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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 280
Chapter 25
ANSWERS TO QUESTIONS
1. From 2008 to 2017, auto loan rates in the United States declined from around 8% to near
historic lows of around 4.5%. At the same time, auto sales increased to near historic high
levels by 2017. How, if at all, does this relate to the monetary transmission mechanism?
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
channels in the U.S.” Is this statement true, false, or uncertain? Explain your answer.
3. How can the interest rate channel still function when short-term nominal interest rates are at
the zero lower bound?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 286
ANSWERS TO APPLIED PROBLEMS
25. Suppose the economy is in recession and the monetary policymakers lower interest rates in
an effort to stabilize the economy. Use an aggregate supply and demand diagram to
demonstrate the effects of a monetary easing when the transmission mechanisms are
functioning normally and when the transmission mechanisms are weak, such as during a
deep downturn or when significant financial frictions are present.
When the transmission mechanisms are functioning normally (and predictably),
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 287
ANSWERS TO DATA ANALYSIS PROBLEMS
1. A “rate cycle” is a period of monetary policy during which the federal funds rate moves from
its low point toward its high point, or vice versa, in response to business cycle conditions. Go
to the St. Louis Federal Reserve FRED database and find data on the federal funds rate
(FEDFUNDS), real business fixed investment (PNFIC96), real residential investment
(PRFIC96), and consumer durable expenditures (PCDGCC96). Use the frequency setting to
convert the federal funds rate data to “quarterly,” and download the data.
a. When did the last rate cycle begin and end? (Note: If a rate cycle is currently in progress,
use the current period as the end.) Is this rate cycle a contractionary or an expansionary
rate cycle?
b. Calculate the percentage change in business fixed investment, residential (housing)
investment, and consumer durable expenditures over this rate cycle.
c. Based on your answers to parts (a) and (b), how effective was the traditional interest rate
channel of monetary policy over this rate cycle?
Based on the contractionary nature of the rate cycle, and the modest increases in all three
2. As defined in Exercise 1, a “rate cycle” is a period of monetary policy during which the
federal funds rate moves from its low point toward its high point, or vice versa, in response
to business cycle conditions. Go to the St. Louis Federal Reserve FRED database and find
data on the federal funds rate (FEDFUNDS), bank reserves (TOTRESNS), bank deposits
(TCDSL), commercial and industrial loans (BUSLOANS), real estate loans (REALLN), real
business fixed investment (PNFIC96), and real residential investment (PRFIC96). Use the
frequency setting to convert the federal funds rate, bank reserves, bank deposits, commercial
and industrial loans, and real estate loans data to “quarterly,” and download the data.
a. When did the last rate cycle begin and end? (Note: if a rate cycle is currently in progress,
use the current period as the end.) Is this rate cycle a contractionary or an expansionary
rate cycle?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 288
b. Calculate the percentage change in bank deposits, bank lending, real business fixed
investment, and real residential (housing) investment over this rate cycle.
c. Based on your answers to parts (a) and (b), how effective was the bank lending channel
of monetary policy over this rate cycle?
The results are somewhat mixed with the data. Based on the contractionary nature of the
rate cycle, we would expect all of these variables to decrease when the policy rate
