the economics of money, banking, and financial markets

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61. 
    

    Real business cycle theorists are critical of monetarist reduced-form evidence because they
    believe ____.
    A) money is the most important cause of changes in aggregate demand
    B) there is reverse causation from the business cycle to money
    C) there is reverse causation from money to the business cycle
    D) business cycles do not exist
    Answer: B
    Diff: 2 Type: MC Page Ref: 27.1A- 12
    Skill: Recall
    Objective List: Appendix: Evaluating Empirical Evidence

    
    


62. 
    

    Real business cycle theory states that the most important cause of business cycles is
    ____.
    A) shocks to the money supply
    B) interest rate shocks
    C) Bank of Canada policy decisions
    D) shocks to tastes and technology
    Answer: D
    Diff: 2 Type: MC Page Ref: 27.1A- 12
    Skill: Recall
    Objective List: Appendix: Evaluating Empirical Evidence

    
    


63. 
    

    Explain what we call structural model evidence in describing the transmission mechanism of
    monetary policy.
    Answer: When we build a structural model to examine the evidence on the effect of changes in
    the money supply on economic activity, we are using a collection of equations that describe the
    behaviour of firms and consumers in many sectors of the economy. These equations then show
    the channels through which monetary and fiscal policy affect aggregate output and spending. A
    structural model might have behavioural equations that describe the working of monetary policy
    through many variables. Structural model evidence on the relationship between M and Y looks at
    empirical evidence on the specific channels of monetary influence, such as the link between
    interest rates and investment spending.
    Diff: 3 Type: SA Page Ref: 27.1A- 1
    Skill: Recall
    Objective List: Appendix: Evaluating Empirical Evidence

    
    


64. 
    

    What do you know about the reduced-form evidence in describing the transmission
    mechanism of monetary policy? provide a brief description.
    Answer: The quantity theory approach to aggregate demand does not describe specific ways in
    which the money supply affects aggregate spending, Instead, it suggests that the effect of money
    on economic activity should be examined by looking at whether movements in Y are tightly
    linked to movements in M. Reduced-form evidence analyzes the effect of changes in M on Y as
    if the economy were a black box whose workings cannot be seen.
    Diff: 1 Type: SA Page Ref: 27.1A- 2
    Skill: Recall
    Objective List: Appendix: Evaluating Empirical Evidence