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© 2014 Pearson Canada Inc.$27.2 Lessons for Monetary Policy
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a
central bank's conduct of monetary policy. These lessons include:
A) It is dangerous always to associate the easing or tightening of monetary policy with a fall or a
rise in short-term interest rates.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term
interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary
policy, thus providing a rationale for interest-rate stability as the primary long-run goal for
monetary policy.
D) Only A and B of the above.
Answer: D
Diff: 3 Type: MC Page Ref: 646
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a
central bank's conduct of monetary policy. These lessons include:
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates
indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term
interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary
policy, thus providing a rationale for interest-rate stability as the primary long-run goal for
monetary policy.
D) Only A and B of the above.
Answer: B
Diff: 3 Type: MC Page Ref: 646
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a
central bank's conduct of monetary policy. These lessons include:
A) Monetary policy can be highly effective in reviving a weak economy so long as short-term
interest rates are not too close to zero.
B) Avoiding fluctuations in the level of unemployment is an important objective of monetary
policy, thus providing a rationale for interest-rate stability as the primary long-run goal for
monetary policy.
C) Other asset prices beside those on short-term debt instruments contain important information
about the stance of monetary policy because they are important elements in various monetary
policy transmission mechanisms.
D) Only A and B of the above.
Answer: C
Diff: 3 Type: MC Page Ref: 646
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy