Question 1

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?

Accepted Answer

The answer of Lower interest rates can lead to higher...

Question 2

Which of the following statements is most correct?

Accepted Answer

Monetary policymakers operate in an environment where change is quite common, as economic conditions and external factors are constantly shifting and requiring adjustments to monetary policy. The other options are incorrect as the Fed has evolved its use of monetary policy over time, the quantitative impact of altering the target federal funds rate can vary, and there is always some degree of uncertainty in policymaking.

Question 3

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

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Question 4

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

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Question 5

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

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Question 6

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

Accepted Answer

The movement away from bank lending towards asset-backed securities has decreased the importance of the bank-lending channel as a mechanism for monetary policy. This is because the transmission of monetary policy through banks is weaker when banks are not the primary source of credit for borrowers.

Question 7

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

Accepted Answer

The Treasury Securities channel is not a transmission channel of monetary policy as it refers to the government's issuance and management of its own debt securities. The other options are transmission channels of monetary policy, as the household net worth channel refers to the impact of changes in asset prices on households' consumption and investment decisions, the asset-price channel reflects the impact of changes in financial asset prices on the broader economy, and the exchange-rate channel refers to the impact of changes in currency values on imports, exports, and inflation.

Question 8

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

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Question 9

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

Accepted Answer

An increase in the real interest rate would lead to an increase in demand for US investments, which would result in an appreciation of the dollar. An appreciation of the dollar would make US exports more expensive for foreign buyers, leading to a decrease in net exports. Therefore, an increase in the real interest rate would result in a decrease in net exports, making option D the correct choice.

Question 10

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

Accepted Answer

When interest rates are reduced, borrowing becomes cheaper which leads to increased consumer and business spending. This improved outlook on future growth and profits can increase investor confidence and lead to higher stock prices.

Question 11

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

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Question 12

Bonds cannot have yields below the effective lower bound because:

Accepted Answer

When bond yields fall below zero, investors may opt to simply hold cash, which has a zero nominal yield. This creates a lower bound on bond yields, as investors are unlikely to accept negative nominal yields when cash is available as an alternative option.

Question 13

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?

Accepted Answer

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Question 14

Instruments that have been securitized include:

Accepted Answer

All the options given are correct. Mortgage-backed securities have been securitized for a long time, and so have car loans and student loans. Credit card debt is another type of asset that is commonly securitized.

Question 15

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

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Question 16

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

Accepted Answer

The shift from traditional bank lending to the use of asset-backed securities changes the dynamics of how monetary policy affects the economy, necessitating a reevaluation of the effectiveness and quantitative impact of adjustments to the federal funds rate by the Federal Open Market Committee (FOMC). This is because the bank-lending channel's influence on monetary policy transmission may be diminished or altered, affecting the overall strategy for managing economic activity and inflation.

Question 17

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

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Question 18

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.

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Question 19

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?

Accepted Answer

The widening current account deficit is not directly related to the challenges faced by monetary policymakers during the financial crisis. The other options are all challenges that became more prominent during this time.

Question 20

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

Accepted Answer

Lower real interest rates will increase the demand for borrowing, causing the government to spend more on debt service costs. This means that government spending may increase as a result of lower interest rates, but not all other variables will necessarily increase. In contrast, lower interest rates will likely boost consumption spending, investment spending, and net exports because they make borrowing cheaper and encourage spending overall.

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