Course Introduction
Monetary Economics
Solved Exam Questions
Monetary Economics explores the role of money and monetary institutions in shaping economic activity and policy. The course covers the theoretical foundations of money, the functions of central banks, the tools and objectives of monetary policy, and the impact of money supply and interest rates on inflation, output, and employment. Students will analyze how monetary policy interacts with financial markets and the real economy, examine models such as the IS-LM framework, and discuss current debates surrounding central bank independence and unconventional monetary strategies. Through case studies and empirical examples, the course provides a comprehensive understanding of the mechanisms and implications of monetary policy in both domestic and international contexts.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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Page 2
Chapter 1: Introduction to Macroeconomics
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Q1) Why is wage and price flexibility crucial to the idea of the "invisible hand?"
Answer: Wage and price flexibility is crucial because in a free-market system,changes in wages and prices are the signals that coordinate the actions of people and businesses in the economy.
Q2) Critics of the government's fiscal policies argued that government deficits A)prevented capital from flowing into the United States.
B)were linked to the excess of imports over exports that occurred in the 1980s.
C)caused the level of unemployment in the United States to increase during the 1980s. D)had directly contributed to a decline in the level of demand in the American economy.
Answer: B
Q3) The unemployment rate is the
A)number of unemployed divided by the number of employed.
B)number of employed divided by the number of unemployed.
C)number of unemployed divided by the labor force.
D)labor force divided by the number of unemployed.
Answer: C
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3
Chapter 2: The Measurement and Structure of the National Economy
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Q1) Describe the three different approaches to measuring the amount of economic activity that occurs during a period of time and explain why they all give identical measurements.
Answer: The approaches are the product approach,which measures the amount of output produced; the income approach,which measures the incomes received by producers of output; and the expenditure approach,which measures the amount of spending by the ultimate purchasers of output.They give identical measurements because everything that is produced is purchased by someone,so the expenditure and product approaches must be equal,and because anything that is purchased means that someone is earning income in the same amount,so the expenditure and income approaches must be equal.
Q2) Marvin's Metal Company produces screws that it sells to Ford,which uses the screws as a component of its cars.In the national income accounts,the screws are classified as A)inventory.
B)final goods.
C)capital goods.
D)intermediate goods.
Answer: D
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) A technological breakthrough in using photons for computers will increase the productivity of those working with computers a hundredfold.You would expect this breakthrough to shift the
A)marginal product of labor curve up and to the right,raising the quantity of labor demanded at any given real wage.
B)marginal product of labor curve down and to the left,reducing the quantity of labor demanded at any given real wage.
C)labor supply curve up,reducing the quantity of labor demanded at any given real wage.
D)labor supply curve down,raising the quantity of labor demanded at any given real wage.
Answer: A
Q2) The equilibrium level of employment,achieved after the complete adjustment of wages and prices,is known as the A)zero-unemployment level of employment.
B)natural state.
C)invisible handshake.
D)full-employment level of employment.
Answer: D
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) When a person gets an increase in current income,what is likely to happen to consumption and saving?
A)Consumption increases and saving increases.
B)Consumption increases and saving decreases.
C)Consumption decreases and saving increases.
D)Consumption decreases and saving decreases.
Q2) Cummins,Hubbard,and Hassett found that investment responded to a tax change that affected the user cost of capital,with an elasticity of A)0)
B)-0.25.
C)-0.66.
D)-1.
Q3) Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?
A)There may be international capital inflows and outflows.
B)Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes.
C)There may be constraints on the level of government spending.
D)There may be constraints on the level of government taxation.
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) If a freeze destroys much of the crop of an agricultural nation,then
A)the desired investment curve would shift to the left.
B)the desired investment curve would shift to the right.
C)net foreign lending would increase.
D)net foreign lending would decrease.
Q2) In a large open economy like the United States,an increased government budget deficit which reduces national saving
A)reduces investment and improves the current account balance.
B)reduces investment and reduces the current account balance.
C)has no effect on investment,but reduces the current account balance.
D)has no effect on either investment or the current account balance.
Q3) In a small open economy,Sd = 200 + 500 rw and Id = 300 - 200 rw.If rw = 0.1,then net exports = A)-50. B)-30. C)30. D)50.
Q4) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Q1) Why do some people think that the productivity slowdown since 1973 is just a return to normalcy after fast productivity growth during the previous 25 years?
A)Productivity growth of the previous 25 years was abnormally low.
B)The Great Depression and World War II had prevented technological opportunities from being exploited.
C)The United States is the only country to face the slowdown,due to poor regulatory decisions.
D)The United States has allowed countries like Japan to steal its technological breakthroughs.
Q2) In the textbook model of endogenous growth,long-run output growth would decline if there were either a ________ in the saving rate or a ________ in the depreciation rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) What types of government policies can increase long-run living standards?
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Chapter 7: The Asset Market, Money, and Prices
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Q1) A one-year bond has an interest rate of 5% today.Investors expect that in one year,a one year bond will have an interest rate equal to 7%.According to the expectations theory of the term structure of interest rates,in equilibrium,a two-year bond today will have an interest rate equal to
A)3)0%.
B)5)0%.
C)5)5%.
D)6)0%.
Q2) Which of the following statements about M1 and M2 is not true?
A)Transaction accounts are part of M1.
B)M2 is more liquid than M1.
C)M2 is larger than M1.
D)Transaction accounts are part of M2.
Q3) The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because
A)the expectations theory doesn't account for taxes.
B)a risk premium exists.
C)an inflation premium must be added to long-term bonds.
D)the Fed can only control short-term interest rates.
Q4) Give five examples of factors that could reduce the demand for money.
Page 9
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Chapter 8: Business Cycles
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Sample Questions
Q1) Which of the following macroeconomic variables is procyclical and lags the business cycle?
A)Business fixed investment
B)Employment
C)Stock prices
D)Nominal interest rates
Q2) Stock and Watson found that monetary policy was responsible for about ________% of the reduction in output volatility that occurred in the mid-1980s.
A)0 to 10
B)10 to 20
C)20 to 30
D)30 to 40
Q3) Identify the comovement (i.e.,direction and timing)of the following variables over a business cycle: (a)industrial production; (b)unemployment; (c)nominal interest rates; (d)nominal money supply growth; and (e)investment.
Q4) What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker,would you rely on them?
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Chapter 9: The IS-LM/AD-AS Model
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Q1) An increase in the expected future marginal product of capital would cause the IS curve to
A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)remain unchanged if firms face borrowing constraints; otherwise,shift down and to the left.
Q2) A temporary supply shock,such as a bumper crop,would
A)shift the FE line to the right and leave the IS curve unchanged.
B)shift the FE line to the left and shift the IS curve up and to the right.
C)shift the FE line to the left and leave the IS curve unchanged.
D)have no effect on the FE line.
Q3) Suppose the Federal Reserve's short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate.What would happen to money supply if there were a reduction in government purchases? Given the Fed's policy,what would happen in the very short run (before general equilibrium is restored)to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium?
Q4) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Q1) The most common measure of productivity shocks used by real business cycle theorists is
A)the Solow residual.
B)average labor productivity.
C)the change in the capital stock.
D)unit labor costs.
Q2) During a recession,would classical economists propose that changes in government spending or taxes be used to improve economic conditions? Briefly explain.
Q3) An adverse supply shock would directly ________ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor.It would also indirectly ________ average labor productivity through changes in the level of employment.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q4) Define real shocks,define nominal shocks,and give an example of each.
Q5) According to the real business cycle theory,what is the principal cause of business cycle fluctuations?
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Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Q1) If firms are price setters,a small decline in the demand for their outputs will cause them to
A)reduce price and reduce the level of output produced.
B)reduce output in the short run,but reduce price in the long run.
C)reduce price in the short run,but reduce output only in the long run.
D)increase price in the short run to offset the effect on profits of a decline in output.
Q2) In the Keynesian model,what are the effects (on output,the real interest rate,and the price level)of an adverse productivity (i.e.,aggregate supply)shock?
Q3) In the Keynesian model in the long run,a decrease in the money supply will cause
A)a decrease in output and an increase in the real interest rate.
B)an increase in the real interest rate but no change in output.
C)a decrease in the real interest rate and a decrease in output.
D)no change in either the real interest rate or output.
Q4) A firm is a price taker if it
A)always sells its output at the industry-determined price.
B)takes consumer demand into consideration in setting its price.
C)takes its production costs into consideration in setting its price.
D)uses a pricing strategy to gain market share.
Page 13
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Chapter 12: Unemployment and Inflation
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Q1) One reason for the fall in the natural rate of unemployment since 1980 is A)changes in the demographic composition of the work force.
B)the decline in inflation.
C)increased competition from foreign workers.
D)the depreciation of the dollar relative to foreign currencies.
Q2) Ball's research showed that the sacrifice ratio
A)was the same for all countries.
B)was nearly zero for most countries.
C)was about 10 for all countries except the United States,where it was about 2.
D)varied considerably across countries.
Q3) Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about
A)0)
B)1)
C)2)
D)3)
Q4) Describe the major costs of inflation,being sure to distinguish between anticipated and unanticipated inflation.
Q5) What is the Lucas critique,and why was it so important to macroeconomists in the 1970s?
Page 14
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Chapter 13: Exchange Rates,Business Cycles,and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) Which of the following changes would cause American net exports to increase?
A)An increase in the real value of the dollar
B)An increase in American income
C)An increase in foreign income
D)A shift in demand by American consumers away from domestically produced goods
Q2) A decrease in the foreign real interest rate would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.
A)rise; shift up
B)rise; shift down
C)fall; shift up
D)fall; shift down
Q3) Purchasing power parity means that
A)enom = PFor / P.
B)P = PFor.
C)P = enom / PFor.
D)enom = mc2.
Q4) Describe the effects of a rise in the domestic real interest rate on the exchange rate and on both domestic and foreign net exports.
Q5) What is purchasing power parity? Why might it not hold?
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Chapter 14: Monetary Policy and the Federal Reserve System
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Q1) What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
Q2) When the Fed increases the quantity of assets it owns,it is said to be engaging in A)credit easing.
B)forward guidance.
C)quantitative easing.
D)a maturity extension program.
Q3) In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is A)1 - res.
B)1 + res.
C)1/res.
D)res2
Q4) Describe,in general terms,the lags in the effects of monetary policy on interest rates,output,and prices.Be sure to note how long it takes each variable to respond to policy changes.
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Chapter 15: Government Spending and Its Financing
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Q1) A decreased government deficit created by a lump-sum tax increase will increase national saving if
A)the value of government bonds outstanding grows slower than the public's wealth.
B)it causes consumption to fall.
C)the government runs a primary surplus as a result.
D)the real interest rate is less than the growth rate of real GNP.
Q2) Who bears the burden of the government debt? Explain why.Under what circumstances is there no burden to be borne?
Q3) When did the United States suffer hyperinflation?
A)Revolutionary War
B)War of 1812
C)World War II
D)Korean War
Q4) Suppose that real GDP is 10,000 and remains constant,nominal GDP is initially 30,000,inflation is 3%,and the debt-GDP ratio is 0.7.Find the largest nominal deficit that the government can run without raising the debt-GDP ratio.
Q5) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
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