ECON 311: FINAL EXAM
79 Cards in this Set
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Which of the following is NOT a benefit of using a nominal anchor for the conduct of monetary policy?
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A nominal anchor creates a rigid rule that does not allow a central bank to adjust to unforeseen circumstances
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The most important goal of monetary policy is said to be...
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price stability
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What illustrates a time-inconsistency problem?
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A parent who threatens to punish a child when he breaks a rule, but doesn't follow through because punishment is unpleasant.
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A condition of low and stable inflation
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Price stability
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Variables such as the inflation rate, exchange rate, or money supply that policy makers use to tie down the price level
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nominal anchor
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Results when discretionary monetary policies are pursued that are expansionary and beneficial in the short run but that have poor outcomes in the long run
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Time-inconsistency problems
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the most extreme example of unstable prices
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hyperinflation
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What is not a goal of monetary policy?
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An unemployment rate as close to zero as possible
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High employment is a worthy goal. T/F
Why?
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True, unemployment results in under-utilized resources and lower output
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There are two types of mandates: _________ mandates, which prioritize price stability above all other objectives, and _____ mandates, which place different objectives on equal footing.
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Hierarchical, Dual
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Does inflation targeting help reduce the time-inconsistency of discretionary policy?
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Yes, it is a mechanism of self-discipline, which effectively ties the hands of policymakers to commit to a policy path
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Which of the following is NOT an advantage of the monetary strategy used at the Federal Reserve under Alan Greenspan and Ben Bernanke in which the nominal anchor is only implicit?
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It has a lack of transparency
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Which of the following is a disadvantage of the monetary strategy used at the Federal Reserve under Alan Greenspan and Ben Bernanke in which the nominal anchor is only implicit?
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It is dependent on the preferences, skills, and trustworthiness of individuals in the central bank and the government
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The recent subprime financial crisis demonstrates a _________ bubble, while the tech-stock bubble of the 1990s demonstrates an __________ bubble.
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Credit-driven, irrational exuberance
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Irrational exuberance bubbles appear to have ________ on the economy compared to credit-driven bubbles.
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Small impacts
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Regulatory Policy to affect what is happening in credit market in the aggregate is referred to as:
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Macroprudential Regulation
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What are three reasons why monetary policy should NOT be used to prick asset-price bubbles?
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There are many different asset prices, and at any one time a bubble may be present in only a fraction of assets; monetary policy actions to prick bubbles can have harmful effects on the aggregate economy, and the effect of raising interest rates on asset prices is highly uncertain
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What is not directly affected by the tools of monetary policy, but links the policy instrument and the goals of monetary policy?
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An intermediate target
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Describe the Fed's Game Plan
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The Fed uses policy instruments to impact its intermediate targets in a way that allows the Fed to achieve its goals
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Y=
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C+I+G+NX
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If real interest rate rises, what happens to investment spending and Y?
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they both rise
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If expected inflation rises, what happens to I and Y?
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they both rise
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What is the exchange rate effect?
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When the real interest rate rises, the exchange rate rises, net exports rise, and Y rises
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What is Tobin's Q?
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Firms market value/replacement cost of capital
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What is the effect of Tobin's Q?
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R falls, stock price rises, Q Rises, I Rises, and Y Rises
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What is the wealth effect?
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R Falls, Stock Rises, Wealth Rises, Consumer Spending Rises, and Y Rises
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What type of effect does the credit view have?
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Adverse Affect
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Credit View
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Firms net worth falls, banks collateral falls, potential losses rise
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Credit View Basics
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Adverse selection rises and bank lending falls
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Show the effect of Moral Hazard
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Firms net worth falls, value of owners equity falls, risky investment behavior rises, moral hazard rises, bank lending falls
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R falls, stock rises, firm's worth rises, ASMH falls, bank lending rises, investment spending rises, Y rises
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Balance Sheet Channel
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R falls, firm's cash flow rises, ASMH falls, bank lending rises, investment spending rises, and Y rises
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Cash Flow Channel
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R falls, Inflation rises, unanticipated price level rises, firm's net worth rises, ASMH falls, bank lending rises, investment spending rises, and Y rises
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Unanticipated Price Level Channel
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R falls, valye of household financial assets rises, likelihood of financial distress falls, consumer dirable/nondurable spending rises, Y rises
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Household Liquidity Effect
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Reserves rise, deposits rise, loans rise, investment spending rises, Y rises
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Bank Lending Channel
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Economic theory suggests that ______ interest rates are ______ important than __________ interest rates in explaining investment behavior.
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Real, more, nominal
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According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on
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business fixed investments
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The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the
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traditional interest rate channel
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If the aggregate price level adjusts slowly over time, than an expansionary monetary policy lowers...
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the short term nominal, real and long term interest rates
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If monetary policy can influence ______ prices and conditions in ______ markets, then it can affect spending through channels other than the traditional interest-rate channel.
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asset;credit
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An expansionary monetary policy lowers the real interest rate, causing the domestic currency to _______, thereby, ______ net exports.
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depreciate; raising
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An expansionary monetary policy increases net exports by _________ interest rates and ______ the value of the dollar.
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lowering real, decreasing
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A contradictory monetary policy raises the real interest rate, causing the domestic currency to _____, thereby _______ net exports.
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appreciate, lowering
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A contradictory monetary policy decreases net exports by _________ interest rates and _________ the value of the dollar.
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Raising real, increasing
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Tobin's Q is defined as the market value of firms ______ the replacement cost of capital.
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Divided by
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Tobin's Q theory suggests that monetary policy may affect investment spending through its impact on
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stock prices
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In the late 1990's, the stock market bubble ______ the value of Tobin's Q, and caused _______ in business equipment.
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increased, over investment
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During the Great Depression, Tobin's Q.....
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fell to unprecedentedly low levels
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According to Tobin's Q theory, ________ policy can affect ________ spending through its effect on the prices of common stock.
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Monetary, investment
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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.
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Low, low
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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 investments goods with only a ______ issue of stock.
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high, cheap, small
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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.....
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cheap, low
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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 _______.
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dear, high
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Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to _______ and consumption to _________.
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increase, increase
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Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ______ channel.
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bank lending
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A rise in stock prices ____________ the net worth of firms and so leads to ______ investment spending because of the reduction in moral hazard.
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increases, increase
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Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes ____ in net worth, which _____ the adverse selection problem, thereby ______ increased lending to finance investment spending.
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rise, reduces, encouraging
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Due to asymmetric info in credit market, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply...
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raises a firm's net worth, decreasing adverse selection and moral hazard problems, thus increasing bank's willingness to lend to finance investment spending
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An expansionary monetary policy raises firms' cash flows by _______ interest rates.
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lowering nominal
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If a contradictory monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through.....
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the household liquidity effect
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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.....
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the household liquidity effect
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According to the household liquidity effect, an expansionary monetary policy causes a ____ in the value of household's financial assets, causing consumer durable expenditure to _____.
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rise, rise
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According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers.....
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feel more secure about their financial position
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The subprime financial crisis caused a recession because of the _____ in adverse selection and moral hazard problems and the _____ in housing prices.
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Increase, decrease
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How can interest rate channel still function when short-term nominal interest rates are at the zero-lower bound?
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If the central bank commits to a higher inflation policy, it can raise inflation expectations, thereby lowering real interest rates, even when the nominal interest rate is zero
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In the 2007-2009 recession, the value of common stocks in real terms fell by nearly 50%. Which of the following shows a transmission mechanism through which the decline in the stock market might have affected aggregate demand and thus contributed to the severity of the recession?
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Falling stock prices lead to a fall in financial wealth, and thus consumption spending falls, reducing aggregate demand
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The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates. True or false?
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False
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Which of the following is a correct transmission channel that shows how monetary policy can affect investment, without relating investment to interest rates?
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Expansionary monetary policy can increase the value of stocks, raising Tobin's q, and thus increasing investment
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The credit market channel of monetary transmission acts primarily through the effect of:
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asymmetric information on lending and balance sheets
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Contradictory monetary policy reduces stock prices, which reduce the value of financial assets and increase the probability of household financial distress. Households with less access to liquid assets spend less on consumption and residential investment. This statement describes which of…
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Household Liquidity Effects
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Expansionary monetary policy increases stock prices and thus the net worth of firms. As net worth rises, adverse selection and moral hazard are reduced, and this bank lending increases, which increases investment. This statement describes what monetary transmission channel?
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Balance Sheet Channel
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R (Falls), E (Falls), NX (Rises), Y(Rises)
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Exchange rate effect
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R (Falls), Ps (rises), Y (Rises), I (Rises), Y(Rises)
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Tobin's Q Theory
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R (Falls), Ps, (Rises), Wealth (Rises), Consumption (Rises), Y (Rises)
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Wealth effect
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R (Falls), Bank Deposits (rise), bank loans (rise), I (rises), Y (rises)
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bank lending channel
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R (Falls), Ps (Rises), Adverse selection and moral hazard (Falls), I (Rises), Y(Rises)
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Balance sheet channel
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If an expansionary monetary policy leads to a house price bubble that fuels strong consumer spending, this is an example of
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the wealth effect
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According to Tobin's Q Theory, expansionary monetary policy will lead to an increase in investment spending because
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the market value of firms rises relative to the replacement cost of capital
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In the late 1990s, the stock market was rising rapidly, the economy was growing, and the Fed kept interest rates low. Identify the correct schematic that explains how this policy stance would affect the economy as it related to the Tobin Q Transmission mechanisms.
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R (fall), PS (Rise), Q(Rise), I(Rise)< Y (Rise)
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Econ 311: Test 1