The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 26

Transmission Mechanisms of Monetary Policy - all with Video Answers

Educators

Chapter Questions

Problem 1

In $2009,$ in the wake of the global financial crisis and when interest rates were at their lowest, the U.S. government instituted a "cash for clunkers" program and later a "cash for appliances" program. Both rebate programs were designed in part to stimulate new spending on automobiles and major appliances. What does the implementation of these programs imply about the government's views of the health of the interest rate channel during that time?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

"Considering that consumption accounts for nearly two-thirds of total GDP, this means that the interest rate, wealth, and household liquidity channels are the most important monetary policy channels in the U.S." Is this statement true, false, or uncertain? Explain your answer.

Nick Johnson

Numerade Educator

Problem 3

How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

Lars Svensson, a former Princeton professor and deputy governor of the Swedish central bank, proclaimed that when an economy is at risk of falling into deflation, central bankers should be "responsibly irresponsible" with monetary expansion policies. What does this mean, and how does it relate to the monetary transmission mechanism?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

Describe an advantage and a disadvantage of the fact that monetary policy has so many different channels through which it can operate.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

"If countries fix their exchange rate, the exchange rate channel of monetary policy does not exist." Is this statement true, false, or uncertain? Explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

During the $2007-2009$ recession, the value of common stocks in real terms fell by more than $50 \%$. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity of the recession? Be specific about the mechanisms through which the stock market decline affected the economy.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 8

"The costs of financing investment are related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates." Is this statement true, false, or uncertain? Explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 9

Predict what will happen to stock prices after a monetary easing, Explain your prediction.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

From mid- 2008 to early $2009,$ the Dow Jones Industrial Average declined by more than $50 \%$, while real interest rates were low or falling. What does this scenario suggest should have happened to investment?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

Nobel Prize winner Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 12

In the late 1990 s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy as it relates to the Tobin $q$ transmission mechanisms.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 13

During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At the same time, the stock market fell dramatically and housing market values declined sharply. Comment on the effectiveness of monetary policy during this period with regard to the wealth channel.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 14

During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks" excess reserves increased sharply, while credit extended to households and firms decreased sharply. Comment on the effectiveness of the bank lending channel during this time.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 15

Why does the credit view imply that monetary policy has a greater effect on small businesses than on large firms?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 16

Why might the bank lending channel be less effective today than it once was?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

One of the classic features of the global financial crisis was the failure of high-profile investment banks and financial firms such as Lehman Brothers, Bear Stearns, and AIG. These firms experienced sharp contractions in the values of their balance sheets due to risky asset holdings. Comment on how this would affect the economy as it relates to the balance sheet channel.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 18

If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downtums?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 19

How does the Great Depression demonstrate the unanticipated price level channel?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 20

How are the wealth effect and the household liquidity effect similar? How are they different?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 21

Following the global financial crisis, mortgage rates reached record-low levels in 2011
a. What effect should this have had on the economy, according to the household liquidity effect channel?
b. During the same time, most banks raised their credit standards significantly, making it much more difficult to qualify for home loans and to refinance existing loans. How does this information alter your answer to part $(\mathrm{a}) ?$

Pragya Ahuja

Numerade Educator

Problem 22

What evidence exists to support the credit view of monetary policy?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 23

"A decrease in short-term nominal interest rates necessarily implies a stance of monetary easing." Is this statement true, false, or uncertain? Explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 24

How does the experience of Japan during the "two lost decades" lend support to the four lessons for monetary policy outlined in this chapter?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 25

Suppose the economy is in recession and the monetary policymakers lower interest rates in an effort to stabilize the economy, Use an aggregate supply and demand diagram to demonstrate the effects of a monetary easing when the transmission mechanisms are functioning normally and when the transmission mechanisms are weak, such as during a deep downtum or when significant financial frictions are present.

Xiaomin Bian

Numerade Educator