Question 1

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

Accepted Answer

A) monetary policy mattered most 
B) monetary policy was all that mattered 
C) monetary policy mattered 
D) monetary policy did not matter 
A) monetary policy mattered most 
B) monetary policy was all that mattered 
C) monetary policy mattered 
D) monetary policy did not matter

Question 2

An expansionary monetary policy raises firms' cash flows by ________ interest rates.

Accepted Answer

A) lowering real 
B) lowering nominal 
C) raising real 
D) raising nominal 
A) lowering real 
B) lowering nominal 
C) raising real 
D) raising nominal

Question 3

The monetarist position on the importance of monetary policy is probably best supported by ________ evidence.

Accepted Answer

A) timing 
B) statistical 
C) historical 
D) structural 
A) timing 
B) statistical 
C) historical 
D) structural

Question 4

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the ________.

Accepted Answer

A) traditional interest-rate channel 
B) Tobins' q theory 
C) wealth effects 
D) cash flow channel 
A) traditional interest-rate channel 
B) Tobins' q theory 
C) wealth effects 
D) cash flow channel

Question 5

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the ________ decreased before ________ decreased.

Accepted Answer

A) money supply; interest rates 
B) money supply; output 
C) budget deficit; interest rates 
D) budget deficit; output 
A) money supply; interest rates 
B) money supply; output 
C) budget deficit; interest rates 
D) budget deficit; output

Question 6

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

Accepted Answer

A) structural model 
B) reduced-form model 
C) black-box model 
D) scientific model 
A) structural model 
B) reduced-form model 
C) black-box model 
D) scientific model

Question 7

Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending.

Accepted Answer

A) decline; increases; encouraging 
B) rise; increases; discouraging 
C) rise; reduces; encouraging 
D) decline; reduces; discouraging 
A) decline; increases; encouraging 
B) rise; increases; discouraging 
C) rise; reduces; encouraging 
D) decline; reduces; discouraging

Question 8

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons?

Accepted Answer

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. 
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. 
C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy. 
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms. 
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. 
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. 
C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy. 
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

Question 9

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

A) indirect-model evidence 
B) organizational-model evidence 
C) reduced-form evidence 
D) structural-model evidence 
A) indirect-model evidence 
B) organizational-model evidence 
C) reduced-form evidence 
D) structural-model evidence

Question 10

The monetarist ________ evidence in which declines in money growth are followed by recessions provides the strongest support for their position that monetary policy matters.

Accepted Answer

A) statistical 
B) historical 
C) timing 
D) structural 
A) statistical 
B) historical 
C) timing 
D) structural

Question 11

The early Keynesians of the 1950s and early 1960s believed that ________.

Accepted Answer

A) monetary policy does not matter at all 
B) fiscal policy matters 
C) monetary policy does matter 
D) A and B only 
A) monetary policy does not matter at all 
B) fiscal policy matters 
C) monetary policy does matter 
D) A and B only

Question 12

What are the advantages of reduced-form evidence?

Accepted Answer

The main advantage of reduced-form evide

Question 13

Real business cycle theorists are critical of monetarist reduced-form evidence because they believe ________.

Accepted Answer

A) money is the most important cause of changes in aggregate demand 
B) there is reverse causation from the business cycle to money 
C) there is reverse causation from money to the business cycle 
D) business cycles do not exist 
A) money is the most important cause of changes in aggregate demand 
B) there is reverse causation from the business cycle to money 
C) there is reverse causation from money to the business cycle 
D) business cycles do not exist

Question 14

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:

Accepted Answer

A) It is dangerous always to associate the easing or tightening of monetary policy with a fall or a rise in short-term interest rates. 
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. 
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy. 
D) A and B only. 
A) It is dangerous always to associate the easing or tightening of monetary policy with a fall or a rise in short-term interest rates. 
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. 
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy. 
D) A and B only.

Question 15

According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers ________.

Accepted Answer

A) feel more secure about their financial position 
B) want to sell stocks and spend the proceeds before stock prices fall 
C) believe that their wages will increase due to increased profitability of firms 
D) can now afford more expensive imports 
A) feel more secure about their financial position 
B) want to sell stocks and spend the proceeds before stock prices fall 
C) believe that their wages will increase due to increased profitability of firms 
D) can now afford more expensive imports

Question 16

Periods of price deflation, such as the Great Depression, are characterized by ________.

Accepted Answer

A) low nominal rates but high real rates of interest 
B) low nominal and real interest rates 
C) real rates of interest lower than the nominal rate of interest 
D) high nominal and real rates of interest 
A) low nominal rates but high real rates of interest 
B) low nominal and real interest rates 
C) real rates of interest lower than the nominal rate of interest 
D) high nominal and real rates of interest

Question 17

A disadvantage of ________ evidence is that it cannot rule out ________.

Accepted Answer

A) reduced-form; reverse causation 
B) reduced-form; adverse selection 
C) structural model; reverse causation 
D) structural model; adverse selection 
A) reduced-form; reverse causation 
B) reduced-form; adverse selection 
C) structural model; reverse causation 
D) structural model; adverse selection

Question 18

The ________ proposes that two types of monetary transmission channels arise as a result of problems in credit markets

Accepted Answer

A) interest rate channel 
B) asset price channel 
C) credit view 
D) Tobin q theory 
A) interest rate channel 
B) asset price channel 
C) credit view 
D) Tobin q theory

Question 19

In response to the early Keynesians, monetarists contended that ________.

Accepted Answer

A) monetary policy during the Great Depression was not easy 
B) bank failures during the Great Depression were not the cause of the decline in the money supply 
C) evidence from the Great Depression demonstrated the ineffectiveness of monetary policy 
D) there is a weak link between interest rates and investment spending 
A) monetary policy during the Great Depression was not easy 
B) bank failures during the Great Depression were not the cause of the decline in the money supply 
C) evidence from the Great Depression demonstrated the ineffectiveness of monetary policy 
D) there is a weak link between interest rates and investment spending

Question 20

If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.

Accepted Answer

A) asset; labor 
B) asset; credit 
C) commodity; labor 
D) commodity; credit 
A) asset; labor 
B) asset; credit 
C) commodity; labor 
D) commodity; credit

Exam 26: Transmission Mechanisms of Monetary Policy

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

An expansionary monetary policy raises firms' cash flows by ________ interest rates.

The monetarist position on the importance of monetary policy is probably best supported by ________ evidence.

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the ________.

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the ________ decreased before ________ decreased.

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

Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending.

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons?

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

The monetarist ________ evidence in which declines in money growth are followed by recessions provides the strongest support for their position that monetary policy matters.

The early Keynesians of the 1950s and early 1960s believed that ________.

What are the advantages of reduced-form evidence?

Real business cycle theorists are critical of monetarist reduced-form evidence because they believe ________.

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:

According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers ________.

Periods of price deflation, such as the Great Depression, are characterized by ________.

A disadvantage of ________ evidence is that it cannot rule out ________.

The ________ proposes that two types of monetary transmission channels arise as a result of problems in credit markets

In response to the early Keynesians, monetarists contended that ________.

If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the decreased before decreased.

Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a in net worth, which the adverse selection problem, thereby increased lending to finance investment spending.

A disadvantage of evidence is that it cannot rule out .

If monetary policy can influence prices and conditions in markets, then it can affect spending through channels other than the traditional interest-rate channel.