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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?

Short Answer

Expert verified

Business and investing behavior are both influenced by moral hazards.

Step by step solution

01

Concept Introduction.

The financial downswing is described as a broad stoppage of business activities in a certain area over a longer length of time.

02

Explanation of solution.

Central banks find it tough to boost growth during downturns. As per the financial perspective, moral hazard has a negative impact on investment behavior as well as the ecosystem. During economic downturns, the challenge of asymmetric data grows, implying that monetary policy should be strengthened to counteract the restricting effects of moral hazard and adverse selection hazard.

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Most popular questions from this chapter

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 (FEDFUNDS), real business fixed investment (PNFIC96), real residential investment (PRFIC96), and consumer durable expenditures (PCDGCC96). 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?

many experts say that the accommodating monetary policy position could be sustained through various financial market mechanisms including financial system routesWhat evidence exists to support the credit view of monetary policy?

"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.

1. Go to http://www.econlib.org/library/Encl/Recessions . html and review the material on recessions.

a. What is the formal definition of a recession?

b. What are the problems with the definition?

c. What are the three Ds used by the National Bureau of Economic Research (NBER) to define a recession?

d. Review Chart 1. What trend is apparent regarding the length of recessions?

Describe an advantage and a disadvantage of the fact that monetary policy has so many different channels through which it can operate.
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