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Chapter 26: Q.9 (page 691)

Predict what will happen to stock prices after a monetary easing. Explain your prediction.

Short Answer

Expert verified

When the price of a stock grows, so does the value of financial riches.

Step by step solution

01

Step 1. Concept of monetary transmission mechanism 

Introduction: The monetary transmission mechanism is a process that occurs when monetary policy actions affect asset prices and economic conditions. The Consumer Confidence Index is a measure of consumer confidence in the economy's economic and financial status.

02

Step 2. Explanation

When the price of a stock rises, the value of financial wealth rises as well, according to the wealth channel of the monetary transmission mechanism. As a result of their growing financial wealth, consumers have more trust in the economy and financial condition, which leads to an increase in stock purchases.

As a result of the loosening of monetary policy, stock values rise, raising the consumer confidence index as consumer confidence in the economy rises.

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Most popular questions from this chapter

As defined in Exercise 1, 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), bank reserves (TOTRESNS), bank deposits (TCDSL), commercial and industrial loans (BUSLOANS), real estate loans (REALLN), real business fixed investment (PNFIC96), and real residential investment (PRFIC96). Use the frequency setting to convert the federal funds rate, bank reserves, bank deposits, commercial and industrial loans, and real estate loans 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 bank deposits, bank lending, real business fixed investment, and real residential (housing) investment over this rate cycle.

c. Based on your answers to parts (a) and (b), how effective was the bank lending channel of monetary policy over this rate cycle?

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?

"If the fed funds rate is at zero, the Fed can no longer implement effective accommodative policy." Is this statement true, false, or uncertain? Explain.

How can expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel?

How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?
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