Question 1

Which of the following occurs as a result of an increase in the money supply in the bank lending channel view, but does not occur in the money lending channel view?

Accepted Answer

A) An increased availability of bank loans 
B) A rightward shift in the MD curve 
C) A high level of output 
D) A rightward shift in the AD curve

Question 2

For breakdowns in lending by financial institutions to affect the volume of funds flowing from savers to borrowers,

Accepted Answer

A) financial institutions must charge lower interest rates than other lenders. 
B) financial institutions must charge higher interest rates than other lenders. 
C) alternative sources of funds to borrowers must be imperfect substitutes for loans from financial institutions. 
D) financial institutions must be subject to less regulation than other lenders.

Question 3

Expansionary monetary policy that leads to lower interest rates, thus encouraging more borrowing to buy homes, is described by the

Accepted Answer

A) bank lending channel. 
B) money channel. 
C) balance sheet channel. 
D) financial market channel.

Question 4

In the money 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.

Question 5

During the financial panic of the early 1930s

Accepted Answer

A) the public converted large amounts of currency to bank deposits. 
B) the spread between interest rates on safe and risky securities widened sharply. 
C) spending by large firms declined relative to spending by households and small firms. 
D) banks shifted large amounts of funds from government securities to loans.

Question 6

The finding that bank loans decline and the volume of commercial paper issued increases when the Fed contracts the level of bank reserves appears to indicate that

Accepted Answer

A) the impact of contractionary monetary policy comes mainly from its effect on interest rates. 
B) during these episodes borrowers who are able to do so switch toward nonbank sources of financing. 
C) changes in credit demand must be responsible. 
D) during these episodes savers must convert bank deposits into commercial paper purchases.

Question 7

In the balance sheet channel, when households have high levels of liquid assets relative to their liabilities, they are more willing to invest in consumer durable goods or housing because

Accepted Answer

A) they estimate the likelihood of financial distress to be low. 
B) they are able to borrow at lower interest rates. 
C) they can make these purchases without having to borrow. 
D) they are likely to be middle-aged, when most purchases of consumer durable goods and houses are made.

Question 8

Large firms find external funds to be more costly than internal funds because

Accepted Answer

A) they must pay taxes on external funds but not on internal funds. 
B) external funds must be raised in financial markets, whereas internal funds may be raised from banks. 
C) legally a portion of external funds must be distributed to shareholders, whereas all internal funds may be used for investment projects. 
D) outside investors require a higher return to compensate them for having to obtain information about the firms.

Question 9

Economists have found that the greater is a borrower's net worth compared to the borrower's desired level of capital investment

Accepted Answer

A) the larger is the gap between the cost of external and internal financing. 
B) the smaller is the gap between the cost of external and internal financing. 
C) the larger is the borrower's tax liability. 
D) the smaller is the borrower's tax liability.

Question 10

A credit crunch

Accepted Answer

A) is an increase by consumers in the default rate on loans. 
B) is a decline in either the ability or the willingness of banks to lend at any particular interest rate. 
C) is a reduction in the money supply by the Fed. 
D) is an increase in the discount rate by the Fed.

Question 11

If the bank lending channel is correct, a credit crunch in bank lending should

Accepted Answer

A) lower interest rates. 
B) be felt disproportionately by borrowers for whom transactions costs of nonbank finance are the highest. 
C) increase the money supply. 
D) lead to disintermediation.

Question 12

If banks become less willing to make loans, the aggregage demand curve

Accepted Answer

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

Question 13

An increase in the money supply can reduce the probability of financial distress by

Accepted Answer

A) directly increasing the funds available to households and businesses. 
B) lowering the prices of U.S. Treasury securities. 
C) allowing the federal government to reduce its budget deficit. 
D) raising stock prices and the value of liquid financial assets.

Question 14

An increase in the willingness of banks to lend will result in

Accepted Answer

A) a lower real interest rate, whereas an increase in the money supply will lead to a higher real interest rate. 
B) a lower real interest rate as will an increase in the money supply. 
C) a higher real interest rate as will an increase in the money supply. 
D) a higher real interest rate, whereas an increase in the money supply will lead to a lower real interest rate.

Question 15

Why are banks able to offer funds more cheaply to many borrowers than can financial markets?

Accepted Answer

A) Banks tend to be willing to settle for lower profits than are other lenders. 
B) Banks are less regulated than are financial markets, which lowers banks' costs of operating. 
C) Banks specialize in gathering information on the creditworthiness of borrowers and monitoring borrowers' activities. 
D) Financial markets are generally uninterested in making loans to small borrowers, because small borrowers usually cannot afford to pay the rates charged large corporations and other large borrowers.

Question 16

What did President George H. W. Bush and his advisers believe was causing the weakness in the U.S. economy in the fall of 1991?

Accepted Answer

A) A credit crunch 
B) High inflation 
C) Low interest rates 
D) A large federal budget deficit

Question 17

Disintermediation involves

Accepted Answer

A) an increase in regulatory restrictions on bank lending. 
B) a shift by depositors from bank deposits to other investments. 
C) an increase in borrowing from banks at the expense of alternative sources of funds. 
D) a decrease in interest rates following an expansion in the money supply.

Question 18

Why do banks engage in credit rationing? If a potential borrower appears to be a poor credit risk, why don't banks simply charge a high enough interest to compensate for the increased probability of default?

Accepted Answer

The answer of Why do banks engage in credit rationing?...

Question 19

Which of the following pieces of advice is an advocate of the bank lending channel most likely to give to officials in an emerging market economy?

Accepted Answer

A) Focus on the development of financial markets because they will be the chief sources of funds to business. 
B) Make sure that financial institutions are developed along with financial markets. 
C) Keep interest rates low to enable young, growing enterprises to borrow in financial markets. 
D) Use credit controls to deal with excessive bank lending.

Question 20

To determine whether a home is affordable, most homebuyers focus on

Accepted Answer

A) the price of the home. 
B) cost of servicing the mortgage compared to take-home pay. 
C) interest rates. 
D) how much the home price has changed in recent years.

Exam 27: Information Problems and Channels for Monetary Policy