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Money, Banking, and Financial Markets Practice Test: Transmission Mechanisms of Monetary Policy
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Monetary policy transmission mechanisms are the channels through which changes in policy rates affect economic variables, such as prices and output. The transmission mechanism is characterized by long, variable, and uncertain time lags, making it difficult to predict the precise effect of monetary policy actions on the economy and price level.  The transmission of monetary policy can be summarized in two stages: Changes to monetary policy affect interest rates in the economy. Changes to interest rates affect economic activity and inflation.  The four key channels of monetary policy... Show more
Money, Banking, and Financial Markets Practice Test: Transmission Mechanisms of Monetary Policy
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25 Questions

1. The monetarists complained that early Keynesian structural models tended to ignore the impact of monetary policy changes on
2. According to Tobinʹs q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital.
3. Tobinʹs q is defined as the market value of firms ________ the replacement cost of capital.
4. Periods of price deflation, such as the Great Depression, are characterized by
5. A model that is composed of many equations that show the channels through which monetary and fiscal policy affect aggregate output and spending is called a
6. Monetarists claim that ________ models ignore important transmission mechanisms and therefore ________ the importance of the effects of monetary policy on the economy.
7. According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of householdsʹ financial assets, causing consumer durable expenditure to ________.
8. With regard to aggregate demand, early Keynesians tended to believe that
9. The monetarist position on the importance of monetary policy is probably best supported by________ evidence.
10. Because ________ evidence is of a ________ nature, there is always the possibility of reverse causation, in which output growth causes money growth.
11. If the movements of the level of the money supply and real output are perfectly coordinated the growth rate of money
12. If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.
13. The ________ held the view that monetary policy does not matter at all for movements in aggregate output.
14. Monetarists directly study the link between money and economic activity using
15. Friedman and Schwartz found that the rate of money growth fell prior to business cycle downturns in
16. Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bankʹs conduct of monetary policy. Which of the following is not one of these lessons?
17. Real business cycle theory states that the most important cause of business cycles is
18. The monetarist ________ evidence in which declines in money growth are followed by recessions provides the strongest support for their position that monetary policy matters.
19. An expansionary monetary policy raises firmsʹ cash flows by ________ interest rates.
20. Early Keynesians concluded that changes in monetary policy had no impact on aggregate output because early empirical studies found no linkage between movements in ________ and________.
21. Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply
22. As a result of recent empirical research, there has been a convergence of Keynesian and monetarist opinion to the view that
23. According to Tobinʹs q theory, when equity prices are low the market price of existing capital is________ relative to new capital, so expenditure on fixed investment is ________.
24. According to Tobinʹs q theory, when equity prices are high the market price of existing capital is________ relative to new capital, so expenditure on fixed investment is ________.
25. If the particular channels through which changes in the money supply affect aggregate income are diverse and continually changing, the best evidence of monetary policyʹs effect is likely to come from

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