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An expansionary monetary policy may cause asset prices to rise, thereby reducing the
likelihood of financial distress and causing consumer durable and housing expenditures to rise.
This monetary transmission mechanism is referred to as ____.
A) the household liquidity effect
B) the wealth effect
C) Tobin's q theory
D) the cash flow effect
Answer: A
Diff: 2 Type: MC Page Ref: 644
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy
According to the household liquidity effect, an expansionary monetary policy causes a
____ in the value of households' financial assets, causing consumer durable expenditure to
____.
A) decline; rise
B) rise; rise
C) rise; fall
D) decline; fall
Answer: B
Diff: 2 Type: MC Page Ref: 644
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy
According to the household liquidity effect, higher stock prices lead to increased
consumption expenditures because consumers ____.
A) feel more secure about their financial position
B) want to sell stocks and spend the proceeds before stock prices fall
C) believe that their wages will increase due to increased profitability of firms
D) can now afford more expensive imports
Answer: A
Diff: 2 Type: MC Page Ref: 644
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy
The subprime financial crisis caused a recession because of the ____ in adverse
selection and moral hazard problems and the ____ in housing prices.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Diff: 2 Type: MC Page Ref: 645
Skill: Recall
Objective List: 27.1 Outline the transmission mechanisms of monetary policy