Question 1

Higher stock prices can lead to greater investment spending by firms because:

Accepted Answer

A)  the cost of external financing is lower. 
B)  the market value of a firm is now less than the replacement cost of the firm. 
C)  the firm gets 100 percent of the increase in the stock value. 
D)  the cost of internal financing is lower and the firm also gets 100 percent of the increase in the stock value. 
A)  the cost of external financing is lower. 
B)  the market value of a firm is now less than the replacement cost of the firm. 
C)  the firm gets 100 percent of the increase in the stock value. 
D)  the cost of internal financing is lower and the firm also gets 100 percent of the increase in the stock value.

Question 2

Policymakers are often reluctant to turn to unconventional monetary policy measures because:

Accepted Answer

A)  they are uncertain of the quantitative impact of using them. 
B)  such policies are potentially too powerful. 
C)  such policies require Congressional approval and Congress is often slow to act. 
D)  such policies require coordination with the central bankers of foreign countries. 
A)  they are uncertain of the quantitative impact of using them. 
B)  such policies are potentially too powerful. 
C)  such policies require Congressional approval and Congress is often slow to act. 
D)  such policies require coordination with the central bankers of foreign countries.

Question 3

If greater stock prices can lead to greater investment spending, should central bankers ever worry about stock prices becoming too high?

Accepted Answer

Yes they should. If stock prices become

Question 4

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

Accepted Answer

Investment spending does not seem to be

Question 5

Explain why a lowering of interest rates should raise stock prices.

Accepted Answer

The price of a stock reflects the net pr

Question 6

Which of the following statements would you say best reflects monetary policy?

Accepted Answer

A)  It is a hard and fast science. 
B)  Its impact is impossible to predict. 
C)  It is a lot like gambling because the outcomes are most of the time uncertain. 
D)  There is certainly some science involved, a lot of understanding that is needed, but a lot of uncertainty still remains. 
A)  It is a hard and fast science. 
B)  Its impact is impossible to predict. 
C)  It is a lot like gambling because the outcomes are most of the time uncertain. 
D)  There is certainly some science involved, a lot of understanding that is needed, but a lot of uncertainty still remains.

Question 7

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

There is some risk. If lower interest ra

Question 8

The direct impact on spending of short-term interest rate changes by central banks is:

Accepted Answer

A)  definitely the strongest of all transmission mechanisms. 
B)  not that powerful. 
C)  only effective for consumption but not investment. 
D)  only effective for net exports but not for investment and consumption. 
A)  definitely the strongest of all transmission mechanisms. 
B)  not that powerful. 
C)  only effective for consumption but not investment. 
D)  only effective for net exports but not for investment and consumption.

Question 9

Each of the following can contribute to the change in the supply of loans resulting from an interest rate change, except:

Accepted Answer

A)  changes in the percentage of loan payment to income. 
B)  changes in the potential of moral hazard. 
C)  changes in borrowers' net worth. 
D)  increases in the demand for loans. 
A)  changes in the percentage of loan payment to income. 
B)  changes in the potential of moral hazard. 
C)  changes in borrowers' net worth. 
D)  increases in the demand for loans.

Question 10

Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant:

Accepted Answer

A)  Firm B's net worth will increase more than Firm A's. 
B)  Firm A's net worth will increase more than Firm B's. 
C)  Neither firm's net worth will change. 
D)  The net worth of both firms will increase and by the same amount. 
A)  Firm B's net worth will increase more than Firm A's. 
B)  Firm A's net worth will increase more than Firm B's. 
C)  Neither firm's net worth will change. 
D)  The net worth of both firms will increase and by the same amount.

Question 11

Suppose that the overnight interest rate falls to the lower bound and output is below potential output.
A central bank could:

Accepted Answer

A)  seek to reduce expectations of future policy rates. 
B)  use its balance sheet to expand the monetary base. 
C)  purchase securities of different maturities to affect their market prices and rates. 
D)  all of the answers given are correct. 
A)  seek to reduce expectations of future policy rates. 
B)  use its balance sheet to expand the monetary base. 
C)  purchase securities of different maturities to affect their market prices and rates. 
D)  all of the answers given are correct.

Question 12

Explain why a corporation may find it advantageous to undertake greater investment when the value of its stock shares increase.

Accepted Answer

If the share price of a firm's stock inc

Question 13

Why is it more correct to say that there may be correlation between high interest rates and the growth rate of output but there is no clear causation?

Accepted Answer

Correlation implies that two variables m

Question 14

Explain how the asset-price channel of monetary policy works in real estate markets.

Accepted Answer

When policymakers lower the short-term i

Question 15

With respect to consumer behavior, the interest-rate channel of monetary policy transmission appears to be:

Accepted Answer

A)  weak because people's decisions to purchase cars or houses depend more on short-term rates rather than long-term rates. 
B)  weak because people's decisions to purchase cars or houses depend more on long-term rates rather than short-term rates. 
C)  strong because people's decisions to purchase cars or houses depend on the short-term rates that policymakers can change. 
D)  strong because it affects both spending and saving decisions. 
A)  weak because people's decisions to purchase cars or houses depend more on short-term rates rather than long-term rates. 
B)  weak because people's decisions to purchase cars or houses depend more on long-term rates rather than short-term rates. 
C)  strong because people's decisions to purchase cars or houses depend on the short-term rates that policymakers can change. 
D)  strong because it affects both spending and saving decisions.

Question 16

The Japanese experience of the 1990s shows:

Accepted Answer

A)  monetary policy is always more effective than fiscal policy. 
B)  monetary policy always works. 
C)  sometimes monetary policy does not work. 
D)  central bankers should not try to counter the business cycle. 
A)  monetary policy is always more effective than fiscal policy. 
B)  monetary policy always works. 
C)  sometimes monetary policy does not work. 
D)  central bankers should not try to counter the business cycle.

Question 17

The relationship between interest rates and stock prices is referred to as:

Accepted Answer

A)  the interest-rate mechanism of monetary policy. 
B)  the investment-spending mechanism of monetary policy. 
C)  the wealth-creating mechanism of monetary policy. 
D)  the asset-price channel of monetary policy. 
A)  the interest-rate mechanism of monetary policy. 
B)  the investment-spending mechanism of monetary policy. 
C)  the wealth-creating mechanism of monetary policy. 
D)  the asset-price channel of monetary policy.

Question 18

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

Accepted Answer

No, just the opposite. If the Fed sells

Question 19

Which of the following statements is most correct?

Accepted Answer

A)  The use of monetary policy in the U.S. has not changed much since the creation of the Fed. 
B)  The quantitative impact on output of altering the target federal funds rate has been quite stable. 
C)  Monetary policymakers operate in an environment with very little uncertainty. 
D)  Monetary policymakers operate in an environment where change is quite common. 
A)  The use of monetary policy in the U.S. has not changed much since the creation of the Fed. 
B)  The quantitative impact on output of altering the target federal funds rate has been quite stable. 
C)  Monetary policymakers operate in an environment with very little uncertainty. 
D)  Monetary policymakers operate in an environment where change is quite common.

Question 20

If a zero-coupon bond sells for par, the nominal interest rate on that bond is:

Accepted Answer

A)  100 percent. 
B)  negative. 
C)  zero. 
D)  infinity. 
A)  100 percent. 
B)  negative. 
C)  zero. 
D)  infinity.

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

Higher stock prices can lead to greater investment spending by firms because:

Policymakers are often reluctant to turn to unconventional monetary policy measures because:

If greater stock prices can lead to greater investment spending, should central bankers ever worry about stock prices becoming too high?

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

Explain why a lowering of interest rates should raise stock prices.

Which of the following statements would you say best reflects monetary policy?

The direct impact on spending of short-term interest rate changes by central banks is:

Each of the following can contribute to the change in the supply of loans resulting from an interest rate change, except:

Suppose that the overnight interest rate falls to the lower bound and output is below potential output. A central bank could:

Explain why a corporation may find it advantageous to undertake greater investment when the value of its stock shares increase.

Why is it more correct to say that there may be correlation between high interest rates and the growth rate of output but there is no clear causation?

Explain how the asset-price channel of monetary policy works in real estate markets.

With respect to consumer behavior, the interest-rate channel of monetary policy transmission appears to be:

The Japanese experience of the 1990s shows:

The relationship between interest rates and stock prices is referred to as:

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

Which of the following statements is most correct?

If a zero-coupon bond sells for par, the nominal interest rate on that bond is:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

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