Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
90. The name balance-sheet channel of monetary policy implies that monetary policy has to
impact categories on a firm’s balance sheet. Explain how the balance sheet of a firm will be
impacted by an increase in interest rates.
91. Why should the supply of loans increase as interest rates fall?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
92. How does adverse selection factor into explaining the reduced supply of loans when
interest rates increase?
93. Explain why a lowering of interest rates should raise stock prices.
94. What role, if any, did the accounting scandals involving some U.S. companies in 2001 and
2002 play in the supply of loans?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
95. Explain how the asset-price channel of monetary policy works in real estate markets.
96. Explain why a corporation may find it advantageous to undertake greater investment when
the value of its stock shares increase.
97. During the 2007-2009 financial crisis, what prevented policy easing from being
transmitted as usual to the real economy?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
98. It has been argued that monetary policy reached its limits in Japan during the late 1990s
and early 2000s. What fact created this belief?
99. How did lax financial institution regulation in the 1990s actually contribute to the long
recession in Japan and the ineffectiveness of expansionary monetary policy?
100. Why can’t the nominal interest rate be negative?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
101. How did poor economic forecasting contribute to the high inflation experienced in the
U.S. economy in the 1970s?
102. Why is deflation, combined with a recessionary gap, and a zero nominal interest rate a
monetary policymaker’s worst nightmare?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
103. 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?
104. What are the unconventional policy options that central bankers can use if the traditional
target interest rate hits zero?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
105. What are the pros and cons of a policy of “leaning against bubbles?”
106. When faced with inflation above desirable levels, is there anything that policy makers
can do about concern that a deep recession will lower inflationary expectations sharply and
thereby raise real interest rates in a destabilizing manner?
107. Why are policy makers reluctant to make unconventional tools part of their regular
arsenal of policy tools?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
Essay Questions
108. 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?
109. 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?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
23–40
110. If greater stock prices can lead to greater investment spending, should central bankers
ever worry about stock prices becoming too high?
111. What are the arguments for and against monetary policymakers intervening to address
equity and property price bubbles?
Chapter 23 – Modern Monetary Policy and the Challenges Facing Central Bankers
112. Discuss the impact of the evolving financial system on the bank-lending channel of
monetary policy transmission? Evaluate what that is likely to mean for future changes in the
target federal funds rate.