Applied Macroeconomics Exam Practice Tests
Course Introduction
Applied Macroeconomics explores the practical application of macroeconomic theories and models to contemporary economic issues and policy-making. The course covers topics such as national income determination, unemployment, inflation, economic growth, monetary and fiscal policy, and international trade, with a strong emphasis on real-world data analysis and case studies. Students will develop the skills needed to interpret economic indicators, evaluate government policies, and understand the macroeconomic environment affecting businesses and society. Through problem-solving exercises and empirical projects, learners will gain hands-on experience in applying macroeconomic concepts to current global and national economic challenges.
Recommended Textbook
Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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18 Chapters
1575 Verified Questions
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) Financial securities that represent partial ownership of a corporation are known as A) bonds.
B) stocks.
C) coupons.
D) dividends.
Answer: B
Q2) Which of the following best describes a "bubble"?
A) when the price of an asset reaches a new high
B) an unsustainable increase in the price of a class of assets
C) rapid increases in inflation
D) when bond prices rise more quickly than stock prices
Answer: B
Q3) Briefly explain the process of securitizing mortgages.
Answer: The mortgage lender sells the loan to a government-sponsored enterprise or financial firm that bundle the mortgage with mortgages from other lenders,providing the basis for a mortgage-backed security.
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) Suppose nominal GDP is $14 trillion and the money supply is $2 trillion.What is the velocity of money?
A) 0.143
B) 7
C) 12
D) 28
Answer: B
Q2) Which of the following is the largest measure of money in the United States?
A) Federal Reserve notes
B) definitive money
C) M1
D) M2
Answer: D
Q3) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
Q4) Why does the payments system continue to change over time?
Answer: New forms of payments are introduced that increase the efficiency of the payments system by reducing transactions costs.
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) A discount bond resembles a simple loan in that
A) the interest on neither is taxable.
B) the borrower repays in a single payment.
C) both represent assets to the borrowers who issue them.
D) both have par values greater than their face values.
Answer: B
Q2) The most common type of simple loan is a(an)
A) automobile loan from a bank.
B) mortgage loan from a bank.
C) commercial loan from a bank.
D) corporate bond.
Answer: C
Q3) Suppose a firm receives $975 for a discount bond with a face value of $1000 to be repaid in one year.What is the amount of interest on the bond? What is the interest rate on the bond? Report a percentage with two decimal places.
Answer: The amount of interest is $1000 - $975 or $25.the interest rate is $25/$975 which equals 2.56%.
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Which of the following is the most likely explanation of Japan's very low market interest rates in the early 2000s?
A) expected deflation
B) an increasing budget deficit
C) an increasing trade surplus
D) an increase in corporate profits
Q2) If the expected gains on stocks rise,while the expected returns on bonds do not change,then
A) the demand curve for bonds will shift to the left.
B) the supply curve for loanable funds will shift to the right.
C) the demand curve for loanable funds will shift to the left.
D) the equilibrium interest rate will fall.
Q3) The demand curve for bonds would be reduced by
A) a decrease in expected returns on other assets.
B) an increase in the information costs of bonds relative to other assets.
C) an increase in wealth.
D) an increase in the liquidity of bonds relative to other assets.
Q4) What is a black swan event?
Q5) Assess the impact on the bond market of the rise in Internet trading of stocks.
Page 6
Q6) How can diversification reduce idiosyncratic risk but not systematic risk?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) If a one-year bond currently yields 5% and is expected to yield 7% next year,the liquidity premium theory predicts that the yield today on a two-year bond should be A) 5%.
B) less than 6%, but more than 5%. C) 6%.
D) more than 6%.
Q2) Which bond would someone in a 35% tax bracket choose to buy: a municipal bond with an interest rate of 7% or a corporate bond with an interest rate of 10%?
Q3) Financial instruments with high information costs
A) will usually be more liquid than similar instruments with low information costs.
B) will have lower yields than U.S. Treasury securities.
C) may not be offered for sale in some states.
D) will have lower prices than similar instruments with low information costs.
Q4) How do ratings agencies earn income?
Q5) Why does the segmented markets theory suggest think that bonds of different maturities are not perfect substitutes for each other?
Q6) What are the economic implications of an inverted yield curve?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) Behavioral economics can best be described as
A) the study of situations in which people's choices do not appear to be economically rational.
B) the study of human economic behavior.
C) the basis for efficient markets.
D) the study of how the economy affects human behavior.
Q2) When market participants have adaptive expectations
A) they use all information available to them.
B) they only slowly adjust their expectations to news which could affect prices or returns.
C) they are more likely to make accurate forecasts than if they have rational expectations.
D) they are able to forecast interest rates more accurately than inflation rates.
Q3) Explain what is meant by the "double taxation of dividends"?
Q4) In Wall Street Jargon,a "Bear Market" typically means
A) stock prices have declined by at least 20%.
B) stock prices have declined by at least 50%.
C) stock prices have risen by at least 20%.
D) stock prices have risen by at least 50%.
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) In a put options contract,the
A) seller has the obligation to receive the instrument at a specified time.
B) buyer has the obligation to deliver the instrument at a specified time.
C) buyer has the obligation to receive the instrument at a specified time.
D) seller has the obligation to deliver the instrument at a specified time.
Q2) In recent decades,
A) trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures.
B) trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures.
C) trading in agricultural and commodities futures was discontinued.
D) trading in financial futures was discontinued.
Q3) Currently,
A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading.
B) trading in financial futures involves more transactions than trading in commodity futures.
C) futures trading is allowed only for financial assets.
D) futures trading is allowed only for commodities.
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Page 9
Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) Which of the following is an advantage of hedging with options instead of forward contracts?
A) Options prices tend to be lower than forward prices.
B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.
C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.
D) Options allow investors to purchase a forward contract at a later date.
Q2) What is an advantage of using options instead of forward contracts when speculating on exchange rates?
Q3) Which of the following has the largest impact on short-run movements in exchange rates?
A) growth rate of exports
B) growth rate of imports
C) investment opportunities
D) changes in the trade deficit
Q4) What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?
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Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) To help offset the costs from loan defaults,the First National Bank of Gotham decides to increase the interest rate it charges on its business loans.As a result of this increase in the interest rate,the creditworthiness of Gotham's loan applicants is likely to A) improve.
B) deteriorate.
C) be unchanged.
D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.
Q2) 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.
Q3) How do car dealers help reduce adverse selection?
Q4) How is the lemons problem in the used car market an example of asymmetric information?
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) The interest rate on interbank loans is called the A) discount rate.
B) federal funds rate.
C) repo rate.
D) prime rate.
Q2) The interest rate on unsecured loans between banks is called the A) discount rate.
B) repurchase rate.
C) T-bill rate.
D) federal funds rate.
Q3) In 2010,the Treasury estimated that the bank portion of TARP would
A) earn a profit
B) cost $60 billion
C) cost $180 billion
D) cost $700 billion
Q4) Compare the characteristics of loans and marketable securities in terms of liquidity,risk,and information costs.
Q5) What is an important difference between certificates of deposits (CDs)worth less than $100,000 compared to those worth $100,000 or more?
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) what were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?
Q2) A syndicate is
A) a group of brokers illegally making use of insider information.
B) a group of commercial banks that agrees to accept the checks of each other's depositors.
C) a group of investment banks underwriting a large security issue.
D) a group of dealers that markets a government bond issue.
Q3) Investment banks
A) lease machinery and equipment to business firms.
B) acquire deposits from savers and lend them to borrowers.
C) assist business firms in raising new capital in primary markets.
D) aid the government to raise funds to cover the budget deficit.
Q4) Sales finance companies
A) purchase accounts receivable of small firms at a discount.
B) sell commercial paper and buy long-term corporate bonds.
C) take in deposits from savers and buy corporate commercial paper.
D) are affiliated with companies which manufacture or sell goods.
Q6) What information is typically included in a prospectus? Page 13
Q5) How do defined-contribution plans differ from defined-benefit plans?
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Page 14
Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) Describe the four stages of the financial regulatory pattern.
Q2) Which investment caused the Reserve Primary Fund to incur heavy losses?
A) mortgage-backed securities
B) real estate investment trusts
C) commercial paper issued by Bear Stearns
D) commercial paper issued by Lehman Brothers
Q3) The fourth stage in the regulatory process is
A) a crisis.
B) response by the financial system.
C) regulation.
D) regulatory response.
Q4) Negotiable certificates of deposit were developed in order to
A) compete for loan business that had been going to the commercial paper market.
B) circumvent interest rate regulations on deposits.
C) increase assets that were acceptable as collateral for discount loans.
D) circumvent reserve requirements.
Q5) What are the primary reasons for and against a policy of "too big to fail."
Q6) Why do banking panics normally lead to recessions?
Q7) Describe the debt-deflation process.
Q8) What are the two most common reasons for a sovereign debt crisis?
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) The political business cycle theory predicts that
A) the Fed acts to promote the interests of the general public.
B) the Fed acts to stimulate economic activity before an election.
C) the President's appointments to the Board of Governors will usually be politicians.
D) political factors over which the Fed has no control are most important in explaining the business cycle.
Q2) Who had served as a de facto lender of last resort during the 1907 panic?
A) The U.S. Treasury
B) J. P. Morgan
C) Henry Ford
D) John D. Rockefeller
Q3) What is the name of the entity,composed of Federal Reserve district bankers,that consults on monetary policy?
A) The Federal Open Market Committee
B) The Federal Advisory Council
C) The Monetary Policy Council
D) The District Bank Committee
Q4) What are the primary arguments for and against the independence of the Fed?
Q5) 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 monetary base is equal to
A) all currency in circulation plus all deposits in financial institutions.
B) all currency in circulation plus checkable deposits in financial institutions.
C) all currency in circulation plus reserves held by banks.
D) checkable deposits in depository institutions plus reserves held by banks.
Q2) The money supply process focuses on the monetary base rather than on bank reserves because
A) bank reserves have little connection to the money supply.
B) the Fed has better control of the monetary base than it has on bank reserves.
C) bank reserves are difficult to measure.
D) banks are not required to report the level of their reserves, which makes it difficult for the Fed to use them to control the money supply.
Q3) The paper currency of the United States is issued by
A) state governments and the Fed.
B) state governments and the U.S. Treasury.
C) the U.S. Congress.
D) the Fed.
Q4) Briefly explain the process of multiple deposit creation.
Page 17
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel.Sally Jones is considered by economists to be
A) naturally unemployed.
B) cyclically unemployed.
C) structurally unemployed.
D) frictionally unemployed.
Q2) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.
Q3) Congress established the FOMC because
A) a group was needed to set reserve requirements for member banks.
B) of a lack of coordination among district banks in carrying out open market operations.
C) Congress was attempting to expand its influence within the Federal Reserve System.
D) a group was needed to coordinate the setting of discount rates by the district banks.
Q4) Which types of unemployment still occur even when the economy is considered to be operating at full employment?
Q5) What is the difference between defensive and dynamic open market operations?
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18
Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) Foreign-exchange market interventions will always
A) lead to a decline in domestic interest rates relative to foreign interest rates.
B) lead to a rise in domestic interest rates relative to foreign interest rates.
C) lead to a decline in the domestic money supply.
D) alter a central bank's holdings of international reserves.
Q2) Why do some economists think a global savings glut contributed to the U.S.running a current account deficit in the 2000s?
Q3) Throughout most of the post-World War II period,the use of capital controls by governments around the world was declining.But in the late 1990s,a number of governments expressed renewed interest in capital controls.What accounts for this renewed interest?
Q4) How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?
Q5) How did the the use of the euro limit the use of monetary policy by European nations severely affected by the Financial Crisis of 2007-2009?
Q6) Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?
Page 19
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) The Polish experience indicates that
A) the aggregate supply curve is vertical, even in the short run.
B) changes in the expected price level do not affect aggregate supply.
C) the transition from a centrally planned to a market economy can result in an upward shift in the short-run aggregate supply curve.
D) increases in the factor productivity will shift the long-run aggregate supply curve to the left.
Q2) In the new Keynesian view a monopolistically competitive firm may fail to increase the price of its product as demand increases because
A) if it does so it will lose all of its customers.
B) the cost to it of changing prices may exceed the benefit of doing so.
C) prices of monopolistically competitive firms are regulated by the federal government and may only be changed with permission.
D) for a monopolistically competitive firm, price is below marginal cost.
Q3) According to New Keynesians,why can firms increase output in the short run in response to higher prices?
Q4) Explain what happens to the short-run aggregate supply curve when output exceeds its potential.
Page 20
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Sample Questions
Q1) The MP curve represents
A) the Fed's monetary policy actions in setting a target for the federal funds rate.
B) the relationship between the money supply and the price level.
C) a relationship between the real interest rate and manufacturing production.
D) the relationship between real interest rates and potential GDP.
Q2) Most economists think changes in which type of unemployment affects inflation?
A) frictional unemployment
B) cyclical unemployment
C) structural unemployment
D) natural rate of unemployment
Q3) The graph of the short-run relationship between the unemployment rate and inflation is called a(n)
A) MP curve.
B) LM curve.
C) IS curve.
D) Phillips curve.
Q4) What is the difference between an autonomous change in spending and an induced change in spending?
Q5) How does the goods market return to equilibrium if AE is less than production?
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