Chapter 25 Transmission Mechanisms of Monetary Policy: The Evidence

　

5) A model that is composed of many equations that show the channels through which monetary and fiscal policy affect aggregate output and spending is called a

A) reduced-form model. B) median-voter model.

C) informed median-voter model. D) structural model.

Answer: D

10) When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing

A) structural-model evidence. B) reduced-form evidence.

C) indirect-model evidence. D) none of the above.

Answer: B

15) Monetarists contend that

A) monetary policy affects aggregate demand solely through investment.

B) monetary policy may affect aggregate demand through many channels.

C) a weak link between nominal interest rates and investment spending implies monetary policy ineffectiveness.

D) monetary policy affects aggregate demand solely through consumption.

Answer: B

20) The monetarist position on the importance of monetary policy is probably best supported by

A) timing evidence. B) statistical evidence.

C) historical evidence. D) structural evidence.

Answer: C

25) Monetary policy may affect spending on new residential housing through

A) an interest-rate channel.

B) an asset price channel.

C) both an interest-rate and asset price channel.

D) none of the above.

Answer: C

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

A) nominal; consumer B) nominal; investment

C) real; consumer D) real; investment

Answer: B

35) In response to the early Keynesians, monetarists contended that

A) monetary policy during the Great Depression was not easy.

B) bank failures during the Great Depression resulted in a decline in the money supply.

C) evidence from the Great Depression did not demonstrate the ineffectiveness of monetary policy.

D) all of the above.

E) only (a) and (b) of the above.

Answer: D

40) In a period of deflation, when there is a declining price level, low nominal interest rates do not necessarily indicate that the cost of borrowing is ____ or that monetary policy is _____.

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

Answer: B

45) In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period,

A) the growth rate of the money supply decreased before output decreased.

B) interest rates decreased before output decreased.

C) the growth rate of federal government spending decreased before output decreased.

D) the growth rate of state and local government spending decreased before output decreased.

Answer: A

50) The bank lending channel may

A) help to explain the sharp drop in housing purchases in 1966 and 1969, when market interest rates rose above Regulation Q ceilings.

B) help to explain why a restrictive monetary policy might cause investment spending by small firms to fall, even though interest rates do not increase measurably.

C) not be as powerful today now that fewer regulations hinder banks' ability to raise funds.

D) help to explain all of the above.

Answer: D

55) The _____ held the view that monetary policy does not matter at all for movements in aggregate output.

A) new Keynesian economists B) early Keynesians

C) early monetarists D) early classical economists

Answer: B

60) The sharp drop in housing purchases in 1966 and 1969, when market interest rates rose above Regulation Q ceilings, is consistent with the

A) bank lending channel. B) the traditional interest rate channel.

C) cash flow channel. D) balance sheet channel.

Answer: A

65) Which of the following accurately describe the current state of the monetarist-Keynesian debate on monetary policy and economic activity?

A) There is now general agreement among Keynesians that monetary policy is indeed an extremely important source of business cycle fluctuations.

B) Although Keynesians now agree that money matters, they do not believe that monetary policy is all that matters.

C) Keynesians and monetarists still disagree over the effectiveness of fiscal policy, and so the monetarist-Keynesian debate on the determinants of aggregate demand is not fully resolved.

D) All of the above.

Answer: D

70) If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers

A) only the short-term nominal interest rate.

B) only the short-term real interest rate.

C) both the short-term nominal and real interest rates.

D) the short-term nominal, the short-term real, and the long-term real interest rates.

Answer: D

75) According to James Tobin, when equity prices are low, as they were in the early 1930s,

A) the market price of existing capital is cheap relative to new capital, so expenditure on fixed investment is low.

B) the market price of existing capital is dear relative to new capital, so expenditure on fixed investment is low.

C) the market price of existing capital is cheap relative to new capital, so expenditure on fixed investment is high.

D) the market price of existing capital is dear relative to new capital, so expenditure on fixed investment is high.

Answer: A

80) Mishkin concludes that four basic lessons regarding monetary policy can be drawn from chapter 25. These lessons include:
  1. Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
  2. Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
  3. 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.
  4. All of the above.
  5. Only (a) and (b) of the above.

Answer: B
  1. Mishkin concludes that four basic lessons regarding monetary policy can be drawn from chapter 25. These lessons include:
  1. It is dangerous always to associate the easing or tightening of monetary policy with a fall or a rise in short-term interest rates.
  2. 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.
  3. Monetary policy can be highly effective in reviving a weak economy so long as short-term interest rates are not too close to zero.
  4. All of the above.
  5. Only (a) and (b) of the above.

Answer: E