Chapter 26: Q.17 (page 691)
If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?
Business and investing behavior are both influenced by moral hazards.
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Lars Svensson, a former Princeton professor and deputy governor of the Swedish central bank, proclaimed that when an economy is at risk of falling into deflation, central bankers should be "responsibly irresponsible" with monetary expansion policies. What does this mean, and how does it relate to the monetary transmission mechanisms?
"Considering that consumption accounts for nearly two-thirds of total GDP, this means that the interest rate, wealth, and household liquidity channels are the most important monetary policy channels in the U.S." Is this statement true, false, or uncertain? Explain your answer.
How does the experience of Japan during the "two lost decades" lend support to the four lessons for monetary policy outlined in this chapter?
"If the fed funds rate is at zero, the Fed can no longer implement effective accommodative policy." Is this statement true, false, or uncertain? Explain.
Why might the bank lending channel be less effective today than it once was?
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