Economics of Money and Banking
Midterm Exam
Course Introduction
This course offers a comprehensive exploration of the fundamental concepts and mechanisms of money, banking, and financial institutions. It covers the role of money in the economy, the structure and functions of central banks, and the process of monetary policy formulation and implementation. Students will analyze the workings of the banking system, including the creation of money, the regulation and supervision of banks, and their role in economic stability. The course also examines the impact of interest rates, inflation, and exchange rates on economic activity, and discusses current issues and developments in global banking and financial markets. Through theoretical frameworks and real-world case studies, students will gain a thorough understanding of how money and banking interact to influence broader economic outcomes.
Recommended Textbook
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) An equation that relates the interest rate to the output gap and the inflation rate is
A)the Phillips relation.
B)the Sharpe ratio.
C)Okun's law.
D)the Taylor rule.
Answer: D
Q2) Earning interest on past interest is referred to as
A)present value.
B)super interest.
C)compounding.
D)discounting.
Answer: C
Q3) Which of the following is NOT a financial policymaker?
A)Securities and Exchange Commission (SEC)
B)Federal Deposit Insurance Corporation (FDIC)
C)Consumer Financial Protection Bureau (CFPB)
D)Federal Reserve System (the Fed)
Answer: C
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Chapter 2: The Financial System and the Economy
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Q1) Beth's financial adviser has asked her to invest in a number of securities rather than investing in one.This is an example of A)securitization.
B)free-riding.
C)sterilization.
D)diversification.
Answer: D
Q2) Everything else remaining unchanged, an increase in the supply of security A and a decrease in the demand for security B will cause the price of security A to_____ and the price of security B to_____ .
A)fall; fall
B)fall; rise
C)rise; fall
D)rise; rise
Answer: A
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Chapter 3: Money and Payments
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Q1) Another name for commodity money is
A)fiat money.
B)glitter money.
C)full-bodied money.
D)inside money.
Answer: C
Q2) The reason why people are putting more funds in checking and savings account rather than in time deposits is that
A)checking and savings account accept fiat money, while time deposits do not.
B)long-term interest rates have declined in recent years, relative to short term interest rates.
C)liquidity of money held in checking and savings accounts is less than that of money held in time deposits.
D)only a few banks accept time deposits, while most banks accept checking and savings accounts.
Answer: B
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Chapter 4: Present Value
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Q1) A debt security that pays interest forever and never repays the principal is a A)fiduciary obligation.
B)federal funds loans.
C)perpetuity.
D)junk bond.
Q2) John spends $4,000 on a perpetuity that pays $150 each year.The yield to maturity of this perpetuity is
A)1.5%.
B)3.75%.
C)6.2 %.
D)15%.
Q3) 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.
Q4) Consider a fixed-payment security that pays $250 at the end of every year for eight years.If the annual rate of discount is 3 percent, calculate the present value of the bond.
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Chapter 5: The Structure of Interest Rates
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Sample Questions
Q1) The process of turning assets such as mortgages into bonds sold to investors is A)default.
B)standard deviation.
C)standardization.
D)securitization.
Q2) A debt security sold by large corporations to raise shortterm funds is known as a(n)
A)commercial paper.
B)treasury bill.
C)debenture.
D)bond.
Q3) 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.
Q4) Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur.
Explain why the spread may matter.
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Chapter 6: Real Interest Rates
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Q1) According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1 percent, then the nominal interest rate will_____percentage points and the real interest rate will decline by______ percentage points.
A)decline by 0; 2
B)increase by 2; 2
C)increase by 0; 0
D)decline by 2; 0 percentage points and the real interest rate will decline by
Q2) Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate rises from 3 percent to 6 percent, the expected real interest rate
A)rises by 0.75 percent.
B)rises by 1.25 percent.
C)falls by 1.25 percent.
D)falls by 0.75 percent.
Q3) How can the expected inflation rate be measured?
Q4) Explain why inflation risk is a problem for investors.
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Page 8
Chapter 7: Stocks and Other Assets
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Q1) An investor expects earnings from a stock to grow at a constant rate of 2% over time and the investors' rate of discount is constant at 5%.If earnings last year were $37, then the fundamental value of the stock would be
A)$74.
B)$111.
C)$1,258.
D)$11,100.
Q2) A stock index tells you
A)the average price of a collection of stocks.
B)the expected changes in the prices of select stocks over a year.
C)where to buy or sell stocks.
D)what stocks to buy or sell.
Q3) A place where people buy or sell stocks is known as a stock
A)exchange.
B)index.
C)fund.
D)holding.
Q4) Write a formula for the equity premium.
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Chapter 8: How Banks Work
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Q1) The S&L crisis in the late 1970s and early 1980s was made much worse by
A)moral hazard, when regulators failed to close bankrupt S&Ls, which in turn caused a credit crunch.
B)adverse selection, when commercial banks were allowed to buy financially sound S&Ls but did not buy bankrupt S&Ls.
C)asymmetric information, because the government did not realize the bad financial condition of the S&Ls.
D)the regulatory dialectic.
Q2) Which size category of banks generally has the largest spread?
A)Small banks
B)Medium-sized banks
C)The 100 largest banks
D)The 10 largest banks
Q3) Banks earn profit by
A)borrowing from depositors at a lower interest rate, and lending those funds at a higher interest rate.
B)reducing the service charges for safety vaults and ATM facilities.
C)lending more loans to non-risky business firms.
D)reducing the amount of transaction deposits.
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Page 10
Chapter 9: Governments Role in Banking
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Q1) The funds used to pay for FDIC insurance coverage come from
A)insurance premiums paid by depositors.
B)insurance premiums paid by banks.
C)U.S.government tax revenue.
D)taxes imposed on interest income.
Q2) Which act set a limit to prevent a bank from merging with others if it would increase its liabilities to more than 10 percent of national bank liabilities?
A)The Gramm-Leach-Bliley Act
B)The Community Reinvestment Act
C)The Dodd-Frank Act
D)The Interstate Banking and Branching Efficiency Act
Q3) Under the assistance method of handling a bank failure, the FDIC
A)takes over the bank and controls its operations.
B)closes the bank, sells off the assets, pays off insured depositors, and then pays off creditors of the bank if funds remain.
C)keeps the bank open and lends funds to it so that it survives.
D)finds a buyer for the bank, giving the buyer the good assets of the bank, and assumes the bad loans of the bank.
Q4) What is the Basel III Accord?
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Chapter 10: Economics Growth and Business Cycles
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Q1) Suppose a country has a population of 122 million, of which 71 million are in the working-age population.Of those, 16 million are not in the labor force and 50 million are employed.
a.Calculate the number of people who are in the labor force.
b.Calculate the number of people who are unemployed.
c.Calculate the labor-force participation rate.
d.Calculate the unemployment rate.
Q2) A period when output, income, and employment are falling is known as A)a recession.
B)an expansion.
C)a peak.
D)a trough.
Q3) In which of the following periods was unemployment the highest in the U.S.economy?
A)Great Depression
B)Economic liftoff period
C)Long boom period
D)Reorganization period
Q4) Explain the four major theories of the causes of the business cycle.
Q5) Describe classical economists.
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Chapter 11: Modeling Money
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Sample Questions
Q1) Suppose the money demand function is M<sup>D</sup> = P × [(0.25 × Y) ? (100 × i)], Where Y is expressed in billions of dollars and i is expressed in percentage points.The term [(0.25 × Y) ? (100 × i)]
Is called
A)the nominal money-demand function.
B)the nominal money-supply function.
C)the real money-supply function.
D)the real money-demand function.
Q2) Describe three different changes in the ATM model that would increase the time between ATM visits and increase the quantity of money demanded.
Q3) Consider the standard dynamic model of money in which the economy is in a steady state with constant levels of output, inflation, and the nominal interest rate.Suppose initially that the steady-state nominal interest rate is 4 percent, the steady-state inflation rate is 2% percent, and the growth rate of the money supply is 2 percent.How will an unanticipated permanent decline in the growth rate of the money supply to 0 percent affect the level of output, the inflation rate, and the nominal interest rate?
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Q1) Describe what monetary policymakers should do if they want to keep the price level in an economy permanently low.?
Q2) With the price level on the vertical axis and output on the horizontal axis, the short-run aggregate-supply curve
A)is vertical.
B)is downward-sloping.
C)is horizontal.
D)is upward-sloping.
Q3) Suppose another breakthrough in computer technology greatly increases total factor productivity.Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.
Q4) A rise in the real interest rate, everything else remaining unchanged, will cause household investment in housing to A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.
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Chapter 13: Modern Macroeconomic Models
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Q1) Under which of the following situations can fiscal policy affect people's expectations?
A)If the interest rate on borrowing is higher than the interest rate on lending
B)If the interest rate on lending is more than the interest rate on borrowing
C)If the interest rate on borrowing and lending are the same
D)If the interest rate on lending changes more than a change in the interest rate on borrowing
Q2) In the two-period model, suppose a household's income in the first period is $50,000, income in the second period is $60,000, and the real interest rate is 25 percent.Draw a diagram showing the budget constraint.Now, suppose the real interest rate declines to 20 percent.Draw the new budget constraint.For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis.If the household decides that its consumption in period 1 should always be one half of the present value of income, determine whether the household is worse off or better off because of the decline in the real interest rate.Show your work.
Q3) Can VARs be used to analyze the effects of monetary policy?
Q4) Describe the general procedures followed by DSGE researchers creating a new model.
Q5) Describe the new neoclassical synthesis.
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Chapter 14: Economic Interdependence
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Q1) A correlation of _____between output growth in two regions would mean that output growth in both regionschanged at exactly the same time and by the same proportionate amount.
A)0
B)less than 0
C)1.0
D)?100
Q2) The balance on the current account plus the balance on the capital and financial account equals
A)0.
B)1 .
C)-1.
D)100.
Q3) Assume that the only good traded between Mexico, the U.S., and Canada is chicken, which is produced by all three countries.If the cost of producing a pound of chicken is 5 pesos in Mexico, 1 U.S.dollar in the U.S., and 2 Canadian dollars in Canada, and if the law of one price holds, what are each of the exchange rates between the three countries?
Q4) How should a country respond when foreign investors withdraw investments from that country?
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Chapter 15: The Federal Reserve System
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Q1) The main advisors of the Chairman of the Federal Reserve Board of Governors are
A)private economists hired as consultants.
B)the Council of Economic Advisors.
C)the U.S.Treasury Department.
D)the directors of the three staff divisions of the Board.
Q2) Which of the following statements is true?
A)If the Fed wants to decrease money supply, it sells government securities.
B)If the Fed wants to increase money supply, it sells government securities.
C)If the Fed wants to decrease money demand, it sells government securities.
D)If the Fed wants to increase money demand, it sells government securities.
Q3) Why are the deliberations of the FOMC kept secret?
Q4) Under which Fed Chairman did the inflation rate decline the most?
A)William McChesney Martin
B)Arthur Burns
C)Paul Volcker
D)Alan Greenspan
Q5) Describe the relationship between central bank independence and macroeconomic variables such as inflation and growth.
Q6) Are there any benefits to having both banking supervisors and economic researchers working together at a Reserve bank?
Page 17
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Chapter 16: Monetary Control
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Q1) Which of the following is true of an economy that has hit the zero lower bound?
A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)Any increase increase in its monetary base is exactly offset by a decline in its money multipliers.
C)Any short-term bond would provide a return that is much lower than the return from holding cash.
D)The economy's interest rates decline when there is an increase in the monetary base.
Q2) If the Fed decides to tighten monetary policy, it uses _____to_____ the money supply.
A)defensive open-market operations; decrease
B)dynamic open-market operations; increase
C)defensive open-market operations; increase
D)dynamic open-market operations; decrease
Q3) If the excess reserves held by banks increase, the money multiplier is likely to A)rise. B)fall.
C)remain unchanged.
D)rise at first, then decline later.
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Chapter 17: Monetary Policy: Goals and Tradeoffs
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Q1) An equation that summarizes the total cost to the economy when output differs from potential and inflation rate differs from the ideal inflation rate is referred to as the A)cost of disinflation.
B)Fed's objective function.
C)Sharpe ratio.
D)Phillips curve.
Q2) If actual output is denoted y and potential output is denoted y*, the output gap is
A)[(y y*)/ y*] × 100.
B)[(y y*)/ y] × 100.
C)[(y* y)/ y*] × 100.
D)[(y* y)/ y] × 100.
Q3) If the actual inflation rate in an economy is 6% and the ideal inflation rate is 4%, the inflation gap in the economy is A)2%.
B)4%.
C)2%.
D)6%.
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) If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?
A) 3 percent
B) 1 percent
C)+1 percent
D)+3 percent
Q2) When a central bank decreases money growth, the bank is said to_______ monetary policy.
A)tighten
B)loosen
C)?destabilize
D)ease
Q3) The Taylor rule implies that the nominal federal funds rate should be increased if there is a_____ output gap or a_____ inflation gap.?
A)?positive? positive
B)?positive? negative
C)?negative? positive
D)?negative? negative
Q4) What challenges do policymakers and researchers face in using the Taylor rule?
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