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Multiple Choice Quiz
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1
The monetary policy transmission mechanism refers to the concept that monetary policy:
A)Always seems to work the way central bankers think it will.
B)Works quickly.
C)Only works through changes consumption and investment.
D)Affects the economy in potentially many ways.
2
The interest-rate channel of monetary policy transmission appears to be:
A)Weak because the investment component of total spending isn't very sensitive to interest rates.
B)Weak because the investment component of total spending is very sensitive to interest rates.
C)Strong because the investment component of total spending isn't very sensitive to interest rates.
D)Strong because the investment component of total spending is very sensitive to interest rates.
3
The direct impact on spending of short-term interest rate changes by central banks is:
A)Definitely the strongest of all transmission mechanisms.
B)Not that powerful.
C)Only effective for consumption but not investment.
D)Only effective for net exports but not for investment and consumption.
4
The bank-lending channel of monetary policy focuses on:
A)The interest rate banks charge their largest customer.
B)The banks' willingness and ability to lend.
C)How central bank policy influences the solvency of banks.
D)The deposit insurance premiums banks will end up paying.
5
An open market purchase of securities by the central bank from banks will:
A)Increase the banks' revenue even if the bank does nothing with the reserves.
B)Induce the banks to make more loans since their revenue will decrease if they do nothing.
C)Decrease the amount of deposits in the banking system.
D)Decrease the banks' willingness and ability to make loans.
6
The balance-sheet channel of monetary policy works because it can:
A)Increase a borrower's asset value but not the burden of his/her liabilities.
B)Change the value of a borrower's assets and liabilities, but it can't change a borrower's net worth.
C)Increase a borrower's assets and reduce the cost of his/her liabilities.
D)None of the answers given is correct.
7
Which of the following statements is correct?
A)Proponents of leaning against bubbles argue that stabilizing inflation will discourage bubbles from developing.
B)Opponents of intervening for a bubble argue that bubbles are hard to identify.
C)Bubbles can be a major threat to the financial system when they are associated with an expansion of credit inflates asset prices.
D)All of the answers given are correct.
8
The correlation between interest rates and stock prices is:
A)Direct.
B)Inverse.
C)There is no relationship.
D)Direct, but only if interest rates rise.
9
Higher home values can increase output in the economy if:
A)People take some of the equity out of their homes and spend it on a vacation.
B)People sell their existing home and build a new one.
C)People finance their child's college education by securing a second mortgage on their now higher-valued home.
D)All of the answers given are correct.
10
If the economy's output increases and it is the result of an increase in potential output, the appropriate monetary policy response would be:
A)The same as it would be for an expansionary output gap.
B)To let the aggregate demand increase and stabilize inflation.
C)To keep aggregate demand constant.
D)To stem the increase in output.
11
Monetary policy reached its limits of influence in Japan in the late 1990s due to the fact that:
A)The yen was seen as overvalued.
B)Interest rate reductions lost their stimulative effect on the economy.
C)People no longer had confidence in the yen.
D)The Japanese central bank had their power revoked.
12
If an economy is experiencing deflation and the nominal interest rate is zero:
A)Monetary policy would be the tool of choice for stabilization.
B)Monetary policy is likely ineffective.
C)Real interest rates will decrease.
D)Aggregate demand is likely to decrease.
13
Monetary policymakers could keep equity and property price bubbles from developing by:
A)Raising their interest rate target when they suspect a bubble.
B)Lowering their interest rate target when they suspect a bubble
C)Expanding the money supply in the economy.
D)Purchasing U.S. treasury securities to drive up their prices.
14
Some people, who believe monetary policymakers should not address equity and property price bubbles, argue their position based on:
A)Their belief that government should stay out of private matters.
B)The policymakers lack experience with financial markets.
C)Price bubbles are virtually impossible to identify when they are developing.
D)All of the answers given are correct.
15
Central bankers are reluctant to use unconventional monetary policy tools because:
A)They aren't very effective.
B)Exiting takes a great deal of time.
C)They have experience in knowing the impact of the tools.
D)Exit from the policies may be difficult.





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