THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 697

CHAPTER 25

Transmission Mechanisms of Monetary Policy

665

effects on interest rates. Is this statement true, false,
or uncertain? Explain your answer.

consumer expenditure. Describe how at least two of
these mechanisms work.

13. Predict what will happen to stock prices if the
money supply rises. Explain why you are making
this prediction.

15. The monetarists have demonstrated that the early
Keynesians were wrong in saying that money doesn t
matter at all to economic activity. Therefore, we
should accept the monetarist position that money is all
that matters. Do you agree? Why or why not?

*14. Franco Modigliani found that the most important
transmission mechanisms of monetary policy involve

WEB EXERCISES
1. Figure 25-1 on page 644 shows the relationship
between estimated real rates and nominal rates for
the United States. Go to www.martincapital.com
and click on charts and data and then on nominal
versus real market rates to find data showing the

spread between real rates and nominal rates. Discuss
the current spread difference compared to that
shown most recently in Figure 25-1. What are the
implications of this change?
2. Figure 25-2 on page 647 discusses business cycles.
While peaks and troughs of economic activity are a

normal part of the business cycle, recessions are not.
They represent a failure of economic policy. Go to
www.econlib.org/library/Enc1/Recessions.html
and review the material reported on recessions.
a. What is the formal definition of a recession?
b. What are the problems with the definition?
c. What are the three D s used by the National
Bureau of Economic Research (NBER) to define
a recession?
d. Review chart 1. What trend is apparent about the
length of recessions?

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