Question 1

Which of the following is not an advantage of a correctly specified structural model?

Accepted Answer

This statement is false. A structural model imposes restrictions on how monetary policy affects the economy by incorporating assumptions and relationships between variables. Therefore, D is not an advantage of a correctly specified structural model.

Question 2

Monetarists' preference for reduced-form models is based on their belief that

Accepted Answer

Monetarists believe that structural models may understate the true effect of money on economic activity, and therefore prefer reduced-form models which directly relate changes in the money supply to changes in economic activity. They also believe that the relationship between money supply and economic activity is unidirectional, with money supply changes affecting economic activity but not the other way around. Thus, reverse causation is not seen as a problem. Monetarists do not limit the effects of monetary policy to investment spending alone.

Question 3

Evidence that is based on a variable having its effect on another variable through channels rather than a direct effect is known as

Accepted Answer

This type of evidence is known as structural-model evidence, as it is based on the structure of how one variable affects another through intermediate channels or pathways.

Question 4

The monetarist reduced-form evidence does not specify the working of the economy and thus is considered to be a

Accepted Answer

Monetarist reduced-form evidence does not provide information on the specific mechanisms that drive the economy or the reasons for observed relationships. In other words, it is essentially a "black box" approach that focuses on the statistical relationships between variables without going into detail about the underlying processes.

Question 5

The ________ held the view that monetary policy does not matter at all for movements in aggregate output.

Accepted Answer

The answer of The ________ held the view that monetary...

Question 6

Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is

Accepted Answer

Reduced-form evidence refers to the direct examination of the relationship between two variables without delving into the underlying mechanisms or structures that might explain the relationship.

Question 7

Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a

Accepted Answer

Structural models are best for predicting the impact of institutional change on the effectiveness of monetary policy because they take into account the underlying economic mechanisms and relationships in the system. Reduced-form models and black-box models may not capture the complexity of the system, while scientific models would not be appropriate in this context as they are not specific to economics.

Question 8

Reverse causation between money and aggregate output is likely to be a problem when a central bank targets

Accepted Answer

When a central bank targets an interest rate, changes in aggregate output can influence the demand for money, which in turn can lead to changes in interest rates. This creates a situation where causation can run from output to money, rather than the other way around, leading to reverse causation issues.

Question 9

Monetarists directly study the link between money and economic activity using

Accepted Answer

Monetarists often use reduced-form models to study the relationship between money supply and economic activity, as these models allow for the analysis of the direct effects of changes in the money supply on economic variables without requiring detailed assumptions about the underlying structure of the economy.

Question 10

Monetarists claim that ________ models ignore important transmission mechanisms and therefore ________ the importance of the effects of monetary policy on the economy.

Accepted Answer

Monetarists argue that structural economic models, which consider the underlying factors affecting the economy such as production and consumption, provide a more accurate representation of the economy than reduced-form models, which focus solely on the relationships between variables. Monetarists claim that reduced-form models tend to understate the importance of the effects of monetary policy on the economy because they ignore important transmission mechanisms, such as changes in interest rates and credit availability. Therefore, the correct choice is (D) structural; understate.

Question 11

The monetarists complained that early Keynesian structural models tended to ignore the impact of monetary policy changes on

Accepted Answer

The answer of The monetarists complained that early Keynesian structural...

Question 12

With regard to aggregate demand,early Keynesians tended to believe that

Accepted Answer

Early Keynesians believed in the importance of fiscal policy in managing aggregate demand, rather than relying solely on monetary policy. They argued that government spending and taxation policies could be used to influence consumption and investment in the economy, which would in turn impact aggregate demand.

Question 13

Monetarists contend that the channels of monetary influence in Keynesian structural models are too ________ defined,________ the importance of monetary policy.

Accepted Answer

Monetarists argue that the channels of monetary influence in Keynesian structural models are too narrowly defined, thus understating the importance of monetary policy.

Question 14

Monetarists assert that monetary policy may affect aggregate demand through

Accepted Answer

Monetarists believe that monetary policy can affect aggregate demand through multiple channels, including interest rates, exchange rates, credit availability, and inflation expectations. The exact effectiveness of each channel may vary depending on the specific economic conditions and the policy implementation.

Question 15

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

Accepted Answer

Monetarists tend to rely on reduced-form evidence, which looks at how changes in the money supply impact the economy, while Keynesians place more emphasis on structural-model evidence, which considers the underlying mechanics of monetary policy and its impact on different economic variables. These differing approaches lead to conflicting conclusions on the importance of monetary policy, making the debate unresolved. Therefore, option B is the correct choice.

Question 16

The channels through which monetary policy affects economic activity are called the ________ of monetary policy.

Accepted Answer

The channels through which monetary policy affects economic activity are commonly known as the transmission mechanisms.

Question 17

On the evening news you hear of a scientific study that directly links premature births to cigarette smoking.This is an example of

Accepted Answer

This is an example of reduced-form evidence because it directly associates an outcome (premature births) with a specific cause (cigarette smoking) without detailing the underlying mechanisms or processes that lead to the outcome.

Question 18

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

Accepted Answer

Reduced-form models are used to capture the overall relationship between variables without specifying the underlying structural channels, making them suitable for analyzing the effects of monetary policy when the channels are diverse and changing.

Question 19

When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing

Accepted Answer

Keynesians are known for their preference for reduced-form models over structural models, and this statement is often used to caution against relying solely on correlation-based evidence to establish causal relationships. Reduced-form models are statistical models that focus on the relationships between variables and do not attempt to explicitly capture underlying economic mechanisms or behaviors.

Question 20

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

Accepted Answer

A structural model is a macroeconomic model that is made up of equations that represent the underlying structure of the economy, including the channels through which monetary and fiscal policy affect aggregate output and spending. This type of model is known for being more complex and detailed than reduced-form models, which simplify the relationships between variables in the economy.

Quiz 23: Transmission Mechanisms of Monetary Policy: The Evidence