Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
60. If an economy is experiencing deflation and the nominal interest rate is zero:
D. Aggregate demand is likely to increase
61. One of the limiting factors for using monetary policy is:
A. The central banks are limited in their ability to print money
62. Deflation:
A. Is always a problem
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
63. Firms have a harder time getting loans during periods of deflation because:
A. Deflation aggravates information problems in ways dissimilar to inflation
64. A way for policymakers to avoid the problems that deflation can present and still meet
their objective of price stability is to:
A. Set a target of zero inflation
65. One reason most central bankers do not set an inflation target of zero is:
A. It is almost impossible to achieve
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
66. When central bankers are acting preemptively they are:
A. Letting markets work and taking a wait and see approach
67. Between January and November of 2001, the FOMC reduced the target federal funds rate
D. Was feeling political pressure to act
68. If the target federal funds rate reaches zero:
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
69. If the target federal funds rate reaches zero the FOMC:
D. Would likely raise the discount rate
70. Policymakers are often reluctant to turn to unconventional monetary policy measures
D. Such policies require coordination with the central bankers of foreign countries
71. Suppose that the overnight interest rate falls to zero and output is below potential output.
D. All of the answers given are correct
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
72. Equity and property price bubbles develop when:
A. Financial assets are undervalued
73. Monetary policymakers could keep equity and property price bubbles from developing
by:
D. Purchasing U.S. treasury securities to drive up their prices
74. When equity and property prices collapse (bust), bank balance sheets are impaired
because:
A. Banks hold a lot of corporate stocks
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
75. Some people, who believe monetary policymakers should not address equity and property
price bubbles, argue their position based on:
A. Their belief that government should stay out of private matters
76. Over the past twenty-five years, bank loans as a percentage of total credit:
A. Increased from less than sixty percent to over 90 percent
77. The importance of the bank lending transmission mechanism of monetary policy:
D. Has always been the weakest of all of the mechanisms
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
78. The movement away from bank lending towards asset-backed securities:
A. Has increased the importance of the bank-lending channel of monetary policy
79. The movement away from bank lending towards asset-backed securities has:
80. Asset-backed securities include:
A. Mortgage-backed securities held by government-sponsored enterprises
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
81. Which of the following statements is most correct?
Short Answer Questions
82. In late 1999, why did it appear the Japanese central bank ran out of policy options?
83. Identify at least three effects that could result when the central bank changes its balance
sheet that can impact the economy.
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
84. Explain how an easing of monetary policy works through the exchange rate and what
potential impact on the economy this would have.
85. Discuss why the interest-rate transmission mechanism of monetary policy isn’t as strong
as most people may think it might be.
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
86. 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?
87. Will an open market sale by the Federal Reserve increase banks’ willingness to make
loans? Explain.
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
88. Inflation can reduce the true cost of debt, and policymakers lower interest rates to
encourage borrowing. Is it a good idea then to always take advantage of lower interest rates to
borrow and rely on inflation to reduce the cost of debt and to increase your ability to repay the
loan?
89. How did financial regulation affect bank lending in the 1980s?