Discuss the impact of the evolving financial system on the bank-lending channel of monetary policy transmission? Evaluate what that is likely to mean for future changes in the target federal funds rate.
What will be an ideal response?
The shift away from bank financing and toward financing in the capital markets means that the bank-lending channel of monetary policy transmission has become less important. This poses a challenge to central bankers, who need to know the quantitative impact their policies are likely to have. But as the structure of the financial system evolves, the effect of a 25- or 50-basis-point change in the federal funds rate will change as well. If the investment component of total spending becomes even less interest-sensitive than it is at present, then it may mean that the changes in the target federal funds rate will have to be larger in order to affect desired changes. This would likely mean more interest rate volatility. However, as the financial system evolves central bank policymaking is likely to evolve with it.
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If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate decreases, then the domestic currency has:
A. become overvalued. B. become undervalued. C. appreciated. D. depreciated.
The FOMC is the
A) name of the meeting the Fed has with Congress twice a year. B) report that summarizes the economy across Fed districts. C) report the Fed gives to Congress twice a year. D) group within the Fed that makes monetary policy. E) interest rate the Fed most directly influences.
Refer to Scenario 17.4. If the flood control system were not in place, the insurer would not be willing to insure against the flood for any premium less than
A) $5,000. B) $10,000. C) $100,000. D) $200,000. E) $1,000,000.
A perfectly competitive firm will not earn an economic profit in the long run, because
A) it is a "price-maker." B) it faces a perfectly inelastic demand curve. C) there are no barriers to entry into the industry. D) it produces differentiated products.