Money and Banking
Final Test Solutions
Course Introduction
This course offers an in-depth exploration of the role of money and banking in the modern economy. Students will examine the functions and types of money, the structure and operation of financial institutions, and the fundamentals of financial markets. Key topics include the creation of money, the regulation and supervision of banks, the conduct of monetary policy by central banks, and the impact of interest rates on economic activities. Through case studies and real-world examples, the course also analyzes the interaction between monetary policy, inflation, and economic stability, providing students with a comprehensive understanding of the financial systems crucial role in economic development.
Recommended Textbook
Macroeconomics 7th Edition by Andrew Abel
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1223 Verified Questions
1223 Flashcards
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) In 1993,the debate heated up in the United States about the North American Free Trade Agreement (NAFTA),which proposed to reduce barriers to trade (such as taxes on or limits to imports)among Canada,the United States,and Mexico.Some people opposed strongly the agreement,arguing that an influx of foreign goods under NAFTA would disrupt the U.S.economy,harm domestic industries,and throw American workers out of work.How might a classical economist respond to these concerns? Would you expect a Keynesian economist to be more or less sympathetic to these concerns than the classical economist? Why?
Answer: A classical economist might argue that the economy would work more efficiently with NAFTA because it reduces trade barriers,making the invisible hand work even better.Workers could specialize even more than before so that total output produced by all three countries would be more.Though the industrial mix might change in each country,wages and prices across industries would adjust quickly,and people in industries that closed down in a particular country would quickly find new jobs. A Keynesian economist might be more sympathetic to concerns about NAFTA because of the belief that adjustment to the changes will not occur quickly.As a result,people in particular industries in a country may become unemployed.Wages won't adjust quickly to restore full employment,so some government action (like retraining programs to give displaced workers new skills)may be desirable.
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Page 3
Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) The Compagnie Naturelle sells mounted butterflies,using butterfly bait it buys from another firm for $20,000.It pays its workers $35,000,pays $1,000 in taxes,and has profits of $3,000.What is its value added?
A)$3000
B)$19,000
C)$39,000
D)$59,000
Answer: C
Q2) Consumer spending is spending by ________ households on final goods and services produced ________.
A)domestic; domestically and abroad
B)domestic; domestically
C)domestic and foreign; domestically and abroad
D)domestic and foreign; domestically
Answer: A
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) A permanent increase in the real wage rate has a ________ income effect on labor supply than a temporary increase in the real wage,so labor supply is ________ with a permanent wage increase than for a temporary wage increase.
A)larger; more
B)larger; less C)smaller; more D)smaller; less
Answer: B
Q2) If Jeff's wage rate rises,he decides to work fewer hours.From this,we can infer that
A)for Jeff,the substitution effect is greater than the income effect.
B)for Jeff,the substitution effect is equal to the income effect.
C)for Jeff,the substitution effect is less than the income effect.
D)Jeff is a nitwit.
Answer: C
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) Jane wants to save $1000 of current income.With an IRA,no taxes are paid on income or interest until the money is withdrawn in five years.Without an IRA,taxes must be paid whenever income or interest is received.Jane's federal/state tax bracket is 35%,and the nominal interest rate is 8%.
(a)How much money will Jane have if she puts her money in an IRA and withdraws the money in five years?
(b)How much money will Jane have if she does NOT put her money in an IRA,but rather in a regular (taxable)savings account,for five years?
(c)How much does Jane gain in five years by using an IRA rather than a regular savings account?
Q2) With a nominal interest rate of 4%,an expected inflation rate of 1%,and interest income taxed at a rate of 25%,what is the expected after-tax real interest rate?
A)3%
B)2%
C)1%
D)0%
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) If all international factor payment flows are investment income,then net investment income from abroad equals
A)net exports.
B)the current account balance.
C)the trade balance.
D)net factor payments from abroad.
Q2) A country's capital and financial account balance decreases if
A)its current account balance increases.
B)its income payment inflows on foreign assets decrease.
C)its domestic residents working abroad reduce the income they send home to their families.
D)foreigners increase their purchases of its existing assets.
Q3) If a U.S.company imports 10 Toyotas from Japan at $15,000 each,and the Japanese company buys airline tickets on a U.S.airline with the money,how does this affect the U.S.balance of payments accounts?
A)debit: merchandise trade; credit:capital and financial account
B)debit: capital and financial account; credit: merchandise trade
C)debit: merchandise trade; credit: services
D)debit: services; credit: merchandise trade
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) In the very long run,the level of consumption per worker can grow continually if
A)the saving rate continually falls.
B)the population growth rate continually rises.
C)productivity continually improves.
D)the depreciation rate continually rises.
Q2) Over the past year,output grew 6%,capital grew 2%,and labor grew 4%.If the elasticities of output with respect to capital and labor are 0.3 and 0.7,respectively,how much did productivity grow?
A)2.0%
B)2.6%
C)3.0%
D)3.3%
Q3) From one year to the next,a country's output rose from 4000 to 4500,its capital stock rose from 10,000 to 12,000,and its labor force declined from 2000 to 1750.Suppose a<sub>k</sub> = 0.3 and a<sub>n</sub> = 0.7.
(a)How much did capital contribute to economic growth over the year?
(b)How much did labor contribute to economic growth over the year?
(c)How much did productivity contribute to economic growth over the year?
Q4) 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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Sample Questions
Q1) Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?
Q2) What's the most common way for a central bank to reduce the money supply?
A)Collect higher taxes
B)Sell bonds to the public
C)Buy bonds from the government
D)Buy bonds from the public
Q3) People's best guesses about returns on assets are called A)expected returns.
B)liquidity.
C)risk.
D)the term structure of returns.
Q4) When a government prints money to finance its expenditures,it is likely to cause A)unemployment.
B)inflation.
C)deflation.
D)reductions in the use of barter.
Q5) Give five examples of factors that could reduce the demand for money.
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Chapter 8: Business Cycles
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Sample Questions
Q1) When plotted with the aggregate price level on the vertical axis and output on the horizontal axis,the long-run aggregate supply curve
A)slopes upward.
B)slopes downward.
C)is vertical.
D)is horizontal.
Q2) An economic variable that doesn't move in a consistent pattern with aggregate economic activity is called
A)procyclical.
B)countercyclical.
C)acyclical.
D)a leading variable.
Q3) The job finding rate
A)equals 1 minus the job loss rate.
B)remains constant over the business cycle.
C)rises in recessions.
D)rises in expansions.
Q4) How has the severity and duration of business cycles changed over time in the United States?
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Chapter 9: The Is-Lmad-As Model
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Sample Questions
Q1) The IS-LM model predicts that a temporary beneficial supply shock
A)increases output,national saving,and investment,but not the real interest rate.
B)increases output,national saving,and the real interest rate,but not investment.
C)increases the real interest rate,investment,and output,but not national saving.
D)increases output,national saving,investment,and the real interest rate.
Q2) Classical economists think general equilibrium is attained relatively quickly because
A)the real interest rate adjusts quickly.
B)the level of output adjusts quickly.
C)the real wage rate adjusts quickly.
D)the price level adjusts quickly.
Q3) The FE line shows the level of output at which the ________ market is in equilibrium.
A)Goods
B)Asset
C)Labor
D)Money
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Measures of the Solow residual show it to be
A)strongly procyclical.
B)mildly procyclical.
C)mildly countercyclical.
D)strongly countercyclical.
Q2) You and a friend are arguing over the issue of the nonneutrality of money.You believe that money is not neutral,and to prove your point you would cite all of the following EXCEPT
A)large gold discoveries that increased the money supply preceded an economic boom.
B)a change in monetary institutions preceded a boom or recession.
C)a change in the leadership of the Fed and its policy was followed by noticeable changes in the money supply and a recession or inflation.
D)the fact that every recession was preceded by a drop in the money supply.
Q3) Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.
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Page 12
Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) The gift exchange motive suggests that
A)workers value benefits like health insurance more than job security.
B)workers prefer a nice work environment,even if they must accept lower wages.
C)workers who feel well treated will work harder and more efficiently.
D)workers will shirk if they are paid a low wage.
Q2) A model in which workers won't be concerned about the possibility of being fired if they don't work hard,because their wage is so low,is called
A)a cost-benefit model.
B)a job-stress model.
C)a gift-exchange model.
D)a shirking model.
Q3) The idea that firms retain some workers in a recession,whom they would otherwise lay off,to avoid the costs of hiring and training,is called
A)the gift exchange motive.
B)worker pooling.
C)labor hoarding.
D)union busting.
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Page 13
Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) The costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation are called
A)menu costs.
B)shoe leather costs.
C)transactions costs.
D)imperfect competition costs.
Q2) A beneficial supply shock would cause
A)a movement up the short-run Phillips curve.
B)a movement down the short-run Phillips curve.
C)the short-run Phillips curve to shift upward and to the right.
D)the short-run Phillips curve to shift downward and to the left.
Q3) When the economy goes into a recession,there's an increase in
A)frictional unemployment.
B)structural unemployment.
C)cyclical unemployment.
D)voluntary unemployment.
Q4) If you were president of the United States,what would you do to reduce the natural rate of unemployment? Propose at least three different methods.
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Page 14
Chapter 13: Exchange Rates,business Cycles,and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) When the British pound rises in value relative to other currencies,then
A)goods imported into Britain rise in price.
B)British exports rise in price.
C)neither British exports nor imports rise in price.
D)both British exports and imports rise in price.
Q2) Suppose the real exchange rate is 10,the domestic price level is 8,and the foreign price level is 4.
(a)What is the nominal exchange rate?
(b)Suppose the real exchange rate rises by 10%,the inflation rate in the domestic country is 6%,and the inflation rate in the foreign country is 4%.By what percentage does the nominal exchange rate change?
(c)Suppose the nominal exchange rate rises by 5%,the real exchange rate rises by 8%,and domestic inflation is 3%.What is the foreign inflation rate?
Q3) A depreciation of the dollar causes
A)a decrease in U.S.exports.
B)an increase in U.S.imports.
C)an increase in the prices of U.S.imports.
D)an increase in the prices of U.S.exports.
Q4) 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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Sample Questions
Q1) If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a
A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.
Q2) Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to
A)$2 million.
B)$3 million.
C)$5 million.
D)$10 million.
Q3) Since the 1930s,the Fed's most important tool for controlling the money supply has been
A)setting the discount rate.
B)setting reserve requirements.
C)moral suasion.
D)open-market operations.
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) State and local governments rely on ________ as their primary source of tax receipts.
A)personal taxes
B)contributions for social insurance
C)indirect business taxes
D)corporate taxes
Q2) The current deficit minus net interest is called the
A)primary deficit.
B)net current deficit.
C)current surplus.
D)primary current deficit.
Q3) When did the United States suffer hyperinflation?
A)Revolutionary War
B)War of 1812
C)World War II
D)Korean War
Q4) Why is the Social Security system in crisis at a time when it's running large surpluses? What's the source of the problem? What solutions have been proposed?
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