Advanced Macroeconomics
Test Bank
Course Introduction
Advanced Macroeconomics explores the theoretical foundations and empirical applications of modern macroeconomic analysis. The course covers topics such as dynamic stochastic general equilibrium models, economic growth, business cycle theories, fiscal and monetary policy, and the microfoundations of macroeconomic behavior. Students will engage with current research, develop analytical tools for solving intertemporal models, and critically assess the effectiveness of policy interventions in closed and open economies. Emphasis is placed on mathematical modeling, rigorous evaluation of macroeconomic data, and understanding the implications of macroeconomic policies in a globalized world.
Recommended Textbook
Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) Economists define money as
A) cash in circulation.
B) deposits in commercial banks.
C) anything that people are willing to accept in payment for goods and services or to pay off debts.
D) bonds issued by large corporations.
Answer: C
Q2) Economists define liquidity as
A) the difference between the return on the asset and the return on a long-term U.S. Treasury bond.
B) the fraction the asset makes up of an investor's portfolio.
C) the ease with which an asset can be exchanged for money.
D) the difference between the total demand for an asset and the total supply of the asset.
Answer: C
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) What do many economists blame for the severity of the Great Depression?
A) The collapse of the banking system.
B) A rapid increase in the money supply.
C) The issuing of an excessively large amount of currency by the Federal Reserve.
D) The collapse of the electronic funds transfer system.
Answer: A
Q2) Make use of the quantity equation to answer the following problem.If the Fed increases the money supply by 4%,velocity increases by 1%,and economic growth is 3%,by how much will the price level increase?
Answer: Since the percent change in the money supply plus the percent change in velocity equals the percent change in GDP plus the percent change in the price level,the price level will increase by 2% (4% + 1% - 3%).
Q3) What is the difference between money,income,and wealth?
Answer: Income is equal to a person's earnings over a period of time.Wealth is the sum of a person's assets minus the sum of a person's liabilities.Money is a medium of exchange and one component of a person's wealth.
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Page 4
Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) If the annual interest rate is 9%,what would you expect to pay for a discount bond paying $10,000 in two years?
A) $8,417
B) $8,200
C) $10,000
D) $11,881
Answer: A
Q2) A one-year discount bond has a face value of $1000 and price of $880.What is the yield to maturity on the bond? Report using percentages with two decimal places. Answer: The yield to maturity is ($1000-$880)/$880 = 13.64%
Q3) Which type of bond would you purchase if you expected higher rates of inflation during the life of the bond?
A) Treasury bond
B) TIPS
C) corporate bond
D) municipal bond
Answer: B
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Chapter 4: Determining Interest Rates
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Q1) Suppose there's a 50% chance of a stock rising by 20% and a 50% chance of it falling by 20%.What is the expected rate of return on the stock?
A) -20%
B) 0%
C) 10%
D) 20%
Q2) The average investor must weigh the benefits of liquidity against
A) the high taxes generally levied on liquid assets.
B) the lower returns on liquid assets.
C) the high transactions costs involved in disposing of liquid assets.
D) the greater variability in the nominal returns on liquid assets.
Q3) The demand curve for bonds would be shifted to the left by an A) increase in wealth.
B) increase in expected returns on bonds.
C) increase in expected inflation.
D) increase in the liquidity of bonds relative to other assets.
Q4) What is a black swan event?
Q5) Suppose that businesses in Japan reduce their spending on plant and equipment.What will be the effect on spending on plant and equipment by businesses in the United States?
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) The expectations theory suggests that
A) the yield curve should usually be upward-sloping.
B) the yield curve should usually be downward-sloping.
C) the slope of the yield curve depends on the expected future path of short-term rates.
D) the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds.
Q2) For state residents,interest on most bonds issued by their state government is
A) exempt from state and federal income taxes.
B) exempt from state, but not from federal, income taxes.
C) exempt from federal, but not from state, income taxes.
D) subject to both state and federal income taxes.
Q3) Differences in the taxation of returns
A) only affect the yields of illiquid credit market instruments.
B) have a negligible effect on the yields of credit market instruments.
C) only affect the yields of high-information cost credit market instruments.
D) create differences in yields among credit market instruments.
Q4) Suppose the private bond rating agencies ceased to exist.What would be the impact on the bond market?
Q5) How do ratings agencies earn income?
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) According to the efficient markets hypothesis,who is most likely to benefit from frequently moving funds from one asset to another?
A) your broker
B) small investors
C) big investors
D) only those who consistently beat the market
Q2) A bubble occurs when
A) the price of a stock is above its fundamental value.
B) inside information is used to make profits from trading a company's stock.
C) a company reports profits that are significantly above or below the expectations of financial analysts.
D) the futures price is greater than the price of the underlying asset.
Q3) A key point made by the Gordon-Growth model is that the A) value of a stock depends on investor's expectations about the future profitability of a firm.
B) past trends in a stock's behavior indicate future price trends.
C) dividends have little to do with a stock's value.
D) risk has little effect on a stock's value.
Q4) What are the differences between common stock and preferred stock?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) Forward contracts
A) are highly liquid.
B) entail small information costs.
C) provide little risk sharing.
D) are subject to default risk.
Q2) Derivative instruments are
A) assets such as bonds or common stock that derive their value from the value of the companies which issue them.
B) assets whose rates of returns must be derived from information published in financial tables.
C) assets which derive their value from underlying assets.
D) computers which display real-time financial information.
Q3) Forward transactions originated in the market for
A) common stock.
B) corporate bonds.
C) government bonds.
D) agricultural and other commodities.
Q4) Why may some investors prefer forward contracts to futures?
Q5) What are the information costs associated with forward contracts?
Q6) What does it mean to "cover a short"?
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Chapter 8: The Market for Foreign Exchange
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Q1) In 2010,fears were growing that the dollar would experience a significant decline in value.What are the likely implications for the euro-dollar exchange rate?
Q2) Since the 1960s,the percentage of U.S.output exported to foreigners A) remained about the same. B) more than doubled. C) increased by more than ten times. D) declined by about half.
Q3) Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar.How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?
A) -59.5%
B) -28%
C) 8%
D) 28%
Q4) Suppose that short-term real interest rates fall in Japan.Is this likely to be good news or bad news for the tourism industry in Hawaii?
Q5) What is a dollar liquidity swap line?
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Q1) How do high interest rates increase the risk of adverse selection in the bond market?
Q2) How does adverse selection affect the economic efficiency of the used car market?
Q3) Credit rationing refers to
A) the increase in the interest rate that occurs when the demand for credit increases.
B) the increase in the interest rate that occurs when the supply of credit increases.
C) the increase in the interest rate that occurs when the supply of credit decreases.
D) a restriction in the availability of credit.
Q4) Symmetric information
A) is the same as perfect information.
B) holds under the assumption of rational expectations.
C) is true only in efficient markets.
D) means that savers and borrowers have the same information.
Q5) How is the lemons problem in the used car market an example of asymmetric information?
Q6) How can restrictive covenants help to reduce moral hazard in bond markets?
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Page 11
Chapter 10: The Economics of Banking
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Q1) Suppose a bank has assets of $500 million and capital of $100 million.Its return on assets is -3%.What is its leverage ratio? What is its return on equity?
Q2) A bank that expects interest rates to fall will
A) want the duration of its assets to be greater than the duration of its liabilities a positive duration gap.
B) want the duration of its assets to be less than the duration of its liabilities a positive duration gap.
C) want the duration of its assets to be greater than the duration of its liabilities a negative duration gap.
D) want the duration of its assets to be less than the duration of its liabilities a negative duration gap.
Q3) National banks are supervised by the
A) Office of the Comptroller of the Currency.
B) Office of Bank Supervision.
C) Securities and Exchange Commission.
D) Office of Management and the Budget.
Q4) How do banks manage credit risk?
Q5) Why do households hold less in checking accounts then they once did?
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) When investment banks buy or sell securities on their own account,it's called
A) financial engineering.
B) proprietary trading.
C) underwriting.
D) factoring.
Q2) In what year did the mutual fund industry in the United States begin?
A) 1812
B) 1924
C) 1974
D) 1990
Q3) What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?
Q4) How is the use of leverage a "double-edged sword"?
Q5) The shadow banking system refers to
A) commercial banks.
B) community banks.
C) pawn shops and institutions that offer payday loans.
D) nonbank financial institutions such as investment banks, hedge funds, and money market mutual funds.
Q6) What information is typically included in a prospectus? Page 13
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Page 14
Chapter 12: Financial Crises and Financial Regulation
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Q1) Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s?
A) The Fed's decision not to make loans to insolvent banks.
B) The large number of small, poorly diversified banks.
C) The large number of rural banks that held agricultural loans during a time of falling commodity prices.
D) The large amount of fraud carried out by bank managers.
Q2) By the summer of 2008,about what percent of subprime mortgages were overdue by at least 30 days?
A) 10%
B) 25%
C) 34%
D) 50%
Q3) A bank panic occurs when
A) a bank is worried that its loans will not be repaid.
B) an individual bank cannot meet its reserve requirements.
C) a bank lacks sufficient funds with which to make loans.
D) the situation in which many banks experience a bank run simultaneously.
Q4) Describe the four stages of the financial regulatory pattern.
Q5) Why do governments want to maintain the health of the banking system?
Page 15
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) Which groups were opposed to the Bank of the United States?
A) northeastern industrial interests
B) northeastern financial interests
C) southern and western agrarian and small-business interests
D) exporters
Q2) Which of the following does not serve on the Governing Council of the European Central Bank?
A) governors of the national central banks
B) members of the executive board
C) finance ministers of each country
D) chair of the executive board
Q3) What was the original intent of the Federal Reserve Act of 1913?
Q4) The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as
A) Class A directors.
B) Class B directors.
C) Class C directors.
D) Class D directors.
Q5) Who serves as voting members of the Federal Open Market Committee (FOMC)?
Page 16
Q6) What are the roles of Federal Reserve district banks?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) The difference between currency outstanding and currency in circulation is equal to A) vault cash.
B) bank reserves.
C) coins issued by the U.S. Treasury.
D) zero; they are the same thing.
Q2) Although open market operations and discount loans both change the monetary base,the Fed has
A) greater control over open market operations than over discount loans.
B) greater control over discount loans than over open market operations.
C) very little control over either discount loans or open market operations.
D) complete control over both discount loans and open market operations.
Q3) If the Fed buys securities worth $10 million,then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increase by $10 million.
Q4) Briefly explain the process of multiple deposit creation.
Q5) Suppose the Fed makes a $5 million discount loan to a bank.Illustrate how this affects the balance sheets of the Fed and the banking system.
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Chapter 15: Monetary Policy
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Q1) What is the difference between defensive and dynamic open market operations?
Q2) The Fed tends not to use discount policy as its principal tool in influencing the money supply since
A) discount loans do not affect the money supply.
B) it does not have as much control over discount loans as it has on open market operations.
C) it is prohibited from doing so by an act of Congress.
D) it prefers to use reserve requirements.
Q3) Describe the three types of unemployment?
Q4) Discount loans intended for banks that are not financially healthy are called A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.
Q5) The original Federal Reserve Act
A) specified open market operations as the Fed's main policy tool.
B) specified open market operations as one of several Fed policy tools.
C) specified that open market operations be employed by the Fed only in circumstances where discount loans were ineffective.
D) did not specifically mention open market operations.
Page 18
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Chapter 16: The International Financial System and Monetary Policy
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Q1) How did maintaining the gold standard deepen the severity of the Great Depression?
Q2) How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?
Q3) Briefly describe how the Bretton Woods system worked.What advantages did it have over the gold standard? What problems did the Bretton Woods system eventually encounter?
Q4) If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency,
A) the central bank's holdings of international reserves will fall.
B) the domestic money supply will rise.
C) domestic interest rates will fall.
D) it will buy foreign assets.
Q5) If the Fed sterilizes the purchase of foreign assets,
A) its assets and liabilities rise by the same amount.
B) its assets and liabilities fall by the same amount.
C) the composition of its assets changes, but its liabilities are unaffected.
D) the composition of its liabilities changes, but its assets are unaffected.
Page 19
Q6) Discuss the problems associated with the imposition of capital controls.
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Q1) When economists state that money is neutral in the long run,they mean that in the long run,
A) fluctuations in the money supply are equally likely to lead to recessions as to expansions.
B) changes in the money supply have the same impact on the rich as they do on the poor.
C) the level of output is independent of the nominal money supply.
D) the price level is independent of the nominal money supply.
Q2) Which of the following will NOT shift the aggregate demand curve to the right?
A) a decline in the price level
B) an increase in government expenditures
C) an increase in investment
D) an increase in the money supply
Q3) Analyze the following statement: "I know the fact that prices have started to rise rapidly seems like bad news,but at least prices starting to go up means that output must be starting to go up as well."
Q4) How do new Keynesians use menu costs to help explain price stickiness in the short run?
Q5) How does an increase in the price level lead to a higher interest rate?
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) An increase in the output gap causes the demand for real balances
A) to rise and the interest rate to fall.
B) to fall and the interest rate to rise.
C) and the interest rate to fall.
D) and the interest rate to rise.
Q2) Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the
A) interest rate channel.
B) balance sheet channel.
C) money channel.
D) bank lending channel.
Q3) A decline in the output gap causes the demand for real balances
A) to rise and the interest rate to fall.
B) to fall and the interest rate to rise.
C) and the interest rate to fall.
D) and the interest rate to rise.
Q4) What three parts of the economy are represented in the IS-MP model?
Q5) Explain how does an increase in real interest rates affect the components of AE.
Q6) What is the multiplier? If MPC =0.75,what is the value of the multiplier in the simple model of the economy?
Page 21
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