Question 1

According to the reading "Priced to Perfection," what is the primary reason given as to why house prices have been able to rise significantly in the past decade?

Accepted Answer

The primary reason given in the reading for the significant rise in house prices in the past decade is the decline in borrowing costs. This has made it easier for people to obtain mortgages and has increased demand for homes, leading to higher prices.

Question 2

Lower interest rates which reduce the debt-servicing burden of households, thus increasing their net worth, is best described by the

Accepted Answer

Lower interest rates reduce the debt-servicing burden of households, which in turn increases their net worth by reducing their liabilities. This is known as the balance sheet channel.

Question 3

Expansionary monetary policy leading to increased borrowing for purchases of homes and durable goods is explained by the

Accepted Answer

The answer of Expansionary monetary policy leading to increased borrowing...

Question 4

Evaluate the following observation: "It appears that the economy is suffering from a credit crunch. Borrowing by households and small businesses has declined much more sharply than has borrowing by large businesses."

Accepted Answer

The answer of Evaluate the following observation: "It appears that...

Question 5

Why do banks engage in credit rationing? If a potential borrower appears to be a poor credit risk, why don't banks simply charge a high enough interest to compensate for the increased probability of default?

Accepted Answer

The answer of Why do banks engage in credit rationing?...

Question 6

In early 2001 consumer prices in Japan were declining. Why might this deflation have a significant contractionary impact on the Japanese economy?

Accepted Answer

The answer of In early 2001 consumer prices in Japan...

Question 7

Expansionary monetary policy that leads to lower interest rates, thus encouraging more borrowing to buy homes, is described by the

Accepted Answer

Expansionary monetary policy that leads to lower interest rates is primarily associated with the money channel, as it affects the quantity and cost of money and credit available in the economy. Lower interest rates encourage more borrowing for investment, stimulating economic growth. The bank lending channel involves the effects of monetary policy on the lending decisions of banks, the balance sheet channel involves the effects on the balance sheets of households and businesses, and the financial market channel involves the effects on asset prices and the overall functioning of financial markets. However, while these channels may also play a role in transmitting the effects of monetary policy, the money channel is most directly associated with changes in interest rates.

Question 8

Evaluate the following argument: "Small businesses generally have to pay more for funds they borrow from banks than they would if they raised the funds in financial markets. This shows that small businesses must value the personal relationships they maintain with bank loan officers. Otherwise, they would be taking advantage of the cheaper funds available in financial markets."

Accepted Answer

The answer of Evaluate the following argument: "Small businesses generally...

Quiz 27: Information Problems and Channels for Monetary Policy