Handout 12-

[Q1] Due to asymmetric information in credits markets, monetary policy may affect economics activity through the balance sheet channel, where an increase in money supply

A) lowers the value of the dollar, increasing net exports and aggregate demand.

B) raises the level of bank reserves, deposits, and the bank loans, thereby raising spending by those individuals who do not have access to credit markets

C) raises firm's net worth, decreasing adverse selection and moral hazard problems, thus increasing bank's willingness to lend to finance investment spending.

D) raises stock prices, lowering the cost of new capital relative to firms' market value, thus increasing investment spending.

[Q2] In a period of deflation, when there is a declining price level, _________ nominal interest rates do not necessarily indicate that the cost of borrowing is ________ or that monetary policy is easy.

A) low; low

B) high; low

C) high; high

D) low; high

[Q3] Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to _____ and consumption to _______.

A) decrease; increase

B) increase; decrease

C) decrease; decrease

D) increase; increase

[Q4] According to Tobin's q theory, _______ policy can affect ______ spending through its effect on the prices of common stock.

A) monetary; consumption

B) fiscal; investment

C) fiscal; consumption

D) monetary; investment

[Q5] 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) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rate are already near zero.

B) 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

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) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.

[Q6] 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) cash flow channel

C) wealth effects

D) Tobins' q theory

[Q7] 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; fall

B) decline; rise

C) rise; fall

D) rise; rise