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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

2. Leo Krippner, an economist at the Reserve Bank of New Zealand, publishes an “Effective Monetary Stimulus” (EMS) measure designed to gauge the stance of U.S. monetary policy. Go to the website
1. Go to www.econlib.org/library/Enc1/Recessions.html, and review the material on recessions.a. What is the formal definition of a recession?b. What are the problems with the definition?c. What are
27. As defined in Exercise 1, a “rate cycle” is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to
26. A “rate cycle” is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business-cycle conditions. Go
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
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?
23. In general, if stock prices are rising, consumption growth is strong, house price appreciation is high, and unemployment is low, would you classify monetary policy as likely to be tight or easy?
22. In December 2015, the Fed raised the fed funds rate for the first time in nearly a decade and gradually increased interest rates over a prolonged period of time after that. However, the Fed
21. “If the overnight interest rate is at zero, the Bank of Canada can no longer implement effective accommodative policy.” Is this statement true, false, or uncertain? Explain.
20. Following the global financial crisis, mortgage rates reached record-low levels by 2013.a. What effect should this have had on the economy, according to the household liquidity effect channel?b.
19. How are the wealth effect and the household liquidity effect similar? How are they different?
18. How does the Great Depression demonstrate the unanticipated price level channel?
17. If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?
14. From August 2014 to August 2017, the Fed continued to reiterate that monetary policy was “accommodative.” And during this time, excess reserves by banks decreased from around $2.67 trillion
13. During and after the global financial crisis, the Bank of Canada reduced the overnight interest rate to nearly zero. At the same time, the stock market fell dramatically and housing market values
12. In the late 1990s, 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
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.
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
9. From early 2009 to fall 2017, the S&P 500 stock index increased by a cumulative 260%, or approximately 30% per year. Over the same period, one index of consumer confidence increased from 56 to
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
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
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.
5. Describe an advantage and a disadvantage of the fact that monetary policy has so many different channels through which it can operate.
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
3. How can the interest rate channel still function when short-term nominal interest rates are at the zero lower bound?
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
1. From 2008 to 2017, auto loan rates in the United States declined from around 8% to near historic lows of around 4.5%. At the same time, auto sales increased to near historic high levels by 2017.
2. Various survey-based measures of inflation expectations are available in the United States reflecting consumer, market, and economists’ outlooks. For instance, the Survey of Professional
1. Robert Lucas won the Nobel Prize in economics. Go to https://www.nobelprize.org/prizes/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for?When was it
2. Go to the St. Louis Federal Reserve FRED database, and find data on the core PCE price index (PCEPILFE) and the spot price of a barrel of oil (WTISPLC). For both variables, convert the units
1. Go to the Bank of Canada’s website, and find data on the inflation rate (the 12-month growth rate in total CPI).a. Calculate the average inflation rate over the last 12 and the last 24 months of
25. How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock?How does a credible nominal anchor help if a negative aggregate supply
24. Suppose two countries have identical aggregate demand curves and potential levels of output, and is the same in both countries. Assume that in 2019, both countries are hit with the same negative
23. Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country’s central bank affect the speed of
22. Suppose the central bank is following a constant-money-growthrate rule and the economy is hit with a severe economic downturn. Use an aggregate supply and demand graph to show the possible
20. How can the establishment of an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?
18. In recent years, central banks have dramatically increased the amount of communication with market participants and the public, and at the same time, in many of these countries, average inflation
17. Central banks that engage in inflation targeting usually announce the inflation target and time period for which that target will be relevant. In addition, central bank officials are held
15. “The more credible the policymakers who pursue an anti-inflation policy, the more successful that policy will be.” Is this statement true, false, or uncertain? Explain your answer.
14. As part of its response to the global financial crisis, the Federal Reserve in the United States lowered the federal funds rate target to nearly zero by December 2008 and quadrupled the monetary
13. In Japan, the government and central bank have enacted policies recently to raise inflation permanently from persistently low levels; however, inflation continues to remain near zero. How, if at
12. In general, how does credibility (or lack thereof) affect the aggregate supply curve?
11. How is constrained discretion different from discretion in monetary policy? How are the outcomes of these policies likely to differ?
10. How would an unexpected change in the equilibrium real overnight interest rate be an argument against using a Taylor rule for monetary policy implementation?
9. In some countries, the government chooses the head of the central bank. The same government can fire the head of the central bank and replace him or her with another director at any time. Explain
8. Many economists are worried that a high level of budget deficits may lead to inflationary monetary policies in the future. Could these budget deficits have an effect on the current rate of
7. If, in a surprise victory, a new government that the public believes will pursue inflationary policy is elected to office, predict what might happen to the level of output and inflation even
5. In what sense can greater central bank independence make the time-inconsistency problem worse?
4. If the public expects the Bank of Canada to pursue a policy that is likely to raise short-term interest rates permanently to 5%, but the Bank does not go through with this policy change, what will
3. Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Bank of Canada increases the overnight interest rate. Assume the Bank of Canada is
2. “The Lucas critique by itself casts doubt on the ability of discretionary stabilization policy to be beneficial.” Is this statement true, false, or uncertain? Explain your answer.
1. What does the Lucas critique state about the limitations of our current understanding of the way in which the economy works?
2. The Federal Reserve has a listing of the nonconventional policy tools used for liquidity provision at www.federalreserve.gov/monetarypolicy/expiredtools.htm. Of those tools, which one was the
1. It can be an interesting exercise to compare the purchasing power of the dollar over different periods in history. Go to www.bankofcanada.ca/en/rates, and scroll down to the link to the inflation
2. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate
1. Go to the St. Louis Federal Reserve FRED database, and find quarterly data on the Canadian unemployment rate (aged 15 and over) and the quarterly Canadian Consumer Price Index (all items) since
30. Suppose that is determined by two factors: financial panic and asset purchases.a. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below
29. In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As
28. Many developing countries suffer from endemic corruption. How does this help explain why these countries’ economies typically have high inflation and economic stagnation? Use a graph of
27. As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate
25. Suppose the government decides to decrease government expenditures as a means of cutting the existing government budget deficit.a. Using a graph of aggregate demand and supply, show the effects
24. In what ways can nonconventional monetary policy affect the real interest rate for investments when the economy reaches the zero lower bound? How are credit spreads affected?
20. What will happen if policymakers erroneously believe that the natural rate of unemployment is 7% when it is actually 5% and therefore pursue stabilization policy?
19. How can monetary authorities target any inflation rate they wish?
16. In both the 1960s and the 1970s in Canada, inflation increased significantly. However, unemployment behaved very differently in the two decades. Why is this?
15. In the early 1970s, an unexpected productivity slowdown led most economists to believe that potential output was larger than it actually was. How are policymakers likely to respond under this
14. If the economy’s self-correcting mechanism works slowly, should the government necessarily pursue discretionary policy to eliminate unemployment? Why or why not?
13. “If the data and recognition lags could be reduced, activist policy probably would be more beneficial to the economy.” Is this statement true, false, or uncertain? Explain your answer.
11. In the United States, many observers have commented in recent years on the “political gridlock in Washington, D.C.” and referred to Congress as a “Do Nothing Congress.” What type of
10. The fact that it takes a long time for firms to get new plants and equipment up and running is an illustration of what policy problem?
8. Suppose three economies are hit with the same temporary negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country
7. In what way is a permanent negative supply shock worse than a temporary negative supply shock?
6. Why do temporary negative supply shocks pose a dilemma for policymakers?
5. Why does the divine coincidence simplify the job of policymakers?
4. During the global financial crisis, how was the Bank of Canada able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Bank’s
3. For each of the following shocks, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium.a. Consumers
2. “If autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.” Is this statement true, false, or uncertain? Explain your answer.
Go to the St. Louis Federal Reserve FRED database, and find U.S.data on the personal consumption expenditure price index(PCECTPI), a measure of the price level; real compensation per hour (COMPRNFB);
Go to the CANSIM database, and find monthly data from January 1992 to August 2017 on the total unemployment rate (series V2062815) and the (all items) Consumer Price Index (series V41690914).a. What
During 2017, some Bank of Canada officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher
Classify each of the following as a supply shock or a demand shock. Use a graph to show the effects on inflation and output in the short run and in the long run.a. Financial frictions increase.b.
Proposals have been made that advocate an increase in the national sales tax. Predict the effects of such a tax on the aggregate supply and demand curves, showing the effects on output and inflation.
Suppose the government passes legislation that encourages investment in research and the development of new technologies.Assuming this policy leads to a positive productivity change for the Canadian
In what ways is the Bank of Canada’s disinflation considered a success? In what ways is it considered a failure?
Why did the Bank of Canada pursue inherently recessionary policies in the early 1980s?
Suppose the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in
In the aftermath of the financial crisis in the United States, labour mobility has decreased significantly. How, if at all, might this affect the natural rate of unemployment?
“If prices and wages are perfectly flexible, then and changes in aggregate demand have a smaller effect on output.” Is this statement true, false, or uncertain? Explain your answer.
If the labour force becomes more productive over time, how would the long-run aggregate supply curve be affected?
In many countries around the world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a country’s long-run aggregate
“The appreciation of the U.S. dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your answer.
If large budget deficits cause the public to think there will be higher inflation in the future, what is likely to happen to the short-run aggregate supply curve when budget deficits rise?
“If prices and wages are perfectly flexible, then and changes in aggregate demand have a smaller effect on output.” Is this statement true, false, or uncertain? Explain your answer.
If the labour force becomes more productive over time, how would the long-run aggregate supply curve be affected?
In many countries around the world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a country’s long-run aggregate
“The appreciation of the U.S. dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your answer.
Continuing from the previous problem, use the monthly CPI and calculate the percent change from a year ago. Then plot both series on the same graph, using data from 2007 through the most current data
A measure of real interest rates can be approximated by the interest rate on inflation-protected long-term Canada bonds, or Real Return Bonds. Go to the CANSIM database, and find monthly data from
Suppose the MP curve is given by r = 2 + π, and the IS curve is given by Y = 20 − 2r.a. Derive an expression for the AD curve, and draw a graph labelling points at π = 0, π = 4, and π = 8.b.
Consider the economy described in Applied Problem 23 .a. Derive expressions for the MP curve and the AD curve.b. Assume that π = 2.What are the real interest rate and the equilibrium level of

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