Question 1

Why can't the nominal interest rate be negative?

Accepted Answer

Investors can always hold cash.Since cash carries a zero nominal interest rate, no investor would willingly hold a bond (which carries some risk) that pays a negative interest rate when he/she could carry cash, which pays a zero interest rate.

Question 2

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 on short-term rates rather than long-term rates
B)  Weak because people's decisions to purchase cars or houses depend 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 B

Question 3

Research has revealed that the investment component of total spending is:

Accepted Answer

A)  The key transmission channel for monetary policy
B)  Not very sensitive to interest rates
C)  Highly sensitive to interest rates
D)  The key transmission channel for monetary policy and highly sensitive to interest rates B

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

The answer of Discuss why the interest-rate transmission mechanism of...

Question 5

Increases in a borrower's net worth:

Accepted Answer

A)  Reduces the problem of moral hazard
B)  Lowers the information costs of lending
C)  Reduces the problem of adverse selection
D)  All of the answers given are correct

Question 6

A way for policymakers to avoid the problems that deflation can present and still meet their objective of price stability is to:

Accepted Answer

A)  Set a target of zero inflation
B)  Set an inflation target well above 5 percent
C)  Set an inflation target of two to three percent
D)  Target a nominal interest rate of zero

Question 7

One of the limiting factors for using monetary policy is:

Accepted Answer

A)  The central banks are limited in their ability to print money
B)  Central banks are limited in their ability to make loans
C)  There is a lower nominal-interest-rate bound of zero
D)  The real interest rate cannot fall below zero

Question 8

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

Accepted Answer

A)  The balance-sheet channel
B)  The tax-impact channel
C)  The asset-price channel
D)  The exchange-rate channel

Question 9

The chapter seems to imply that the direct influence of short-term interest rate changes by central bankers is not that powerful in terms of their direct impact on spending.Why then do so many people pay attention to the monetary policy?

Accepted Answer

The answer of The chapter seems to imply that the...

Question 10

One reason most central bankers do not set an inflation target of zero is:

Accepted Answer

A)  It is almost impossible to achieve
B)  They believe it would cause deflation
C)  It would hit the zero nominal-interest-rate bound
D)  None of the answers given is correct

Question 11

The Federal Reserve surveys lending officers regularly to:

Accepted Answer

A)  Determine the interest rates they charge
B)  Get a feel for the supply and demand for loans
C)  Get a feel for the quantity and quality of loans
D)  All of the answers given are correct

Question 12

Chapter 23 pointed out 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 Chapter 23 pointed out lower interest rates...

Question 13

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

Accepted Answer

The answer of Identify at least three effects that could...

Question 14

When equity and property prices collapse (bust), bank balance sheets are impaired because:

Accepted Answer

A)  Banks hold a lot of corporate stocks
B)  Banks own a lot of property outright
C)  The collateral that is backing many of the loans banks have made is now worth less
D)  Banks hold a lot of corporate stocks and they also own a lot of property outright

Question 15

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

Accepted Answer

A)  They are uncertain of the quantitative experiences 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 16

The correlation between interest rates and stock prices is:

Accepted Answer

A)  Direct
B)  Inverse
C)  There is no relationship
D)  Direct, but only if interest rates rise

Question 17

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

Accepted Answer

The answer of Why should the supply of loans increase...

Question 18

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

Accepted Answer

The answer of Explain why a lowering of interest rates...

Question 19

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

Question 20

Why did the FOMC cut the target federal funds rate so aggressively between January and November of 2001 when most measures of economic activity showed that the economy was already rebounding from the recession earlier in the year?

Accepted Answer

The answer of Why did the FOMC cut the target...

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