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Section 7 Lecture 9
203
Lecture 9
Q1
True or False: Most economists agree that there are too many problems with monetary policy and it should not be used.
Usefulness
Try Again!
True
While monetary policy does have some issues, it is a commonly used set of tools to smooth the business cycle.
False
Correct!
Monetary policy is useful however, it is important to keep the problems in mind when implementing policy.
Q2
Which lags are associated with monetary policy? Answer Yes or No for each option.
Problems
Yes!
The operational lag is length of time from when policy makers decide on the action to take and when the policies begin to take effect.
operational leg
No!
administrative lag.
Unlike fiscal policy, monetary policy does not experience an administrative lag. Monetary policy does not deal with political battles like those that happen within Congress and between Congress and the President. The Fed implements policies based on majority rules.
Yes!
recognition lag.
The recognition lag is the length of time it takes policy makers to realize action is needed from the start of the event. If the event is a recession, from the time the recession started to the time policy makers realize a recession is going on.
Q3
Cyclical asymmetry refers to:
Problems
Try Again!
This is known as the liquidity trap. Expansionary monetary policy is less effective after interest rates reach 0.
interest rates cannot fall less than 0 percent.
Try Again!
This refers to crowding out. Crowding out is a problem associated with fiscal policy, not monetary policy.
higher interest rates limit investment by private businesses
Correct!
The goal of monetary policy during a recession is expand investment spending to increase aggregate demand. However, targeting a lower interest rate may not be enough to increase investment spending. During a recession businesses are less likely to find profitable investment opportunities, not due to the interest rate, but due to a low expected return.
it can be difficult to entice businesses to increase investment during a recession.
Q4
One common complaint is the Fed is:
Problems
Try Again!
The Fed, and monetary policy, has fewer lags and is often more quick to respond than the federal government and fiscal policy.
too slow
Correct!
Some critics of the Fed complain is too independent. There is a lack of oversight and no audits of the Fed. Some believe this makes the Fed too powerful.