Log out Go to App
Go to App

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks' excess reserves increased sharply, while credit extended to households and firms decreased sharply. Comment on the effectiveness of the bank lending channel during this period.

Why might the bank lending channel be less effective today than it once was?

In the late 1990 s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy as it relates to the Tobin q transmission mechanisms.

Nobel Prize winner Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.

During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At the same time, the stock market fell dramatically and housing market values declined sharply. Comment on the effectiveness of monetary policy during this period with regard to the wealth channel
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free