978-0133836790 Chapter 25

Chapter 25

ANSWERS TO QUESTIONS

1. In 2009, in the wake of the global financial crisis and when interest rates were at their lowest,

the U.S. government instituted a “cash for clunkers” program and later a “cash for

durables were weak at this period of time, indicating that the interest rate channel, as it

affected consumer durables, was not very healthy. As a result, the government instituted such

2. “Considering that consumption accounts for nearly two–thirds of total GDP, this means that the

interest rate, wealth, and household liquidity channels are the most important monetary policy

investment fluctuations are much more pronounced over the business cycle than changes in

consumption, leading to the possibility that interest rate effects on investment could be

3. How can the interest rate channel still function when short term nominal interest rates are at

the zero lower bound?

term interest rates low for a long time, which can have the effect of lowering longer-term

4. Lars Svensson, a former Princeton professor and deputy governor of the Swedish central

bank, proclaimed that when an economy is at risk of falling into deflation, central bankers

interest-rate channel, creating further deflationary pressure. In addition, short-term nominal

and expand aggregate demand safely and surely to get out of a deflationary spiral.

5. Describe an advantage and a disadvantage of the fact that monetary policy has so many

different channels through which it can operate.

of the economy in which the same policy can still impact the economy. On the other hand,

6. “If countries fix their exchange rate, the exchange rate channel of monetary policy does not

change the real interest rate to maintain the exchange rate, which means net exports and

7. During the 2007–2009 recession, the value of common stocks in real terms fell by more than

50%. How might this decline in the stock market have affected aggregate demand and thus

in stock prices lowered Tobin’s q and might have reduced investment spending. Second, the

decline in financial wealth, as a result of the stock price decline, could have caused a drop in

adverse selection and moral hazard problems in lending and might have resulted in a reduction

in lending and less investment spending.