Q&A Hero

Q: The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the A) traditional interest-rate channel. B) Tobins' q theory. C) wealth effects. D) cash flow channel.

Q: According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on A) business fixed investment. B) government expenditure. C) consumer nondurables. D) net exports.

Q: Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior. A) nominal; more; real B) real; less; nominal C) real; more; nominal D) market; more; real

Q: 25.1 Transmission Mechanism of Monetary Policy

Q: Recent Japanese experience has been characterized by tight monetary policy, as indicated by A) falling interest rates. B) short-term interest rates near zero. C) falling asset prices. D) low real interest rates.

Q: In the late 1990s and early 2000s, the Japanese economy has experienced A) easy monetary policy as indicated by falling nominal interest rates. B) easy monetary policy as indicated by short-term interest rates near zero. C) tight monetary policy as indicated by falling asset prices. D) tight monetary policy as indicated by short-term interest rates near zero.

Q: Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons? A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy. D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

Q: Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include: A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. C) 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. D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms.

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

Q: Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.

Q: Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.

Q: The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers A) feel more secure about their financial position. B) want to sell stocks and spend the proceeds before stock prices fall. C) believe that their wages will increase due to increased profitability of firms. D) can now afford more expensive imports.

Q: According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________. A) decline; rise B) rise; rise C) rise; fall D) decline; fall

Q: An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as A) the household liquidity effect. B) the wealth effect. C) Tobin's q theory. D) the cash flow effect.

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

Q: An expansionary monetary policy raises firms' cash flows by ________ interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal

Q: Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply A) raises stock prices, lowering the cost of new capital relative to firms' market value, thus increasing investment spending. B) raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks' willingness to lend to finance investment spending. C) raises the level of bank reserves, deposits, and bank loans, thereby raising spending by those individuals who do not have access to credit markets. D) lowers the value of the dollar, increasing net exports and aggregate demand.

Q: Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending. A) decline; increases; encouraging B) rise; increases; discouraging C) rise; reduces; encouraging D) decline; reduces; discouraging

Q: A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard. A) raises; higher B) raises; lower C) reduces; higher D) reduces; lower

Q: Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel. A) balance sheet B) bank lending C) cash flow D) unanticipated price level

Q: Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________. A) cheap; low B) dear ; low C) cheap; high D) dear; high

Q: 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 ________. A) cheap; low B) dear ; low C) cheap; high D) dear; high

Q: According to Tobin's q theory, if q is ________, new plant and equipment capital is ________ relative to the market value of business firms, so companies can buy a lot of new investment goods with only a ________ issue of stock. A) high; dear; large B) high; cheap; large C) high; cheap; small D) low; cheap; large E) low; cheap; small

Q: According to Tobin's q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital. A) low; low B) low; high C) high; low D) high; high

Q: According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock. A) fiscal; consumption B) fiscal; investment C) monetary; consumption D) monetary; investment

Q: During the Great Depression, Tobin's q A) rose dramatically, as did real interest rates. B) fell to unprecedentedly low levels. C) stayed fairly constant, in contrast to most other economic measures. D) rose only slightly, in spite of Hoover's attempts to prop it up.

Q: In the late 1990s, the stock market bubble ________ the value of Tobin's q, and caused ________ in business equipment. A) increased; underinvestment B) increased; overinvestment C) decreased; underinvestment D) decreased; overinvestment

Q: Ending the "Great Inflation" era in the 1970's is an example of A) inflation targeting. B) exchange rate targeting. C) central bank independence. D) appointment of a more conservative central banker. E) all of the above.

Q: Approaches to establishing central bank credibility include A) inflation targeting. B) exchange rate targeting. C) central bank independence. D) appointment of a more conservative central banker. E) all of the above.

Q: Approaches to establishing central bank credibility include A) continued success at keeping inflation under control. B) inflation targeting. C) exchange rate targeting. D) all of the above.

Q: Approaches to establishing central bank credibility include A) continued success at keeping inflation under control. B) central bank independence. C) appointment of a more conservative central banker. D) all of the above.

Q: The U.S. government can play an important role in establishing the credibility of anti-inflation policy by A) demonstrating fiscal responsibility. B) monitoring the Fed. C) conducting fiscal policy. D) all of the above.

Q: Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target. A) If the commitment is credible, the public's expected inflation will remain unchanged. B) Credible policy produces better outcomes on both inflation and output in the short run. C) Policies that are not credible produce worse economic contraction. D) all of the above. E) both A and C.

Q: Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) economic contraction will be worse. D) all of the above. E) both B and C.

Q: Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) over time inflation will fall. D) all of the above. E) both A and C.

Q: Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) over time inflation will fall back down to the inflation target. D) all of the above. E) both A and B.

Q: Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will not shift. C) over time inflation will fall back down to the inflation target. D) all of the above. E) both A and B.

Q: A credible nominal anchor A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. B) can help to anchor inflation expectations, which leads to smaller fluctuations in inflation. C) is required for a policy rule. D) all of the above. E) both A and B.

Q: ________ imposes a conceptual structure and inherent discipline on policy makers, but without eliminating all flexibility. A) Constrained discretion B) A policy rule C) A discretionary policy D) The Taylor rule

Q: Arguments for discretionary policies include A) policy rules can be too rigid because they cannot foresee every contingency. B) policy rules do not easily incorporate the use of judgment. C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. E) all of the above.

Q: Arguments for discretionary policies include A) policy rules can be too rigid because they cannot foresee every contingency. B) the time-inconsistency problem can lead to poor economic outcomes. C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. D) all of the above.

Q: Arguments for adopting a policy rule include A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. D) all of the above.

Q: Arguments for adopting a policy rule include A) the time-inconsistency problem can lead to poor economic outcomes. B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. C) policy makers and politicians cannot be trusted. D) all of the above.

Q: A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is A) a Taylor rule. B) a discretionary policy. C) a policy rule advocated by monetarists. D) advocated by activists.

Q: According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. C) one cannot predict the term-structure relationship as it depends on expectations. D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed.

Q: A rise in short-term interest rates that is believed to be only temporary A) is likely to have a significant effect on long-term interest rates. B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent. C) is likely to have only a small impact on long-term interest rates. D) cannot possibly affect long-term interest rates.

Q: The interest rate thought to have the most important impact on aggregate demand is the A) short-term interest rate. B) T-bill rate. C) rate on 90-day CDs. D) long-term interest rate.

Q: The Lucas critique is an attack on the usefulness of A) conventional econometric models as forecasting tools. B) conventional econometric models as indicators of the potential impacts on the economy of particular policies. C) rational expectations models of macroeconomic activity. D) the relationship between the quantity theory of money and aggregate demand.

Q: The Lucas critique indicates that A) advocates of discretionary policies' criticisms of rational expectations models are well-founded. B) advocates of discretionary policies' criticisms of rational expectations models are not well-founded. C) expectations are important in determining the outcome of a discretionary policy. D) expectations are not important in determining the outcome of a discretionary policy.

Q: The rational expectations hypothesis implies that when macroeconomic policy changes, A) the economy will become highly unstable. B) the way expectations are formed will change. C) people will be slow to catch on to the change. D) people will make systematic mistakes.

Q: Lucas argues that when policies change, expectations will change thereby A) changing the relationships in econometric models. B) causing the government to abandon its discretionary stance. C) forcing the Fed to keep its deliberations secret. D) making it easier to predict the effects of policy changes.

Q: The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as A) the monetarist revolution. B) the Lucas critique. C) public choice theory. D) new Keynesian theory.

Q: Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies, most economists agree that A) stabilization policies proved more difficult in practice than many economists had expected. B) stabilization policies proved not to be inflationary. C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. D) the discretionary policymakers were right in believing that the private economy is inherently stable.

Q: 24.1 Lucas Critique of Policy Evaluation

Q: In the period 1965 through the 1970s, policymakers pursued ________ policies in order to achieve ________. A) expansionary; high employment B) expansionary; low inflation C) contractionary; high employment D) contractionary; low inflation

Q: Because policies in the United States were too expansionary from 1965 through 1973, the U.S. suffered A) demand-pull inflation. B) cost-push inflation, as workers sought higher wages in order to keep up with inflation. C) both demand-pull and cost-push inflation. D) neither demand-pull nor cost-push inflation.

Q: Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from A) an employment target that was set too high. B) the government's inability to sell bonds to the Fed. C) an expansion in the money supply to finance federal government expenditures. D) the excessive sale of government bonds to the public.

Q: Which of the following is most likely to lead to inflationary monetary policy? A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising government budget deficits

Q: Which of the following is most likely to lead to inflationary monetary policy? A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising unemployment

Q: Which of the following is least likely to lead to inflationary monetary policy? A) Rising unemployment B) Expanding federal budget deficits C) Declining oil prices D) Conflict in the Middle East

Q: Demand-pull inflation can result when A) policymakers set an unemployment target that is too high. B) a persistent budget deficit is financed by selling bonds to the public. C) a persistent budget deficit is financed by selling bonds to the central bank. D) workers get numerous wage increases.

Q: Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing A) how fast prices rise relative to wages. B) the unemployment rate with its natural rate level. C) when prices rise relative to wages. D) government debt to real GDP.

Q: If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and A) cost-push inflation. B) demand-pull inflation. C) cost-pull inflation. D) demand-push inflation.

Q: If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in A) demand-pull inflation. B) hyperinflation. C) deflation. D) cost-push inflation.

Q: If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant. A) decrease; demand B) increase; demand C) decrease; supply D) increase; supply

Q: The combination of a successful wage push by workers and the government's commitment to high employment leads to A) demand-pull inflation. B) supply-side inflation. C) supply-shock inflation. D) cost-push inflation.

Q: To say that inflation is a monetary phenomenon seems to beg the question: A) Why does inflationary monetary policy occur? B) Why do politicians seek reelection? C) Why is the Fed independent? D) Why does the U.S. Treasury print so much money?

Q: Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon." A) monetary B) political C) policy D) budgetary

Q: The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was A) John Maynard Keynes. B) John R. Hicks. C) Milton Friedman. D) Franco Modigliani.

Q: The nonactivists who opposed the recent fiscal stimulus package argue that A) fiscal stimulus would take too long to work because of long implementation lags. B) fiscal stimulus might kick in after the economy had already recovered. C) fiscal stimulus could lead to increased volatility in inflation and economic activity. D) all of the above. E) none of the above.

Q: The time it takes for the policy actually to have an impact on the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to change policy instruments once they have decided on the new policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes to pass legislation to implement a particular policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to obtain data indicating what is happening in the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The effectiveness lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The implementation lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The legislative lag represents A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.