term interest rates near zero
C) falling asset prices
D) low real interest rates

Question 41

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 42

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 43

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.

Question 44

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 45

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 46

A basic principle in economics is that correlation ________ imply ________.

A) does not necessarily; causation
B) does; causation
C) does not necessarily; independence
D) Both A and C

Question 47

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 48

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 49

A basic principle in economics is that ________ does not necessarily imply ________.

A) correlation; causation
B) correlation; significance
C) causation; correlation
D) Both A and C

Question 50

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 51

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 52

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 53

Using ________ we can predict how ________ changes may affect the link between M and Y.

A) a structural model; institutional
B) a structural model; political
C) reduced form evidence; institutional
D) reduced form evidence; political

Question 54

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 55

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

Question 56

A ________ model is one that describes how ________.

A) structural; the economy works
B) structural; prices change
C) simple; the economy works
D) analytical; prices change

Question 57

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 58

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 59

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

Question 60

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 61

________ nominal interest rates do ________ indicate that the cost of borrowing is ________.

A) Low; not necessarily; low
B) High; necessarily; high
C) Low; necessarily; low
D) Both B and C

Question 62

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 63

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 64

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 65

When using reduced-form evidence to evaluate monetary policy and find that M affects Y,________.

A) it is possible that we may suffer from reverse causation
B) we are sure that there is no reverse causation
C) there is never adverse selection
D) there is never moral hazard

Question 66

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 67

The early Keynesians of the 1950s and early 1960s believed that ________.

A) monetary policy does not matter at all
B) fiscal policy matters
C) monetary policy does matter
D) Both A and B

Question 68

Most Keynesians currently believe that ________.

A) monetary policy does matter
B) monetary policy is irrelevant
C) fiscal policy does matter
D) Both A and C

Question 69

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 70

A disadvantage of ________ evidence is that it cannot rule out ________.

A) reduced-form, reverse causation
B) reduced-form; adverse selection
C) structural model; reverse causation
D) structural model; adverse selection

Question 71

The reduced form approach ________ the way monetary policy affects the economy and may be ________ likely to spot the full effect of changes in M on Y.

A) does not restrict; more
B) restricts; more
C) does not restrict; less
D) restricts; less

Question 72

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 73

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 74

When the Bank of Canada has an interest rate target,________ output might lead to a ________ money supply.

A) higher; higher
B) higher; lower
C) higher; stable
D) lower; lower

Question 75

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 76

A(n)________ of reduced-form evidence is that it cannot rule out ________.

A) disadvantage; reverse causation
B) disadvantage; adverse selection
C) advantage; reverse causation
D) advantage; adverse selection

Question 77

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 78

When the ________ has an interest rate target,________ output might lead to a ________ money supply.

A) Bank of Canada; higher; higher
B) Bank of Canada; higher; lower
C) Ministry of Finance; higher; higher
D) Ministry of Finance; lower; lower

Question 79

Early Keynesians believed that monetary policy ________.

A) affected aggregate demand solely through its effect on nominal interest rates
B) did not affect aggregate demand through nominal interest rates
C) affected aggregate demand through many channels
D) affected real output directly

Question 80

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