Course Introduction
Monetary Economics
Chapter Exam Questions
Monetary Economics examines the role of money and financial institutions in the economy, focusing on how monetary policy influences inflation, output, and employment. The course explores the theoretical foundations and practical workings of central banks, the demand and supply for money, the transmission mechanisms of monetary policy, and the interaction between monetary policy and fiscal policy. It also analyzes issues such as the determination of interest rates, exchange rates, financial crises, and the evolving role of digital currencies and payment systems in the modern economy.
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MandB 3 3rd Edition by Dean Croushore
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Page 2
Chapter 1: Money and the Financial System
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Q1) When the overall level of business activity declines persistently, there is said to be A)a revolution.
B)a hyperinflation.
C)a recession.
D)an expansion.
Answer: C
Q2) Buying stocks gives an investor
A)a very low but safe return.
B)ownership in corporations.
C)the riskiest asset available in the market.
D)a pure and random speculative gamble.
Answer: B
Q3) The expected rate of change in prices is known as the A)forecasted mean CPI.
B)Okun's law coefficient.
C)augmented inflation rate.
D)expected inflation rate.
Answer: D
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3
Chapter 2: The Financial System and the Economy
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Q1) Treasury bills issued by the U.S.government
A)do not have a specific period of maturity.
B)promises to pay dividends to its owners.
C)are long term debt securities.
D)are short term debt securities.
Answer: D
Q2) You buy a bond for $1,000 today that promises interest of $50 in one year plus the return of your principal. However, the probability that the company will default and not pay you either interest nor repay your principal is 1 percent.The expected return on the bond is _____percent.
A)3.95
B)4.00
C)4.95
D)5.00
Answer: A
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Chapter 3: Money and Payments
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Q1) When people keep money for some period instead of spending it or investing it, money is serving the role of a
A)medium of exchange.
B)unit of account.
C)store of value.
D)standard of deferred payment.
Answer: C
Q2) Which of the following functions of money encourages specialization in the production of goods and services?
A)Unit of account
B)Store of value
C)Standard of deferred payments
D)Medium of exchange
Answer: D
Q3) Inflation affects money by
A)increasing money's efficiency as a medium of exchange.
B)limiting money's role as a store of value.
C)reducing the supply of money.
D)reducing transactions and search costs.
Answer: B
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Chapter 4: Present Value
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Q1) The present value of a series of future payments is
A)inversely related to the future value.
B)unrelated to the discount factor.
C)inversely related to the rate of discount.
D)directly related to the discount factor.
Q2) Consider a coupon bond that pays $350 every year and repays its principal amount of $5,000 at the end of four years.If the annual rate of discount is 6 percent, what is the present value of the bond?
Q3) Suppose you take out a car loan of $10,000 for 3 years at an annual interest rate of 8 percent, with payments to be made monthly.What will be the approximate monthly payments? The relevant formula is: \[F = P \times \frac { i
\right) ^ { N } }\] .
A)$313.36.
B)$323.36.
C)$853.45.
D)$3,880.34.
Q4) Consider a perpetuity that pays $300 every year.If the rate of discount is 6 percent, calculate the present value of the bond.
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Chapter 5: The Structure of Interest Rates
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Q1) What is the reason for a low rated security to generate a high yield to maturity?
Q2) The U.S.Treasury security that was issued most recently, in the primary market, is known as the
A)off-the-run security.
B)on-the-run security.
C)in-the-money security.
D)out-of-the-money security.
Q3) When the federal tax rate on interest income is 20 percent, an investor will purchase______in order to maximize returns.
A)a local government bond with an interest rate of 7 percent
B)a corporate bond with an interest rate of 8 percent
C)a corporate bond with an interest rate of 8.5 percent
D)a local government bond with an interest rate of 6.5 percent
Q4) An inverted yield curve indicates that
A)an economic expansion has just begun.
B)an economic expansion has been going on for several years.
C)a recession is about to begin.
D)a recession is nearly over.
Q5) What do steep upward-sloping yield curves indicate about the business cycle?
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Chapter 6: Real Interest Rates
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Q1) One way that homeowners and banks can share the risk of inflation is through A)fixed-rate mortgages.
B)refinancing.
C)default.
D)adjustable-rate mortgages.
Q2) According to the Fisher hypothesis, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4 percent, then the nominal interest rate will _____percentage points and the real interest rate will change by ______percentage points.
A)rise by 0; ?2
B)fall by 2; ?2
C)rise by 2; 0
D)fall by 1; 1
Q3) If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4 percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?
A)0.0 percent
B)0.2 percent
C)2.0 percent
D)20.0 percent
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Chapter 7: Stocks and Other Assets
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Q1) A model of stock prices that allows for more sources of risk than just the stock market's excess return is the ________ theory.
A)excess-return
B)random-walk
C)arbitrage-pricing
D)idiosyncratic-risk
Q2) A place where people buy or sell stocks is known as a stock A)exchange.
B)index.
C)fund.
D)holding.
Q3) When stock prices are unpredictable, they are said to A)be riskless.
B)follow a random walk.
C)lack a martingale.
D)be ex-dividend.
Q4) Write a formula for the equity premium.
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Chapter 8: How Banks Work
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Q1) A bank offers credit cards with a 24 percent interest rate, when its competitors' cards have just a 18 percent interest rate.What do you predict will happen? Will the bank profit from its offer?
Q2) When people or firms that are worse than average risks are most likely to enter a contract that is offered to everyone, the problem is called
A)irrational expectations.
B)adverse selection.
C)opportunity cost.
D)moral hazard.
Q3) Which of the following statements is true of banks?
A)Small banks do not face the same competitive pressure as large banks do.
B)Location of banks does not determine the level of competition among them.
C)Bank spreads are large for large banks.
D)Returns on equity are large for small banks.
Q4) A bank's reserves equal its
A)government securities.
B)transactions deposits.
C)vault cash plus deposits at the Federal Reserve.
D)cash assets plus government securities.
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Chapter 9: Governments Role in Banking
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Q1) A commercial bank that gets its charter from a state government (the state in which its headquarters are located) is called a bank.
A)local
B)community
C)charter
D)state
Q2) To oppose the Glass-Steagall Act, banks argued that they
A)would be forced to extend deposit insurance coverage to firms that were not banks.
B)would have a conflict of interest between their needs to underwrite stocks and to serve their customers.
C)could gain greater monopoly power by lending only to big businesses.
D)could take advantage of economies of scope if they were able to underwrite securities and sell them directly to their customers.
Q3) The law that allowed banks to engage in investment banking was the
A)Gramm-Leach-Bliley Act.
B)Glass-Steagall Act.
C)McFadden Act.
D)Garn-St.Germain Act.
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Chapter 10: Economics Growth and Business Cycles
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Q1) The shortest economic expansion in U.S.history occurred in the A)1960s.
B)1970s.
C)1980s.
D)1990s.
Q2) Explain how compensation per hour has changed in the periods of economic liftoff, reorganization, and the long boom.What explanations can you offer for the changes?
Q3) Consider the following production function? Y = A×K<sup>a</sup>×L<sup>1?a</sup>.
If a = 0.3, and over the past year total factor productivity (TFP) grew 2.3 percent, capital grew 2 percent, and output grew 5 percent, what was the growth rate of labor?
A)2 percent
B)3 percent
C)4 percent
D)5 percent
Q4) Explain the four major theories of the causes of the business cycle.
Q5) Describe classical economists.
Q6) Explain how a sudden change in productivity could lead to a change in economic output.Give an example.
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Chapter 11: Modeling Money
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Q1) A steady state is a situation in which the key variables in the model
A)are constant or else growing at a constant rate.
B)are growing at a decreasing rate.
C)are endogenous.
D)measure zero.
Q2) In the ATM model of the demand for cash
A)both the nominal interest rate and the cost of going to an ATM are endogenous variables.
B)both the nominal interest rate and the cost of going to an ATM are exogenous variables.
C)the nominal interest rate is an exogenous variable while the average cash balances is an endogenous variable.
D)the nominal interest rate is an endogenous variable while the cost of going to an ATM is an exogenous variable.
Q3) The liquidity-preference model assumes that the amount people spend depends on A)their real incomes and the incomes of other people around them.
B)the cost of withdrawing money from an ATM.
C)the probability of theft and loss of money.
D)their real incomes and prices of goods and services.
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Chapter 12: The Aggregate-Demandaggregate-Supply
Model
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Q1) A rise in wealth, everything else remaining unchanged, will cause household investment in housing to A)decline.
B)not change.
C)rise.
D)fall at first, then rise later.
Q2) A rise in the incomes of foreign consumers, everything else remaining unchanged, causes net exports to A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.
Q3) Describe the arguement put forward by the Nobel laurete Robert E.Lucas about the flaws in the large structural macroeconomic models.
Q4) The largest component of aggregate demand is A)net exports.
B)government spending.
C)investment.
D)consumption.
Page 14
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Chapter 13: Modern Macroeconomic Models
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Q1) A disadvantage of univariate time-series models and VARs is
A)they cannot be used easily to analyze the effects of monetary policy.
B)they are based on classical, rather than Keynesian, economic theory.
C)they provide poor forecasts.
D)they are not based on data.
Q2) In the two-period model, suppose a household's income in period one is $30,000 and its income in period two is $40,000.Also assume that the household face the real interest rate of 25 percent.What is the present value of the Household's income?
A)$62,000
B)$46,000
C)$20,000
D)$30,000
Q3) A model that is based on the decisions of economic agents is known as A)a rational-expectations model.
B)a decision-theoretic model.
C)a model with microeconomic foundations.
D)a fully compatible real business cycle model.
Q4) Describe the general procedures followed by DSGE researchers creating a new model.
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Chapter 14: Economic Interdependence
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Q1) International investors believe that when a country gets into financial trouble, the IMF will rescue the country, thus reducing the investors' risk.As a result, investors take greater risks than they would otherwise.This is an example of
A)a risk premium.
B)a lender of last resort.
C)adverse selection.
D)moral hazard.
Q2) A measure of the flow of goods and services out of a country into other countries or other items that cause payments to flow into the country is
A)the national savings account balance.
B)the balance on current account.
C)the capital account balance.
D)the capital and financial account balance.
Q3) Which of the following statements is true?
A)A shock affects all countries to the same extent.
B)Some shocks are positive and some are negative.
C)Some shocks benefit one country and harm others.
D)The same shock cannot affect more than one country at once.
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Chapter 15: The Federal Reserve System
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Q1) In 2006, Chairman Greenspan left the Fed because
A)President Bush wanted him to resign.
B)he reached mandatory retirement age.
C)his term as Governor expired.
D)his term as Chairman expired.
Q2) Publications of the Federal Reserve Bank such as the economic review are available
A)to the public for free.
B)only to the President of the United States.
C)only to members of the Federal Reserve Bank.
D)to all individuals willing to pay a fixed annual subscription charge.
Q3) Open-market operations are carried out between the Open Market Desk of the Fed and
A)foreign central banks.
B)the U.S.government.
C)citizens residing in the U.S.
D)primary government securities dealers.
Q4) Why are the deliberations of the FOMC kept secret?
Q5) Explain the rationale behind having twelve Federal Reserve Banks scattered around the country.
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Chapter 16: Monetary Control
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Q1) If the ratio of currency to transaction accounts is 1, the ratio of nontransaction accounts to transaction accounts is 6, the ratio of retail money-market funds to transaction accounts is 2, the ratio of required reserves to transaction accounts is 0.07, and the ratio of excess reserves to transaction accounts is 0.02, calculate the M1 multiplier and the M2 multiplier.
Q2) If the Open-Market Desk at the Fed sells securities, the most likely effect is that the A)federal funds rate decreases.
B)primary credit discount rate decreases.
C)primary credit discount rate increases.
D)federal funds rate increases.
Q3) Which of the following is true of an economy in a liquity trap?
A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)The economy's nominal short-term interest rates become close to zero.
C)The banks in the economy do not hold any reserves.
D)The economy's interest rates decline when there is an increase in the monetary base.
Q4) Since the 2008 financial crisis, what has happened to the M1 and M2 multipliers?
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Chapter 17: Monetary Policy: Goals and Tradeoffs
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Q1) Okun's Law relates
A)the unemployment gap and the inflation rate.
B)the unemployment gap and the inflation gap.
C)the inflation gap and the output gap.
D)the unemployment gap and the output gap.
Q2) The inflation surprise is defined as
A)the sum of the natural rate of unemployment and the ideal inflation rate.
B)the difference between the actual inflation rate and the expected inflation rate.
C)the expected inflation rate in an economy multiplied by the population of the economy.
D)the non-accelerating inflation rate of unemployment (NAIRU).
Q3) In comparison to when monetary policy is not contractionary, under a contractionary monetary policy, the unemployment rate is____ and the inflation rate is____ over time.
A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher
Q4) What are the five major costs of anticipated inflation?
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Chapter 18: Rules for Monetary Policy
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Q1) Which equation best represents the Taylor rule?
A)i = r* + ?<sup>T</sup> + {w<sub>1</sub> × [(Y ? Y*)/Y*] × 100} + [w<sub>2</sub> × (? ? ?<sup>T</sup>)]
B)i = r* + ? + {w<sub>1</sub> × [(Y ? Y*)/Y*] × 100} + [w<sub>2</sub> × (? ? ?<sup>T</sup>)]
C)i = r + ?<sup>T</sup> + {w<sub>1</sub> × [(Y ? Y*)/Y*] × 100} + [w<sub>2</sub> × (? ? ?<sup>T</sup>)]
D)i = r + ? + {w<sub>1</sub> × [(Y ? Y*)/Y*] × 100} + (w<sub>2</sub> × ?)
Q2) Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?
A)The economy will enter into a recession.
B)The level of economic activity will increase.
C)The actual inflation rate will rise.
D)The federal funds rate will fall.
Q3) Monetarists think that
A)money growth is closely related to inflation in the long run.
B)money demand is unstable in the long run.
C)the central should focus on short run economic fluctuations.
D)the central bank should rely on discretionary policy making.
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