Question 1

What do you know about the reduced-form evidence in describing the transmission mechanism of monetary policy? provide a brief description.

Accepted Answer

The quantity theory approach to aggregate demand does not describe specific ways in which the money supply affects aggregate spending, Instead, it suggests that the effect of money on economic activity should be examined by looking at whether movements in Y are tightly linked to movements in M. Reduced-form evidence analyzes the effect of changes in M on Y as if the economy were a black box whose workings cannot be seen.

Question 2

Monetarists directly study the link between money and economic activity using ________.

Accepted Answer

A)  structural models 
B)  reduced-form models 
C)  scientific models 
D)  experimental models 
A)  structural models 
B)  reduced-form models 
C)  scientific models 
D)  experimental models B

Question 3

Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior.

Accepted Answer

A)  nominal; more; real 
B)  real; less; nominal 
C)  real; more; nominal 
D)  market; more; real 
A)  nominal; more; real 
B)  real; less; nominal 
C)  real; more; nominal 
D)  market; more; real C

Question 4

Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is ________.

Accepted Answer

A)  reduced-form evidence 
B)  organizational-model evidence 
C)  direct-model evidence 
D)  structural-model evidence 
A)  reduced-form evidence 
B)  organizational-model evidence 
C)  direct-model evidence 
D)  structural-model evidence

Question 5

An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

Accepted Answer

A)  appreciate; raising 
B)  appreciate; lowering 
C)  depreciate; raising 
D)  depreciate; lowering 
A)  appreciate; raising 
B)  appreciate; lowering 
C)  depreciate; raising 
D)  depreciate; lowering

Question 6

Early Keynesians believed that low ________ during the Great Depression indicated that ________ policy was easy.

Accepted Answer

A)  money growth; fiscal 
B)  money growth; monetary 
C)  interest rates; fiscal 
D)  interest rates; monetary 
A)  money growth; fiscal 
B)  money growth; monetary 
C)  interest rates; fiscal 
D)  interest rates; monetary

Question 7

If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through ________.

Accepted Answer

A)  the bank lending channel 
B)  Tobin's q 
C)  the traditional interest-rate channel 
D)  the household liquidity effect 
A)  the bank lending channel 
B)  Tobin's q 
C)  the traditional interest-rate channel 
D)  the household liquidity effect

Question 8

Early Keynesians viewed monetary policy as influencing aggregate demand solely through its impact on ________ interest rates, which, in turn, affect ________ spending.

Accepted Answer

A)  nominal; consumer 
B)  nominal; investment 
C)  real; consumer 
D)  real; investment 
A)  nominal; consumer 
B)  nominal; investment 
C)  real; consumer 
D)  real; investment

Question 9

Recent Japanese experience has been characterized by tight monetary policy, as indicated by ________.

Accepted Answer

A)  falling interest rates 
B)  short-term interest rates near zero 
C)  falling asset prices 
D)  low real interest rates 
A)  falling interest rates 
B)  short-term interest rates near zero 
C)  falling asset prices 
D)  low real interest rates

Question 10

The monetarist statistical evidence examines the correlations between both ________ and ________ with ________.

Accepted Answer

A)  money; aggregate spending; the unemployment rate 
B)  money; autonomous expenditures; the unemployment rate 
C)  money; consumption spending; aggregate spending 
D)  money; autonomous expenditures; aggregate spending 
A)  money; aggregate spending; the unemployment rate 
B)  money; autonomous expenditures; the unemployment rate 
C)  money; consumption spending; aggregate spending 
D)  money; autonomous expenditures; aggregate spending

Question 11

Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase

Question 12

By the standard of low-grade bonds, interest rates were ________ and monetary policy was ________ during the Great Depression.

Accepted Answer

A)  low; tight 
B)  low; easy 
C)  high; tight 
D)  high; easy 
A)  low; tight 
B)  low; easy 
C)  high; tight 
D)  high; easy

Question 13

Discuss three channels by which monetary policy affects stock prices and aggregate spending.

Accepted Answer

The answer should include three of the f

Question 14

According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

Accepted Answer

A)  cheap; low 
B)  expensive ; low 
C)  cheap; high 
D)  expensive; high 
A)  cheap; low 
B)  expensive ; low 
C)  cheap; high 
D)  expensive; high

Question 15

The early Keynesians of the 1950s and early 1960s believed that ________.

Accepted Answer

A)  monetary policy does not matter at all 
B)  fiscal policy matters 
C)  monetary policy does matter 
D)  A and B only 
A)  monetary policy does not matter at all 
B)  fiscal policy matters 
C)  monetary policy does matter 
D)  A and B only

Question 16

Real business cycle theory states that the most important cause of business cycles is ________.

Accepted Answer

A)  shocks to the money supply 
B)  interest rate shocks 
C)  Bank of Canada policy decisions 
D)  shocks to tastes and technology 
A)  shocks to the money supply 
B)  interest rate shocks 
C)  Bank of Canada policy decisions 
D)  shocks to tastes and technology

Question 17

What are the advantages of structural model evidence if the structure is correct?

Accepted Answer

a. Because we can evaluate each transmis

Question 18

During the Great Depression, real interest rates ________.

Accepted Answer

A)  rose to unprecedentedly high levels 
B)  rose only slightly above the long-run trend 
C)  fell to unprecedentedly low levels 
D)  fell only slightly below the long-run trend 
A)  rose to unprecedentedly high levels 
B)  rose only slightly above the long-run trend 
C)  fell to unprecedentedly low levels 
D)  fell only slightly below the long-run trend

Question 19

According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________.

Accepted Answer

A)  decline; rise 
B)  rise; rise 
C)  rise; fall 
D)  decline; fall 
A)  decline; rise 
B)  rise; rise 
C)  rise; fall 
D)  decline; fall

Question 20

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:

Accepted Answer

A)  Monetary policy can be highly effective in reviving a weak economy so long as short-term interest rates are not too close to zero. 
B)  Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy. 
C)  Other asset prices beside those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms. 
D)  A and B only. 
A)  Monetary policy can be highly effective in reviving a weak economy so long as short-term interest rates are not too close to zero. 
B)  Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy. 
C)  Other asset prices beside those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms. 
D)  A and B only.

Exam 26: Transmission Mechanisms of Monetary Policy

What do you know about the reduced-form evidence in describing the transmission mechanism of monetary policy? provide a brief description.

Monetarists directly study the link between money and economic activity using ________.

Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior.

Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is ________.

An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

Early Keynesians believed that low ________ during the Great Depression indicated that ________ policy was easy.

If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through ________.

Early Keynesians viewed monetary policy as influencing aggregate demand solely through its impact on ________ interest rates, which, in turn, affect ________ spending.

Recent Japanese experience has been characterized by tight monetary policy, as indicated by ________.

The monetarist statistical evidence examines the correlations between both ________ and ________ with ________.

Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.

By the standard of low-grade bonds, interest rates were ________ and monetary policy was ________ during the Great Depression.

Discuss three channels by which monetary policy affects stock prices and aggregate spending.

According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

The early Keynesians of the 1950s and early 1960s believed that ________.

Real business cycle theory states that the most important cause of business cycles is ________.

What are the advantages of structural model evidence if the structure is correct?

During the Great Depression, real interest rates ________.

According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________.

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Filters

Economic theory suggests that interest rates are important than interest rates in explaining investment behavior.

An expansionary monetary policy lowers the real interest rate, causing the domestic currency to , thereby net exports.

Early Keynesians believed that low during the Great Depression indicated that policy was easy.

Early Keynesians viewed monetary policy as influencing aggregate demand solely through its impact on interest rates, which, in turn, affect spending.

The monetarist statistical evidence examines the correlations between both and with .

Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to and consumption to .

By the standard of low-grade bonds, interest rates were and monetary policy was during the Great Depression.

According to Tobin's q theory, when equity prices are low the market price of existing capital is relative to new capital, so expenditure on fixed investment is .

According to the household liquidity effect, an expansionary monetary policy causes a in the value of households' financial assets, causing consumer durable expenditure to .