Question 1

What did President Bush's advisers believe should be done about the weakness in the U.S. economy in the fall of 1991?

Accepted Answer

A) They argued in favor of an expansionary fiscal policy. 
B) They argued in favor of waiting for the effects of falling prices. 
C) They argued in favor of an expansionary monetary policy. 
D) They argued in favor of waiting for economic recovery in Japan and Europe to increase demand for U.S. products. 
A) They argued in favor of an expansionary fiscal policy. 
B) They argued in favor of waiting for the effects of falling prices. 
C) They argued in favor of an expansionary monetary policy. 
D) They argued in favor of waiting for economic recovery in Japan and Europe to increase demand for U.S. products.

Question 2

The main reason that markets for finance do not resemble simple auction markets, such as the market for wheat, is that

Accepted Answer

A) markets for finance tend to be dominated by a few large lenders. 
B) because of asymmetric information, savers must spend resources to learn about borrowers. 
C) markets for finance are much more closely regulated by the government than are other markets. 
D) simple auction markets usually suffer from excess demand for their products. 
A) markets for finance tend to be dominated by a few large lenders. 
B) because of asymmetric information, savers must spend resources to learn about borrowers. 
C) markets for finance are much more closely regulated by the government than are other markets. 
D) simple auction markets usually suffer from excess demand for their products.

Question 3

As a result of asymmetric information

Accepted Answer

A) small firms are better able to secure external financing than are large firms. 
B) investment spending may fall in a recession even if true investment opportunities do not change. 
C) short-run fluctuations in output are smaller than they would otherwise be. 
D) fluctuations in the amount of internal funds have large effects on the investment in plant and equipment carried out by mature firms. 
A) small firms are better able to secure external financing than are large firms. 
B) investment spending may fall in a recession even if true investment opportunities do not change. 
C) short-run fluctuations in output are smaller than they would otherwise be. 
D) fluctuations in the amount of internal funds have large effects on the investment in plant and equipment carried out by mature firms.

Question 4

In the bank lending channel, an expansionary monetary policy will in the short run

Accepted Answer

A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate. 
A) increase the real interest rate. 
B) decrease the real interest rate. 
C) leave the real interest rate unaffected. 
D) have an ambiguous effect on the real interest rate.

Question 5

Bank lending channel advocates are skeptical of Milton Friedman and Anna Schwartz's explanation of the role of banking panics in explaining the Great Depression, because they believe Friedman and Schwartz failed to take into account the effect of the banking panics on

Accepted Answer

A) the supply of money. 
B) interest rates. 
C) the availability of bank loans. 
D) consumer confidence. 
A) the supply of money. 
B) interest rates. 
C) the availability of bank loans. 
D) consumer confidence.

Question 6

In the balance sheet channel, an expansionary monetary policy

Accepted Answer

A) will lead to a greater increase in output than in the money channel. 
B) will not affect the real interest rate. 
C) will result in increased spending only for firms and households dependent for credit on bank loans. 
D) will lead to a larger budget deficit than in the money channel. 
A) will lead to a greater increase in output than in the money channel. 
B) will not affect the real interest rate. 
C) will result in increased spending only for firms and households dependent for credit on bank loans. 
D) will lead to a larger budget deficit than in the money channel.

Question 7

In which of the following years did the Fed move quickly when signs of a credit crunch appeared?

Accepted Answer

A) Only 1991 
B) Only 1991 and 1998 
C) Only 1998 and 2001 
D) 1991, 1998, and 2001 
A) Only 1991 
B) Only 1991 and 1998 
C) Only 1998 and 2001 
D) 1991, 1998, and 2001

Question 8

In early 2001 consumer prices in Japan were declining. Why might this deflation have a significant contractionary impact on the Japanese economy?

Accepted Answer

Falling prices increase the real value o

Question 9

The decline in the price level following the 1929 stock market crash may have reduced household spending on durable goods and houses because the decline

Accepted Answer

A) resulted in higher nominal interest rates. 
B) led the government to increase its spending, which crowded out spending by households. 
C) increased the real value of outstanding household debt. 
D) led to an offsetting decline in nominal wages. 
A) resulted in higher nominal interest rates. 
B) led the government to increase its spending, which crowded out spending by households. 
C) increased the real value of outstanding household debt. 
D) led to an offsetting decline in nominal wages.

Question 10

Evaluate the following observation: "It appears that the economy is suffering from a credit crunch. Borrowing by households and small businesses has declined much more sharply than has borrowing by large businesses."

Accepted Answer

The observation is correct in

Question 11

In comparing the actions of the Fed in the fall of 1998 with its actions in the fall of 1991, we can say that

Accepted Answer

A) in both instances the Fed moved quickly to raise interest rates in the face of an expected increase in inflation. 
B) in both instances the Fed moved quickly to cut interest rates in the face of signs of a credit crunch. 
C) the Fed moved more quickly in 1998 than in 1991 to cut interest rates in the face of signs of a credit crunch. 
D) the Fed failed in both cases to take action in the face of signs of a credit crunch. 
A) in both instances the Fed moved quickly to raise interest rates in the face of an expected increase in inflation. 
B) in both instances the Fed moved quickly to cut interest rates in the face of signs of a credit crunch. 
C) the Fed moved more quickly in 1998 than in 1991 to cut interest rates in the face of signs of a credit crunch. 
D) the Fed failed in both cases to take action in the face of signs of a credit crunch.

Question 12

From 1929 to 1933 expenditures on fixed investment, consumer durable goods, and housing all declined in constant dollars by at least

Accepted Answer

A) 5%. 
B) 10%. 
C) 25%. 
D) 50%. 
A) 5%. 
B) 10%. 
C) 25%. 
D) 50%.

Question 13

In the money channel view of how changes in the money supply affect output and the real interest rate in the short run,

Accepted Answer

A) other financial assets are considered to be poor substitutes for bank loans by many borrowers. 
B) banks are passive intermediaries, meeting the public's demand for money by supplying deposits. 
C) credit crunches have a very important role to play. 
D) interest rates do not necessarily bring the volume of funds desired to be lent by savers into equilibrium with the volume of funds desired to be borrowed by borrowers. 
A) other financial assets are considered to be poor substitutes for bank loans by many borrowers. 
B) banks are passive intermediaries, meeting the public's demand for money by supplying deposits. 
C) credit crunches have a very important role to play. 
D) interest rates do not necessarily bring the volume of funds desired to be lent by savers into equilibrium with the volume of funds desired to be borrowed by borrowers.

Question 14

Which of the following countries suffered a banking crisis during the early 1930s?

Accepted Answer

A) Germany 
B) Canada 
C) United Kingdom 
D) Japan 
A) Germany 
B) Canada 
C) United Kingdom 
D) Japan

Question 15

In the bank lending channel, an expansionary monetary policy will shift to the right

Accepted Answer

A) only the money supply line. 
B) only the money supply line and the aggregate demand curve. 
C) only the money supply line and the money demand curve. 
D) the money supply line, the money demand curve, and the aggregate demand curve. 
A) only the money supply line. 
B) only the money supply line and the aggregate demand curve. 
C) only the money supply line and the money demand curve. 
D) the money supply line, the money demand curve, and the aggregate demand curve.

Question 16

One reason why financial panics in the United States in the nineteenth and early twentieth centuries resulted in less bank lending is that

Accepted Answer

A) depositors converted significant amounts of bank deposits to currency. 
B) banks shifted from loans to purchases of U.S. government securities as the yields on these securities rose sharply. 
C) the U.S. government restricted bank lending in order to free funds to cover its budget deficits. 
D) companies shifted from bank loans to the bond market as rates on bonds dropped below rates charged by banks. 
A) depositors converted significant amounts of bank deposits to currency. 
B) banks shifted from loans to purchases of U.S. government securities as the yields on these securities rose sharply. 
C) the U.S. government restricted bank lending in order to free funds to cover its budget deficits. 
D) companies shifted from bank loans to the bond market as rates on bonds dropped below rates charged by banks.

Question 17

A majority of lending from savers to borrowers takes place through

Accepted Answer

A) financial intermediaries. 
B) stock and bond markets. 
C) direct lending by the government. 
D) private transactions among friends and relatives. 
A) financial intermediaries. 
B) stock and bond markets. 
C) direct lending by the government. 
D) private transactions among friends and relatives.

Question 18

An increase in borrower net worth will shift the aggregate demand curve

Accepted Answer

A) and the money demand curve to the left. 
B) and the money demand curve to the right. 
C) to the left, and the money demand curve to the right. 
D) to the right, and the money demand curve to the left. 
A) and the money demand curve to the left. 
B) and the money demand curve to the right. 
C) to the left, and the money demand curve to the right. 
D) to the right, and the money demand curve to the left.

Question 19

Expansionary monetary policy leading to increased borrowing for purchases of homes and durable goods is explained by the

Accepted Answer

A) balance sheet channel. 
B) money channel. 
C) bank lending channel. 
D) interest rate channel. 
A) balance sheet channel. 
B) money channel. 
C) bank lending channel. 
D) interest rate channel.

Question 20

In the money channel, loans by financial institutions

Accepted Answer

A) are central to understanding the impact of monetary policy on output. 
B) play no special role in the money supply process. 
C) are considered poor substitutes for other sorts of borrowing. 
D) are considered important only during recessions. 
A) are central to understanding the impact of monetary policy on output. 
B) play no special role in the money supply process. 
C) are considered poor substitutes for other sorts of borrowing. 
D) are considered important only during recessions.

Exam 27: Information Problems and Channels for Monetary Policy

What did President Bush's advisers believe should be done about the weakness in the U.S. economy in the fall of 1991?

The main reason that markets for finance do not resemble simple auction markets, such as the market for wheat, is that

As a result of asymmetric information

In the bank lending channel, an expansionary monetary policy will in the short run

Bank lending channel advocates are skeptical of Milton Friedman and Anna Schwartz's explanation of the role of banking panics in explaining the Great Depression, because they believe Friedman and Schwartz failed to take into account the effect of the banking panics on

In the balance sheet channel, an expansionary monetary policy

In which of the following years did the Fed move quickly when signs of a credit crunch appeared?

In early 2001 consumer prices in Japan were declining. Why might this deflation have a significant contractionary impact on the Japanese economy?

The decline in the price level following the 1929 stock market crash may have reduced household spending on durable goods and houses because the decline

Evaluate the following observation: "It appears that the economy is suffering from a credit crunch. Borrowing by households and small businesses has declined much more sharply than has borrowing by large businesses."

In comparing the actions of the Fed in the fall of 1998 with its actions in the fall of 1991, we can say that

From 1929 to 1933 expenditures on fixed investment, consumer durable goods, and housing all declined in constant dollars by at least

In the money channel view of how changes in the money supply affect output and the real interest rate in the short run,

Which of the following countries suffered a banking crisis during the early 1930s?

In the bank lending channel, an expansionary monetary policy will shift to the right

One reason why financial panics in the United States in the nineteenth and early twentieth centuries resulted in less bank lending is that

A majority of lending from savers to borrowers takes place through

An increase in borrower net worth will shift the aggregate demand curve

Expansionary monetary policy leading to increased borrowing for purchases of homes and durable goods is explained by the

In the money channel, loans by financial institutions

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Inflation: Causes and Consequences

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