Money and Banking Chapter 23
In the aftermath of the 2007-2009 financial crisis,
U.S. government agencies became the dominant source for new housing finance.
When an easing of monetary policy improves the net worth of individuals and firms, monetary policy is following
a balance sheet channel.
If nominal interest rate targets are at the ELB, policymakers will struggle to correct the growing recessionary gap since they cannot lower rate further. The associated economic condition is known as ______.
a deflationary spiral
An asset price bubble exists when _________; it is generally recognized as a bubble ________________.
a single asset price rises sharply and then falls sharply; after the fact
The higher the net worth of the borrower:
the more likely the lender will be repaid. the smaller the credit risk premium.
In the United States thirty years ago, banks __________; today they _________.
provided nearly all credit in the economy; represent less than 60% of all credit extended
By influencing bank lending, policymakers do which of the following?
Affect the way people obtain lending Affect real output and inflation
The decline of banks as a source of finance began prior to the 2007 financial crisis. What accompanied this decline?
An increase in money-market mutual funds A rise in shadow banks An increase in securities brokers
The Great Depression, Japan's experience in the 90s, the financial crisis of 2007-2009, and the euro-area crisis all had which of the following in common?
Asset bubbles
Which of the following is a nontraditional channel of the monetary policy transmission mechanism?
Asset prices Balance sheets Bank lending
In what way are banks essential to the operation of a modern economy?
Banks solve problems caused by information asymmetries Banks direct resources from savers to investors
Which of the following defines a deflationary spiral?
Deflation worsens as aggregate demand shifts left Deflation worsens as the real interest rate rises and spending falls.
In what way are banks essential to the operation of a modern economy?
Financial intermediaries monitor loan recipients Financial intermediaries screen borrowers
Under which of the following circumstances is deflation a problem to the economy?
If setting the nominal interest rate at the ELB does not raise output.
Which of the following is true about how increases in interest rates affect borrowing?
Increases in interest rates tend to decrease stock prices.
Which of the following is not considered an unconventional policy tools employed by central bankers?
Interest rate reductions
Which of the following is true about the financial crisis of 2007-2008?
It began in the United States. It spread to almost all corners of the global economy.
Which of the following illustrates one way expansionary monetary policy benefits borrowers primarily through net worth?
It increases the difference between revenues and expenses for firms.
What is the general consequence of the fact that nominal interest rates cannot fall below the ELB?
It restricts what monetary policymakers can do.
Which of the following is true about the financial crisis of 2007 to 2009?
It was a global financial crisis, and some nations ended up worse off in terms of lost output than the United States.
Indicate characteristics of the effective lower bound (ELB).
Its level is not precisely known. It is below zero.
Analysts disagree on the best way to handle price bubbles. Which of the following is not true about their different points of view?
Opponents of the macroprudential regulatory approach would suggest tight interest rates across the nation to deal with bubbles.
Which of the following is not a challenge facing policymakers after the financial crisis of 2007 - 2009?
Policymakers have too many new options to use.
Regulators are unsure whether pre-crisis trends toward more direct finance and policy innovation will continue. Which of the following is most likely true?
Regulators will likely slow the pace at which securitization progresses.
Which of the following policies might a central banker employ when the traditional interest rate target, an overnight rate, hits the lower bound?
Targeted asset purchases Quantitative easing Forward guidance
Asset bubbles are damaging because of the wealth effects. What is meant by this?
The impair the balance sheets of leveraged intermediaries They cause consumption to rise and then contract just as quickly
The relationship between the interest rate and the stock market is called the _______ channel of monetary policy transmission.
asset
When the Federal Reserve decreases the target interest rate,
asset prices increase, causing household wealth to rise.
The relationship between the interest rate and the stock market is called the _______ channel of monetary policy transmission
asset-price
Monetary policy affects the perceived creditworthiness of borrowers; the text refers to this as the ________ channel of monetary policy transmission.
balance-sheet
Over the last several decades in the United States, the trend in financing in the capital market has shifted from emphasizing _____________; this _____________ the importance of the channel of monetary policy in the decades preceding the financial crisis of 2007 - 2009.
bank financing toward securities financing; reduced
During financial crises like that between 2007 - 2009, traditional monetary policy in response to asset price bubbles will be significantly less effective for
both expansionary and contractionary policy.
Bank-lending practices can be influenced by
both the central bank and financial regulators.
Ways in which policy-controlled interest rates influence the quantity of aggregate output demanded are called _________ of monetary policy transmission.
channels
Which of the following is not a nontraditional channel of the monetary policy transmission mechanism?
exchange
When the central bank lowers the target interest rate,
exports rise and imports fall.
When the central bank increases the target interest rate,
financing becomes more expensive.
From the Great Depression to the 2007 onset of the most recent financial crisis, nationwide housing prices
have almost never fallen.
In general, we can say with some certainty that housing prices over the last 80 years
have been reasonably stable.
The key to the balance-sheet and bank-lending channels of the monetary policy transmission mechanism is
information.
The two traditional channels of the monetary policy transmission mechanism are the ____________ and ____________ channels.
interest-rate; exchange-rate
Data on the interest-rate channel of the monetary policy transmission mechanism indicate that, when the Federal Reserve lowers interest rates,
investment and consumption rise, but not by much.
A certain economist is not shy about sharing her opinion that asset price bubbles should be aggressively identified and eliminated. In other words, this economist favors _______; today bubbles are generally seen as _______ threatening than in the past.
leaning against the bubble; more
The bank-lending channel of the monetary policy transmission mechanism became _______ important in the years before the 2007 - 2009 crisis due to movements toward more __________ finance.
less; direct
Deflation can result when shocks that __________ occur when current policy and target rates ____________.
lower aggregate expenditures; at the effective lower bound
The balance-sheet channel of monetary policy transmission works because policy affects
net worth of potential borrowers.
Increases in innovations like mortgage-backed securities provide an example of the trend in recent years toward increased __________.
securitization
Data on the exchange-rate channel of the monetary policy transmission mechanism indicate that
so many other factors influence international trade that the channel may be ineffective.
The asset-price channel of monetary policy transmission refers to
the relationship between the interest rate and the stock market.
The bank-lending channel of the monetary policy transmission mechanism works because central bank policies affect
the supply of reserves in the banking system.
During the 2007 - 2009 financial crisis, asymmetric information problems were _______ than usual and traditional policy tools were ______ effective than they are under normal circumstances.
worse; less
