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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

Following the global fi nancial crisis, mortgage rates reached record-low levels in 2011.a. What eff ect should this have had on the economy, according to the household liquidity eff ect channel?b.
How are the wealth eff ect and the household liquidity eff ect similar? How are they diff erent?
How does the Great Depression demonstrate the unanticipated price level channel?
If adverse selection and moral hazard increase, how does this aff ect the ability of monetary policy to address economic downturns?
One of the classic features of the global fi nancial crisis was the failure of high-profi le American investment banks and fi nancial fi rms such as Lehman Brothers, Bear Stearns, and AIG. These fi
Why might the bank lending channel be less eff ective today than it once was?
Why does the credit view imply that monetary policy has a greater eff ect on small businesses than on large fi rms?
During and after the global fi nancial crisis, the Bank of Canada provided banks with large amounts of liquidity.Banks’ excess reserves increased sharply, while credit extended to households and fi
During and after the global fi nancial 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
In the late 1990s, the stock market was rising rapidly, the U.S. economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would aff ect the
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.
From mid-2008 to early 2009, the S&P/TSX declined sharply, while real interest rates were low or falling.What does this scenario suggest should have happened to investment?
Predict what will happen to stock prices after a monetary easing. Explain your prediction.
“The costs of fi nancing investment are related only to interest rates; therefore, the only way that monetary policy can aff ect investment spending is through its eff ects on interest rates.” Is
In 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 aff ected aggregate demand and thus contributed to the
“If countries fi x their exchange rate, the exchange rate channel of monetary policy does not exist.” Is this statement true, false, or uncertain? Explain your answer.
Describe an advantage and a disadvantage of the fact that monetary policy has so many diff erent channels through which it can operate.
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 defl ation, central bankers should be
How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?
“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
In 2009, in the wake of the global fi nancial crisis and when interest rates were at their lowest, governments around the world instituted programs designed in part to stimulate new spending on
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 shock
Suppose two countries have identical aggregate demand curves and potential levels of output, and g is the same in both countries. Assume that in 2016, both countries are hit with the same negative
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
Suppose the central bank is following a constant-moneygrowth-rate rule and the economy is hit with a severe economic downturn. Use an aggregate supply and demand graph to show the possible effects on
What traits characterize a “conservative” central banker?
How can the establishment of an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?
What are the purposes of inflation targeting, and how does this monetary policy strategy achieve them?
Suppose the statistical office of a country does a poor job in measuring inflation and reports an annualized inflation rate of 4% for a few months, while the true inflation rate has been around 2.5%.
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 accountable
Why did the oil price shocks of the 1970s affect the economy differently than the oil price shocks of 2007?
“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.
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 base
In general, how does credibility (or lack thereof) affect the aggregate supply curve?
How is constrained discretion different from discretion in monetary policy? How are the outcomes of these policies likely to differ?
How does Switzerland’s monetary targeting strategy as described in this chapter demonstrate the case against monetary policy rules?
Outline the benefits and costs of sticking to a set of rules in each of the following cases. How does each of these situations relate to the conduct of economic policy?a. Going on a dietb. Raising
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 the
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 inflation?
If, in a surprise victory, a new government is elected that the public believes will pursue inflationary policy, predict what might happen to the level of output and inflation even before the new
What are the arguments for and against policy rules?
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
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 considering
“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.
What does the Lucas critique state about the limitations of our current understanding of the way in which the economy works?
Suppose that f is determined by two factors: fi nancial panic and asset purchases.a. Using an MP curve and an AS/AD graph, show how a suffi ciently large fi nancial panic can pull the economy below
Many developing countries suff er from endemic corruption. How does this help explain why these countries’ economies typically have high infl ation and economic stagnation? Use a graph of aggregate
As monetary policymakers become more concerned with infl ation stabilization, the slope of the aggregate demand curve becomes fl atter. How does the resulting change in the slope of the aggregate
Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fl uctuations in output and infl ation.
Suppose the government decides to decrease its expenditures as a means of cutting the existing government budget defi cit.a. Using a graph of aggregate demand and supply, show the eff ects of such a
What nonconventional monetary policies shift the aggregate demand curve, and how do they work?
Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
How does the policy rate hitting a fl oor of zero lead to an upward-sloping aggregate demand curve?
How can demand-pull infl ation lead to cost-push infl ation?
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?
“Because government policymakers do not consider infl ation desirable, their policies cannot be the source of infl ation.” Is this statement true, false, or uncertain?Explain your answer.
Given a relatively steep and a relatively fl at short-run aggregate supply curve, which curve would support the case for nonactivist policy? Why?
Suppose one could measure the welfare gains derived from eliminating output (and unemployment) fl uctuations in the economy. Assuming these gains are relatively small for the average individual, how
If the economy’s self-correcting mechanism works slowly, should the government necessarily pursue discretionary policy to eliminate unemployment? Why or why not?
Why do activists believe that the economy’s self-correcting mechanism works slowly?
“If the data and recognition lags could be reduced, activist policy probably would be more benefi cial to the economy.” Is this statement true, false, or uncertain?Explain your answer.
Is stabilization policy more likely to be conducted through monetary policy or through fi scal policy? Why?
If someone told you, “policymakers couldn’t vote themselves out of a phone booth,” what type of policy lag would that person be referring to?
The fact that it takes a long time for fi rms to get new plants and equipment up and running is an illustration of what policy problem?
“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.”Is this statement true, false, or uncertain? Explain your answer.
Suppose three economies are hit with the same temporary negative supply shock. In country A, infl ation initially rises and output falls; then infl ation rises more and output increases. In country
In what way is a permanent negative supply shock worse than a temporary negative supply shock?
Why do temporary negative supply shocks pose a dilemma for policymakers?
Why does the divine coincidence simplify the job of policymakers?
During the global fi nancial crisis, how were central banks around the world able to help off set the sharp increase in fi nancial frictions without the option of lowering interest rates further? Did
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 longrun equilibrium.a. Consumers reduce
“If autonomous spending falls, the central bank should lower its infl ation target in order to stabilize infl ation.”Is this statement true, false, or uncertain? Explain your answer.
What does it mean when we say that the infl ation gap is negative?
During 2014, 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.
Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.
Proposals have been made that advocate an increase in the national sales tax. Predict the effects of such an increase on the aggregate supply and demand curves, showing the effects on output and
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
Using an aggregate demand and supply graph, show and describe the effects in both the short run and the long run of the following:a. A temporary negative supply shock.b. A permanent negative supply
Why did China fare much better than the United States and the United Kingdom during the 2007–2009 financial crisis?
In what ways is the Bank of Canada disinflation considered a success? In what ways is it considered a failure?
Why did the Federal Reserve pursue inherently recessionary policies in the early 1980s?
Are there any “good” supply shocks?
What factors led to decreases in both the unemployment and inflation rates in the 1990s?
What happens to inflation and output in the short run and the long run when government spending increases?
If the unemployment rate is above the natural rate of unemployment, holding other factors constant, what will happen to inflation and output?
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
When aggregate output is below the natural rate of output, what happens to the inflation rate over time if the aggregate demand curve remains unchanged? Why?
Internet sites that enable people to post their resumes online reduce the costs of job searches. How do you think the Internet has affected the natural rate of unemployment?
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?
What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?
“If prices and wages are perfectly flexible, then g = 0 and changes in aggregate demand have a smaller effect on output.” Is this statement true, false, or uncertain?Explain your answer.
Why are central banks so concerned with inflation expectations?
As the labour force becomes more productive over time, how is the long-run aggregate supply curve affected?
What determines the unemployment rate when output is at potential?
“The depreciation of the U.S. dollar from February 2009 to February 2014 had a positive effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your
Identify three factors that can shift the aggregate demand curve to the right and three different factors that can shift the aggregate demand curve to the left.
Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.
Derive an expression for the new AD curve, and draw the new AD curve using the graph from part (a).c. What does your answer to part (b) imply about the relationship between a central bank’s
Suppose the MP curve is given by r = 2 + p, and the IS curve is given by Y = 20 - 2 r .a. Derive an expression for the AD curve, and draw a graph labelling points at p = 0, p = 4, and p = 8.b.

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