Chapter 26: Q.9 (page 691)
Predict what will happen to stock prices after a monetary easing. Explain your prediction.
When the price of a stock grows, so does the value of financial riches.
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In the late s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy as it relates to the Tobin transmission mechanisms.
During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks' excess reserves increased sharply, while credit extended to households and firms decreased sharply. Comment on the effectiveness of the bank lending channel during this period.
"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.
"A decrease in short-term nominal interest rates necessarily implies a stance of monetary easing." Is this statement true, false, or uncertain? Explain your answer.
A "rate cycle" is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business cycle conditions. Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds rate (), real business fixed investment (), real residential investment (), and consumer durable expenditures (). Use the frequency setting to convert the federal funds rate data to "quarterly," and download the data.
a. When did the last rate cycle begin and end? (Note: If a rate cycle is currently in progress, use the current period as the end.) Is this rate cycle a contractionary or an expansionary rate cycle?
b. Calculate the percentage change in business fixed investment, residential (housing) investment, and consumer durable expenditures over this rate cycle.
c. Based on your answers to parts (a) and (b), how effective was the traditional interest rate channel of monetary policy over this rate cycle?
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