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Chapter 26: Q.8 (page 691)

"The costs of financing investment are related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates." Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The stated assertion is incorrect.

Step by step solution

01

Step 1. Concept of cost of investing and monetary policy

The cost and interest charges incurred to purchase investments are referred to as the cost of financing investments.

The central bank's monetary policy, which includes interest rate and money supply control, is known as monetary policy. The central bank employs monetary policy to achieve goals such as growth, consumption, and liquidity.

02

Step 2. Explanation

The given statement is false. Cost of financing investments include the interest rates and also the other charges like brokerage paid.

Cost of financing investments can affect the availability of loan which may mold the expenditure on investments. Further, the stock market gets affected by the monetary policy which results in untoward selection and moral jeopardy in lending and this jeopardized lending will affect the expenditure on a purchase.

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Most popular questions from this chapter

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.

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

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?

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?

Leo Krippner, an economist at the Reserve Bank of New Zealand, publishes an 'Effective Monetary Stimulus' (EMS) measure, designed to gauge the stance of U.S. monetary policy. Go to the website http://www,rbnz.govt NZ/research-and-publications/research-programme/ additional-research/measures-of-the-stance-of-united states-monetary-policy and examine the EMS measure. Is monetary policy becoming tighter, or looser according to the measure?
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