Q&A Hero

Q: On the evening news you hear of a scientific study that directly links premature births to cigarette smoking. This is an example of A. direct-model evidence. B. informed voter-model evidence. C. structural-model evidence. D. reduced-form evidence.

Q: From the earlier 1990s until 2012, the Japanese monetary was ________ and stock and real estate prices were ________. A. tight; rising. B. easy; rising. C. tight; falling. D. easy; falling.

Q: ________ examines whether one variable affects another by using data to build a model that explains the channels through which this variable affects the other. A. Indirect-model evidence B. Organizational-model evidence C. Reduced-form evidence D. Structural-model evidence

Q: From 1990s until 2012, 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 the following. 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: Tobin's q theory suggests that monetary policy may affect investment spending through its impact on A. stock prices. B. interest rates. C. bond prices. D. cash flow.

Q: Tobin's q is defined as the market value of firms ________ the replacement cost of capital. A. times B. minus C. plus D. divided by

Q: A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar. A. lowering real; decreasing B. lowering real; increasing C. raising nominal; increasing D. raising real; increasing

Q: A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A. appreciate; raising B. appreciate; lowering C. depreciate; raising D. depreciate; lowering

Q: An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar. A. lowering nominal; decreasing B. lowering real; decreasing C. raising nominal; increasing D. raising real; increasing

Q: An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A. appreciate; raising B. appreciate; lowering C. depreciate; raising D. depreciate; lowering

Q: If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel. A. asset; labor B. asset; credit C. commodity; labor D. commodity; credit

Q: 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.

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: 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.

Q: The recognition 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 data 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 existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for A. supply-side policy. B. nonactivists. C. activists. D. demand-management policy.

Q: Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output. A. supply; less B. supply; more C. demand; less D. demand; more

Q: If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government A. do nothing. B. try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C. try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D. try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: If aggregate output is below the natural rate level, activists of policies would recommend that the government A. do nothing. B. try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C. try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D. try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: Activists of the policies believe that A. the self-correcting mechanism through wage and price adjustment is very slow. B. wages and prices are sticky. C. the government needs to pursue active policy to eliminate high unemployment when it develops. D. all of the above.

Q: Nonactivists of the policies believe that A. wages and prices are very flexible. B. the self-correcting mechanism is very rapid. C. government action is unnecessary. D. all of the above.

Q: Which of the following statements is CORRECT? A. If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. B. If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. C. Stabilizing economic activity in response to a temporary supply shock results in a larger deviation of inflation from the inflation target rather than a stabilization of inflation. D. all of the above.

Q: When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A. aggregate demand curve shifts rightward. B. output will be at its potential. C. inflation rate will be higher. D. all of the above. E. both A and B.

Q: When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to A. more stable economic activities. B. a large deviation of output from its potential. C. divine coincidence. D. both B and C.

Q: When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate output drops in the short run. B. output will return to potential output over time. C. aggregate output is stabilized. D. all of the above. E. both A and B.

Q: When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will be unchanged. E. both B and D.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate demand curve shifts leftward. B. output will be unchanged. C. output will be at its potential. D. all of the above. E. both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate demand curve shifts leftward. B. aggregate demand curve shifts rightward. C. output will be unchanged. D. both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be higher. B. output will be at its potential. C. output will be unchanged. D. inflation will be unchanged. E. both A and B.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be unchanged. D. inflation will be unchanged.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both B and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both A and B.

Q: If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then A. potential output falls. B. the long-run aggregate supply curve shifts leftward. C. the short-run aggregate supply curve shifts upward. D. all of the above.

Q: When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will be unchanged. E. both B and D.

Q: When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both A and B.

Q: The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall A) shifted the aggregate demand curve to the right. B) shifted the aggregate demand curve to the left. C) shifted the aggregate supply curve to the right. D) shifted the aggregate supply curve to the left.

Q: Policy makers cannot achieve both price stability and economic activity stability when facing A. temporary supply shocks. B. permanent supply shocks. C. demand shocks. D. all of the above.

Q: To promote an economic expansion and an exit from the deflationary environment that the Japanese had been experiencing for the past fifteen years, the "Abenomics" aims atA. increasing inflation target.B. increasing inflation expectations.C. purchasing long-term bonds.D. all of the above.E. none of the above.

Q: With the followings is NOT one of the reasons why quantitative easing in and of itself will not necessarily be stimulative? A. Most of the resulting increase in the monetary base just flows into holdings of excess reserves. B. Banks just add to their holdings of excess reserves instead of making loans. C. The asset purchase program involves only the purchase of short-term government securities. D. The asset purchase program involves only the purchase of long-term government securities.

Q: With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A. fall; rise B. fall; fall C. rise; rise D. rise; fall

Q: The Fed's quantitative easing is to purchase ________ to affect credit spreads. A. long-term securities B. short-term securities C. both long-term and short-term securities D. private assets

Q: Liquidity provision and asset purchase may not be enough to stimulate the economy unless the these policy actions are able to A. lower the real interest rate for investments. B. lower the short-term real interest rate. C. raise the policy rate above zero. D. lower the policy rate.

Q: The real interest rate for investments reflects not only the short-term real interest rate set by the central bank, but also the financial frictions. When the policy rate has hit the floor of zero, to stimulate the economy at given inflation rates, policymakers can A. lower the financial frictions. B. lower the short-term real interest rate. C. lower both the short-term real interest rate and the financial frictions. D. lower the policy rate.