Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
52. If the target federal funds rate reaches the lower bound the FOMC:
a. must stop purchasing securities since they cannot lower nominal rates below the lower
bound.
b. would likely shift their focus to purchasing longer-term securities.
c. would likely raise the required reserve rate.
d. would likely raise the discount rate.
53. Policymakers are often reluctant to turn to unconventional monetary policy measures
because:
a. they are uncertain of the quantitative impact 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.
54. Suppose that the overnight interest rate falls to the lower bound and output is below
potential output. A central bank could:a. seek to reduce expectations of future policy rates.
b. use its balance sheet to expand the monetary base.
c. purchase securities of different maturities to affect their market prices and rates.
d. all of the answers given are correct.
55. Equity and property price bubbles are commonly associated with periods when:
a. financial assets are undervalued.
b. financial asset prices reflect the book value of companies.
c. financial asset prices are well above what seems to be a reasonable present value estimate of
earnings.
d. the earnings that companies report are overstated.
56. Monetary policymakers could keep equity and property price bubbles from developing by:
a. raising their interest rate target when they suspect a bubble.
b. lowering their interest rate target when they suspect a bubble.
c. expanding the money supply in the economy.
d. purchasing U.S. treasury securities to drive up their prices.
57. When equity and property prices collapse (bust), bank balance sheets are impaired
because:
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.
58. 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.
b. the policymakers lack experience with financial markets.
c. price bubbles are virtually impossible to identify when they are developing.
d. all of the answers given are correct.
59. Over the past thirty years, bank loans as a percentage of total credit:
a. increased from less than sixty percent to over 90 percent.
b. stayed fairly constant at around eighty percent.
c. decreased from accounting for virtually all of the credit to less than sixty percent.
d. dropped from seventy five percent to less than thirty percent.
60. The importance of the bank lending transmission mechanism of monetary policy:
a. has increased over the past thirty years.
b. has decreased over the past thirty years.
c. should continue to grow in importance.
d. has always been the weakest of all of the mechanisms.
20
61. The movement away from bank lending towards asset-backed securities:
a. has increased the importance of the bank-lending channel of monetary policy.
b. has eliminated the bank-lending channel as a mechanism for monetary policy.
c. has not affected the importance of the bank-lending channel.
d. will require the FOMC to rethink the quantitative impact of changing the target federal
funds rate.
62. The movement away from bank lending towards asset-backed securities has:
a. increased the importance of the bank-lending channel of monetary policy.
b. eliminated the bank-lending channel as a mechanism for monetary policy.
c. decreased the importance of the bank-lending channel.
d. led the FOMC to abandon interest-rate targets.
63. Instruments that have been securitized include:
a. mortgage-backed securities held by government-sponsored enterprises.
b. car loans and student loans.
c. credit card debt.
d. all of the answers given are correct.
64. Which of the following statements is most correct?
a. The use of monetary policy in the U.S. has not changed much since the creation of the Fed.
b. The quantitative impact on output of altering the target federal funds rate has been quite
stable.
c. Monetary policymakers operate in an environment with very little uncertainty.
d. Monetary policymakers operate in an environment where change is quite common.
65. Increases in the real interest rate will result in a(n):
a. increase in net exports because it will lead to a depreciation of the dollar.
b. decrease in net exports because it will lead to a depreciation of the dollar.
c. increase in net exports because it will lead to an appreciation of the dollar.
d. decrease in net exports because it will lead to an appreciation of the dollar.
66. Stock prices may rise from a reduction in interest rates because:
a. consumer and business confidence about future growth improves.
b. stockholders will expect lower future earnings.
c. financial market participants are less optimistic about future earnings.
d. the present value of future earnings will decrease.
67. Each of the following is a transmission channel of monetary policy, except:
a. the household net worth channel.
b. the Treasury Securities channel.
c. the asset-price channel.
d. the exchange-rate channel.
68. Bonds cannot have yields below the effective lower bound because:
a. the U.S. treasury guarantees all bonds to have a positive yield.
b. the banking technology does not exist to deal with negative yields.
c. people can always hold cash.
d. all of the answers given are correct.
69. In theory, lower real interest rates will tend to cause all but which of the following to
increase?
a. Consumption spending
b. Investment spending
c. Net exports
d. Government spending
70. The driving force in the balance-sheet channel of monetary policy mechanism is which of
the following?
a. Information
b. Timing
c. Asset diversity
d. Bank net worth
71. One impact of the 2007-2009 financial crisis was to heighten the challenges faced by
monetary policymakers. All but which of the following was grew more prominent as a result of
the crisis?
a. Stock and property values have a tendency to go through boom and bust cycles.
b. The nation’s current account deficit keeps widening.
c. Policymakers options are limited since the nominal interest rate cannot fall below the effective
lower bound.
d. The structures of the economy and financial system are constantly evolving.
Short Answer Questions
72. Identify at least three effects that could result when the central bank changes its balance sheet
that can impact the economy.
73. Explain how an easing of monetary policy works through the exchange rate and what
potential impact on the economy this would have.
24
74. Discuss why the interest-rate transmission mechanism of monetary policy isn't as strong as
most people may think it might be.
75. 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?
76. Will an open market sale by the Federal Reserve increase banks' willingness to make loans?
Explain.
77. 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?
78. How did financial regulation affect bank lending in the 1980s?
79. 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.
80. Why might the supply of loans increase as interest rates fall?
81. How does adverse selection factor into explaining the reduced supply of loans when interest
rates increase?
82. Explain why a lowering of interest rates should raise stock prices.
83. What role, if any, did the accounting scandals involving some U.S. companies in 2001 and
2002 play in the supply of loans?
84. Explain how the asset-price channel of monetary policy works in real estate markets.
85. Explain why a corporation may find it advantageous to undertake greater investment when the
value of its stock shares increase.
86. During the 2007-2009 financial crisis, what prevented policy easing from being transmitted as
usual to the real economy?
87. Why can't the nominal interest rate be negative?
88. Why is deflation, combined with a recessionary gap, and a nominal interest rate that cannot be
reduced a monetary policymaker's nightmare?
89. Why did the FOMC cut the target federal funds rate so aggressively between September 2007
and December 2008 in a series of 10 cuts?
90. What are the unconventional policy options that central bankers can use if the traditional
target interest rate hits the lower bound?
91. What are the pros and cons of a policy of “leaning against bubbles?”
92. When faced with inflation above desirable levels, is there anything that policymakers can do
about concern that a deep recession will lower inflationary expectations sharply and thereby raise
real interest rates in a destabilizing manner?
93. Why are policymakers reluctant to make unconventional tools part of their regular arsenal of
policy tools?
Essay Questions
94. 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?
95. 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?
96. If greater stock prices can lead to greater investment spending, should central bankers ever
worry about stock prices becoming too high?
97. What are the arguments for and against monetary policymakers intervening to address equity
and property price bubbles?
98. 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.
