Discuss three channels by which monetary policy affects stock prices and aggregate spending
What will be an ideal response?
The answer should include three of the following:
In Tobin's q theory, a monetary expansion increases stock prices, increasing the value of the firm relative to the cost of new capital. This stimulates investment in new capital goods, which in turn increases aggregate spending.
A monetary expansion increases stock prices, increasing wealth and stimulating consumption and aggregate spending.
Expansionary monetary policy increases equity prices. This improves firms' balance sheets, reducing adverse selection and moral hazard and increasing lending for investment, which increases aggregate spending.
In the household liquidity effect, the increase in equity prices due to a monetary expansion improves consumer balance sheets, reducing the probability of financial distress, and increasing consumer spending on durable goods and housing.
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Which of the following shifts both the short-run aggregate supply curve and the long-run aggregate supply curve?
I. changes in the size of the labor force II. changes in the money wage rate III. changes in the quantity of capital A) II only B) both I and II C) both I and III D) I, II and III
Hedging risk for a long position is accomplished by
A) taking another long position. B) taking a short position. C) taking additional long and short positions in equal amounts. D) taking a neutral position.
Monetarists tend to think that the aggregate demand curve is
A) stable. B) vertical. C) horizontal. D) sensitive to changes in investment spending.
The assumption that current-period labor supply is positively related to the current-period real wage is justified as long as the
A) income effect dominates the substitution effect in the short run. B) income effect dominates the substitution effect in the long run. C) substitution effect dominates the income effect in the short run. D) substitution effect dominates the income effect in the long run.