Monetary Policy and Related Concepts: Practice Problems and Solutions

Problem 46. Which of these statements about the credit channel are true? More than one correct answer is possible.

(a) The credit channel results from higher values of collateral being available for loans.
(b) The credit channel has an equal impact on large and small banks.
(c) The credit channel occurs when an increase in the interest rate reduces the number of loans that banks provide.
(d) The credit channel is a channel by which banks extend credit to one another.
(e) The credit channel is a type of credit rationing resulting from monetary policy.

Solution 46. The following statements about the credit channel are true:
(c): The credit channel occurs when an increase in the interest rate reduces the number of loans that banks provide.
(e): The credit channel is a type of credit rationing resulting from monetary policy.

Problem 47. Which of these statements regarding the rule-based and discretion-based approaches to monetary policy are true? More than one correct answer is possible.

(a) Imperfect information and policy lags render a discretion-based approach less effective than would have been the case otherwise.
(b) A discretion-based policy is designed to be as predictable as possible.
(c) A rule-based monetary policy offers greater predictability to agents in the economy.
(d) A rule-based monetary policy is more flexible than a discretion-based monetary policy.
(e) A discretion-based policy is particularly suited to developing countries, where the central banks have shown that they cannot be trusted with following simple rules.

Solution 47. The following statements are true:

(a): Imperfect information and policy lags render a discretion-based approach less effective than would have been the case otherwise.
(c): A rule-based monetary policy offers greater predictability to agents in the economy.

Problem 48. Which of these statements about monetary policy targets are true? More than one correct answer is possible.

(a) The Federal Reserve Bank of the United States has a dual mandate and works to influence both prices and employment levels.
(b) It is possible to target the money supply and interest rates simultaneously.
(c) Targeting the money supply always results in less output variability than targeting interest rates.
(d) When the LM curve is the source of fluctuations, then the Fed should target the money supply in order to reduce output variability.
(e) When the LM curve is the source of fluctuations, then the Fed should target interest rates in order to reduce output variability.
(f) When the IS curve is the source of fluctuations, then the Fed should target interest rates in order to reduce output variability.

Solution 48: The following statements about monetary policy targets are true:
(a): The Federal Reserve Bank of the United States has a dual mandate and works to influence both prices and employment levels.
(e): When the LM curve is the source of fluctuations, then the Fed should target interest rates in order to reduce output variability.

Problem 49: Which of these factors can shift the Aggregate Demand (AD) curve? More than one correct answer is possible.

(a) Large changes in relative prices.
(b) Change in net exports.
(c) Decrease in consumption C.
(d) Increase in government spending G.
(e) New government regulations.
(f) Changes in the tax rate.
(g) Changes in labor supply.
(h) Anything that shifts the IS curve.
(i) Discoveries of new natural resources.
(j) New technologies.
(k) Substantial changes in weather.
(l) Anything that shifts the LM curve.

Solution 49: The following factors can shift the Aggregate Demand (AD) curve:

(b): Change in net exports.
(c): Decrease in consumption C.
(d): Increase in government spending G.
(f): Changes in the tax rate.
(h): Anything that shifts the IS curve.
(m): Anything that shifts the LM curve.

Problem 50: Which of these factors can shift the Aggregate Supply (AS) curve? More than one correct answer is possible.

(a) Large changes in relative prices.
(b) Change in net exports.
(c) Decrease in consumption C.
(d) Increase in government spending G.
(e) New government regulations.
(f) Changes in the tax rate.
(g) Changes in labor supply.
(h) Anything that shifts the IS curve.
(i) Discoveries of new natural resources.
(j) New technologies.
(k) Substantial changes in weather.
(l) Anything that shifts the LM curve.

Solution 50: The following factors can shift the Aggregate Supply (AS) curve:

(a): Large changes in relative prices.
(e): New government regulations.
(f): Changes in the tax rate.
(g): Changes in labor supply.
(i): Discoveries of new natural resources.
(j): New technologies.
(k): Substantial changes in weather.

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.