Monetary Policy and Related Concepts: Practice Problems and Solutions

Intermediate Macroeconomics Problems and Solutions - Section 10

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

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.