Question 1

A decline in borrower net worth

Accepted Answer

A) raises information costs, but increases the ability of households and firms to borrow. 
B) reduces information costs and increases the ability of households and firms to borrow. 
C) raises information costs and reduces the ability of households and firms to borrow. 
D) reduces information costs and reduces the ability of households and firms to borrow. 
A) raises information costs, but increases the ability of households and firms to borrow. 
B) reduces information costs and increases the ability of households and firms to borrow. 
C) raises information costs and reduces the ability of households and firms to borrow. 
D) reduces information costs and reduces the ability of households and firms to borrow.

Question 2

Why are savers often unwise in lending to borrowers who are willing to pay very high interest rates?

Accepted Answer

A) Very high interest rates are against the law in many states. 
B) The high tax rates on interest income make high-interest rate loans unappealing to lenders. 
C) Borrowers will usually pay very high interest rates only when inflation is high, which makes the real interest rate on such loans low. 
D) Adverse selection and moral hazard problems reduce the likelihood of repayment on high-interest rate loans. 
A) Very high interest rates are against the law in many states. 
B) The high tax rates on interest income make high-interest rate loans unappealing to lenders. 
C) Borrowers will usually pay very high interest rates only when inflation is high, which makes the real interest rate on such loans low. 
D) Adverse selection and moral hazard problems reduce the likelihood of repayment on high-interest rate loans.

Question 3

During a credit crunch

Accepted Answer

A) banks typically lower interest rates to attract new borrowers. 
B) small-business investment increases relative to large-business investment. 
C) banks typically hold much smaller portions of their portfolios in loans. 
D) housing investment increases relative to large-business investment. 
A) banks typically lower interest rates to attract new borrowers. 
B) small-business investment increases relative to large-business investment. 
C) banks typically hold much smaller portions of their portfolios in loans. 
D) housing investment increases relative to large-business investment.

Question 4

When a borrower's net worth is high,

Accepted Answer

A) the cost of its internal funds will be high. 
B) the cost of its internal funds will be low. 
C) the cost of its external funds will be high. 
D) information costs are less likely to constrain capital spending. 
A) the cost of its internal funds will be high. 
B) the cost of its internal funds will be low. 
C) the cost of its external funds will be high. 
D) information costs are less likely to constrain capital spending.

Question 5

The credit crunch at the beginning of the 1990-1991 recession is attributable to

Accepted Answer

A) banks' concern about the strength of borrowers' balance sheets. 
B) the imposition of credit controls by the federal government. 
C) disintermediation brought about by rising interest rates. 
D) a shift by depositors from bank deposits to other investments. 
A) banks' concern about the strength of borrowers' balance sheets. 
B) the imposition of credit controls by the federal government. 
C) disintermediation brought about by rising interest rates. 
D) a shift by depositors from bank deposits to other investments.

Question 6

All else being equal, increases in firms' net worth result in

Accepted Answer

A) increases adverse selection problems. 
B) increases moral hazard problems. 
C) increases in capital investment spending. 
D) a greater gap between the cost of internal and external financing. 
A) increases adverse selection problems. 
B) increases moral hazard problems. 
C) increases in capital investment spending. 
D) a greater gap between the cost of internal and external financing.

Question 7

In the basic AD-SRAS model, the assumption is made that

Accepted Answer

A) bank loans are imperfect substitutes for other forms of finance. 
B) all sources of finance are perfect substitutes. 
C) the real interest rate overstates the cost of funds to borrowers. 
D) the real interest rate understates the cost of funds to borrowers. 
A) bank loans are imperfect substitutes for other forms of finance. 
B) all sources of finance are perfect substitutes. 
C) the real interest rate overstates the cost of funds to borrowers. 
D) the real interest rate understates the cost of funds to borrowers.

Question 8

In the money channel, an expansionary monetary policy will in the short run

Accepted Answer

A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate. 
A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate.

Question 9

In the balance sheet channel, an expansionary monetary policy will shift to the right

Accepted Answer

A) only the money supply line. 
B) only the money supply line and the aggregate demand curve. 
C) only the money supply line and the money demand curve. 
D) the money supply line, the money demand curve, and the aggregate demand curve. 
A) only the money supply line. 
B) only the money supply line and the aggregate demand curve. 
C) only the money supply line and the money demand curve. 
D) the money supply line, the money demand curve, and the aggregate demand curve.

Question 10

Analysts have attempted to model the impact of monetary policy on net worth by emphasizing

Accepted Answer

A) the impact of lower interest rates on business spending on fixed investment. 
B) the impact of lower interest rates on household spending on housing and durable goods. 
C) the liquidity of balance sheet positions as a determinant of business and household spending. 
D) the greater variability of business spending compared to household spending. 
A) the impact of lower interest rates on business spending on fixed investment. 
B) the impact of lower interest rates on household spending on housing and durable goods. 
C) the liquidity of balance sheet positions as a determinant of business and household spending. 
D) the greater variability of business spending compared to household spending.

Question 11

Because the Carter credit controls of 1980 were unexpected and imposed by the government, we can conclude that

Accepted Answer

A) the subsequent decline in demand for bank loans most likely caused the 1980 recession. 
B) the subsequent decline in bank loans was the result of a shift in bank loan supply that was independent of any shift in bank loan demand. 
C) the subsequent decline in the supply of bank loans was most likely caused by the 1980 recession. 
D) the controls led to an increase in the demand for money. 
A) the subsequent decline in demand for bank loans most likely caused the 1980 recession. 
B) the subsequent decline in bank loans was the result of a shift in bank loan supply that was independent of any shift in bank loan demand. 
C) the subsequent decline in the supply of bank loans was most likely caused by the 1980 recession. 
D) the controls led to an increase in the demand for money.

Question 12

In some financial panics, an unanticipated drop in the price level led to declining investment because the lower price level

Accepted Answer

A) resulted in higher nominal interest rates. 
B) raised the real value of firms' debt obligations. 
C) reduced the real value of consumers' financial wealth. 
D) reduced the real value of expected future profits. 
A) resulted in higher nominal interest rates. 
B) raised the real value of firms' debt obligations. 
C) reduced the real value of consumers' financial wealth. 
D) reduced the real value of expected future profits.

Question 13

The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect

Accepted Answer

A) the portfolio decisions of households. 
B) the portfolio decisions of businesses. 
C) borrowers' net worth. 
D) lenders' net worth. 
A) the portfolio decisions of households. 
B) the portfolio decisions of businesses. 
C) borrowers' net worth. 
D) lenders' net worth.

Question 14

When households and businesses have to sell illiquid assets to meet current obligations, they are said to be experiencing

Accepted Answer

A) disintermediation. 
B) financial distress. 
C) moral hazard. 
D) adverse selection. 
A) disintermediation. 
B) financial distress. 
C) moral hazard. 
D) adverse selection.

Question 15

In the balance sheet channel, an expansionary monetary policy will in the short run

Accepted Answer

A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate. 
A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate.

Question 16

The effect of a decline in the money supply on the economy differs from the effect of a decline in the willingness of banks to lend in that a decline in the money supply will lead to

Accepted Answer

A) a decline in output, whereas a decline in the willingness of banks to lend will lead to an increase in output. 
B) an increase in the price level, whereas a decline in the willingness of banks to lend will lead to a decrease in the price level. 
C) an increase in the real interest rate, whereas a decline in the willingness of banks to lend will lead to a decrease in the real interest rate. 
D) a decrease in the price level, whereas a decline in the willingness of banks to lend will lead to an increase in the price level. 
A) a decline in output, whereas a decline in the willingness of banks to lend will lead to an increase in output. 
B) an increase in the price level, whereas a decline in the willingness of banks to lend will lead to a decrease in the price level. 
C) an increase in the real interest rate, whereas a decline in the willingness of banks to lend will lead to a decrease in the real interest rate. 
D) a decrease in the price level, whereas a decline in the willingness of banks to lend will lead to an increase in the price level.

Question 17

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 argument is incorrect. Small busines

Question 18

Which of the following statements is correct?

Accepted Answer

A) Because in practice few borrowers are bank-dependent, the bank lending channel is of little real-world importance. 
B) In the money channel, an expansionary monetary policy may cause a leftward shift in the AD curve. 
C) In the bank lending channel, an expansionary monetary policy can increase output in the short run even if it results in an increase in the real interest rate. 
D) In the money channel, an expansionary monetary policy affects the money supply curve but not the money demand curve. 
A) Because in practice few borrowers are bank-dependent, the bank lending channel is of little real-world importance. 
B) In the money channel, an expansionary monetary policy may cause a leftward shift in the AD curve. 
C) In the bank lending channel, an expansionary monetary policy can increase output in the short run even if it results in an increase in the real interest rate. 
D) In the money channel, an expansionary monetary policy affects the money supply curve but not the money demand curve.

Question 19

In financial panics in the United States in the nineteenth and early twentieth centuries

Accepted Answer

A) interest rates rose and stock prices fell in financial markets. 
B) interest rates fell and stock price rose in financial markets. 
C) interest rates and stock prices both fell in financial markets. 
D) interest rates and stock prices both rose in financial markets. 
A) interest rates rose and stock prices fell in financial markets. 
B) interest rates fell and stock price rose in financial markets. 
C) interest rates and stock prices both fell in financial markets. 
D) interest rates and stock prices both rose in financial markets.

Question 20

A financial panic will result in

Accepted Answer

A) a rightward shift in the SRAS curve. 
B) a leftward shift in the SRAS curve. 
C) a rightward shift in the AD curve. 
D) a leftward shift in the AD curve. 
A) a rightward shift in the SRAS curve. 
B) a leftward shift in the SRAS curve. 
C) a rightward shift in the AD curve. 
D) a leftward shift in the AD curve.

Exam 27: Information Problems and Channels for Monetary Policy

A decline in borrower net worth

Why are savers often unwise in lending to borrowers who are willing to pay very high interest rates?

During a credit crunch

When a borrower's net worth is high,

The credit crunch at the beginning of the 1990-1991 recession is attributable to

All else being equal, increases in firms' net worth result in

In the basic AD-SRAS model, the assumption is made that

In the money channel, an expansionary monetary policy will in the short run

In the balance sheet channel, an expansionary monetary policy will shift to the right

Analysts have attempted to model the impact of monetary policy on net worth by emphasizing

Because the Carter credit controls of 1980 were unexpected and imposed by the government, we can conclude that

In some financial panics, an unanticipated drop in the price level led to declining investment because the lower price level

The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect

When households and businesses have to sell illiquid assets to meet current obligations, they are said to be experiencing

In the balance sheet channel, an expansionary monetary policy will in the short run

The effect of a decline in the money supply on the economy differs from the effect of a decline in the willingness of banks to lend in that a decline in the money supply will lead to

Which of the following statements is correct?

In financial panics in the United States in the nineteenth and early twentieth centuries

A financial panic will result in

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Inflation: Causes and Consequences

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