Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
23-1
Multiple Choice Questions
1. The Japanese experience of the 1990s shows:
A. Monetary policy is always more effective than fiscal policy
2. During the financial crisis of 2007-2009 which of the following countries experienced a
decline in real GDP roughly twice that of the United States?
A. Canada
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
3. All of the following would represent the transmission of monetary policy, except:
D. Net exports changing
4. The monetary policy transmission mechanism refers to the concept that monetary policy:
A. Always seems to work the way central bankers think it will
5. An easing of monetary policy should:
D. Increase investment and household spending but lower net exports
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
6. Research has revealed that the investment component of total spending is:
D. The key transmission channel for monetary policy and highly sensitive to interest rates
7. Decreases in the real interest rate will result in a(n):
D. Decrease in net exports because it will lead to an appreciation of the dollar
8. Which of the following traditional channels of monetary policy transmission can be
described as powerful?
A. The interest-rate channel
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
D. Strong because the investment component of total spending is very sensitive to interest
rates
10. Changing short-term interest rates have a(n):
A. Strong and significant impact on household purchase decisions
11. With respect to consumer behavior, the interest-rate channel of monetary policy
transmission appears to be:
D. Strong because it affects both spending and saving decisions
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
12. The impact of monetary policy on the exchange rate and net exports is best described as:
A. The strongest of all the parts of the transmission mechanism
D. Only effective for net exports but not for investment and consumption
14. Which of the following statements is most correct?
A. High interest rates cause recessions
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
15. The Federal Reserve surveys lending officers regularly to:
A. Determine the interest rates they charge
16. The Federal Reserve’s surveys of bank loan officers contain questions about:
A. The interest rates being charged
17. The Federal Reserve’s surveys of bank loan officers contain questions about both the
demand for and the supply of loans. On the supply side, the questions have to do with all of
the following except:
A. The interest rates being charged
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
18. The Federal Reserve’s surveys of bank loan officers can help the Fed determine whether:
D. An increase in the quantity of new loans was due to a decrease in supply or an increase in
demand
19. The bank-lending channel of monetary policy focuses on:
D. The deposit insurance premiums banks will end up paying
20. An open market purchase of securities by the central bank from banks will:
D. Decrease the banks’ willingness and ability to make loans
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
21. An open market sale of securities by the central bank to banks will:
D. Increase the banks’ willingness and ability to make loans
22. In 1980, President Carter authorized the Federal Reserve to impose a series of credit
controls. These were put in place to:
A. Stem the large number of bank failures
23. The additional capital requirements put in place following the banking crisis of the 1980s
D. Prolonged economic slowdown lasting much of the 1990s
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
24. The balance-sheet channel of monetary policy works because it can:
A. Increase a borrower’s asset value but not the burden of his/her liabilities
25. For a firm, a decrease in the interest rate resulting from monetary policy can:
D. All of the answers given are correct
26. 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:
D. The net worth of both firms will increase and by the same amount
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
27. Given a firm’s liabilities, an increase in interest rates reduces the firm’s net worth because:
D. All of the answers given are correct
28. If a borrower’s net worth increases:
A. The likelihood of moral hazard also increases
29. Increases in a borrower’s net worth:
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
30. If interest rates increase, the supply of loans is likely to:
D. Change by the same amount as demand
31. Each of the following can contribute to the change in the supply of loans resulting from an
interest rate change, except:
A. Changes in the percentage of loan payment to income
32. As interest rates rise the supply of loans may decrease because:
A. Borrowers net worth rises
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
33. The importance of the bank-lending channel of monetary policy transmission:
D. None of the answers given is correct
34. The technological changes that seem to be occurring in lending:
D. Will increase the demand for loans because they eliminate the problems of adverse
selection and moral hazard
35. The correlation between interest rates and stock prices is:
D. Direct, but only if interest rates rise
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
36. The relationship between interest rates and stock prices is referred to as:
A. The interest-rate mechanism of monetary policy
37. If central bankers raise the interest rate, the asset-price channel of monetary policy
D. Stock prices will increase and bond prices will remain flat
38. Stock prices may rise from a reduction in interest rates because:
D. The present value of future earnings will decrease
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
39. Stock prices rise:
A. Usually six to twelve months after interest rates are reduced
40. The relationship between real estate markets and interest rates is:
D. Direct; high interest rates lead to high real estate values as people abandon other financial
assets
41. Higher home values can increase output in the economy if:
A. People take some of the equity out of their homes and spend it on a vacation
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
42. Higher stock prices can lead to greater investment spending by firms because:
D. The cost of internal financing is lower and the firm also gets 100 percent of the increase in
the stock value
43. Each of the following is a transmission channel of monetary policy, except:
D. The exchange-rate channel
44. During the 1990s, the Japanese recession did not respond to the continual interest rate
reductions implemented by monetary policymakers. Which of the following contributing to
this lack of response?
A. Many banks that continued to make loans were actually insolvent
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
45. Monetary policy in Japan during the 1990s was:
A. Highly effective at stemming the recession that occurred
46. Comparing the banking systems of Japan and the U.S. during the 1990s and early 2000s,
one would be likely to say that:
A. The U.S. banking system is much shakier than the Japanese banking system
47. Which of the following statements would you say best reflects monetary policy?
A. It is a hard and fast science
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
48. The challenges facing policymakers today include each of the following, except:
D. The structure of the economy and financial system continues to evolve
49. To compensate for the collapse of intermediation and the fragility of financial markets
during the 2007-2009 financial crisis, central banks deployed all but which of the following
unconventional tools?
D. Credit easing
50. All but which of the following is a reason policy makers are concerned about the strength
of the rebound from the 2007-2009 financial crisis?
A. Banks would make credit expensive and difficult to obtain
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
51. All but which of the following could be adjusted as a means of deflating asset price
bubbles?
D. Fees for insuring the capital of banks
52. The high rates of inflation that were experienced in the 1970s could partly be blamed on:
A. The assumption the economy would continue to grow at the rates that the economy
experienced in the 1960s
53. The high rates of inflation that were experienced in the 1970s could partly be blamed on
all of the following except:
A. The assumption the economy would continue to grow at the rates that the economy
experienced in the 1960s
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
D. Overestimated both the growth rate of potential GDP and inflation
55. If a zero-coupon bond sells for par, the nominal interest rate on that bond is:
A. 100 percent
56. Bonds must have positive yields because:
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
57. The fact that investors can always hold cash creates:
D. Negative nominal interest rates
58. Monetary policy reached its limits of influence in Japan in the late 1990s due to the fact
that:
D. The Japanese central bank had their power revoked
59. If an economy is experiencing deflation and the nominal interest rate is zero:
D. Aggregate demand is likely to decrease