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Chapter 26: Q.15 (page 691)

Why does the credit view imply that monetary policy has a greater effect on small businesses than on large firms?

Short Answer

Expert verified

Small firms will be particularly affected by monetary policy changes that affect lending access.

Step by step solution

01

Concept introduction.

The government bank's monetary policy, which includes the cost of capital and money stock control, is known as monetary policy. The banking system employs monetary policies goals such as development, usage, and fluidity.

02

Explanation of solution.

Small firms are far more reliant on credit facilities than big corporations, hence monetary policy has a stronger impact on them than huge corporations. Small firms will be particularly affected by monetary policy changes that affect lending access.

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Most popular questions from this chapter

"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.

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

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

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?

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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