Economics of Money and Banking
Mock Exam
Course Introduction
This course explores the fundamental principles of money, banking, and financial markets, examining their roles within the broader economy. Students will study the structure and functions of financial institutions, central banking, and monetary policy. Topics include the creation and regulation of money, interest rate determination, the behavior of banks and other financial intermediaries, and the impact of monetary policy on economic stability and growth. Through theoretical concepts and real-world examples, the course emphasizes how money and banking systems influence inflation, employment, and macroeconomic performance.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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18 Chapters
1993 Verified Questions
1993 Flashcards
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) The Troubled Asset Relief Program (TARP)allowed
A) the Treasury to inject funds into commercial banks in return for stock in the banks.
B) the Fed to provide funds to commercial banks in return for stock.
C) the Treasury to insure bank deposits at major U.S. banks.
D) the Fed to make loans to banks as the lender of last resort.
Answer: A
Q2) All of the following took place during the economic crisis that began in 2007 EXCEPT A) the financial system was disrupted.
B) large portions of the U.S. economy were cut off from the funds they needed to thrive.
C) there was a devastating decline in the production of goods and services throughout the economy.
D) unlike households, most businesses still had easy access to funds.
Answer: D
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3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) Why do individuals hold money when it does NOT provide the services that,say,a house does?
A) Money is the most liquid asset.
B) Money is the only form in which wealth may be held.
C) Money increases in value faster than other assets.
D) Money is useful in avoiding taxes on certain transactions.
Answer: A
Q2) Which of the following is a form of e-money?
A) gold
B) PayPal
C) an American Express card
D) traveler's checks
Answer: B
Q3) According to the quantity theory of money,the growth rate of which of the following is zero?
A) money supply
B) velocity
C) real GDP
D) price level
Answer: B
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Which of the following is NOT a discount bond?
A) a U.S. savings bond
B) a U.S. Treasury bill
C) a U.S. Treasury note
D) a zero-coupon bond
Answer: C
Q2) The yield to maturity on a new one-year discount bond equals
A) (FV- P)/P.
B) (D - FV)/P.
C) (FV - P)/FV.
D) (P - FV)/FV.
Answer: A
Q3) If the real interest rate is -1.4% and the nominal interest rate is 0.6%,expected inflation equals
A) -2%.
B) -0.8%.
C) 0.8%.
D) 2%.
Answer: D
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Which of the following will cause the money demand curve to shift to the left?
A) a decrease in real GDP
B) an increase in the price level
C) a decrease in the nominal interest rate
D) an increase in the supply of money
Q2) Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the financial crisis?
A) increased demand for U.S. government bonds
B) the perceived riskiness of alternative investments such as stocks
C) low interest rates on corporate bonds and similar short-term assets
D) increases in expected inflation
Q3) The demand curve for bonds would be shifted to the left by
A) an increase in expected returns on other assets.
B) a decrease in the information costs of bonds relative to other assets.
C) a decrease in expected inflation.
D) an increase in the liquidity of bonds relative to other assets.
Q4) Suppose that businesses in Japan reduce their spending on plant and equipment.What will be the effect on spending on plant and equipment by businesses in the United States?
Q5) What is a black swan event?
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) The default risk premium fluctuates mainly
A) because bond rating agencies tend to be inconsistent in their ratings of bonds.
B) because risk-neutral investors will often become risk-averse as time passes.
C) because taxes tend to rise over the long run.
D) as new information about a borrower's creditworthiness becomes available.
Q2) All of the following are names for bonds receiving low ratings EXCEPT A) junk.
B) garbage.
C) high yield.
D) speculative.
Q3) The term structure is usually defined with yields on which securities?
A) corporate bonds
B) commercial paper
C) U.S. Treasury securities
D) municipal bonds
Q4) Why did some economists and policymakers think ratings agencies had a conflict of interest leading up to the Financial Crisis of 2007-2009?
Q5) How do ratings agencies earn income?
Q6) What are the economic implications of an inverted yield curve?
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) Mean reversion refers to the tendency for
A) futures prices to revert to the prices of the underlying securities.
B) the long-run mean return on stocks to equal the long-run mean return on bonds.
C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future.
D) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future.
Q2) Noise traders
A) tend to lose money on stock trades, but help to stabilize the market.
B) tend to make higher returns than do "buy-and-hold" investors.
C) create additional risk in the market by increasing price fluctuations.
D) trade only when they have inside information.
Q3) Which of the following is NOT a popular stock market index?
A) Dow Jones Industrial Average
B) NASDAQ
C) S&P 500
D) Moody's Market Index
Q4) Explain how a bubble can develop in the market for an asset.
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) Forward transactions originated in the market for A) common stock.
B) corporate bonds.
C) government bonds.
D) agricultural and other commodities.
Q2) Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?
A) acquire a derivative that increases in value if grape prices increase
B) acquire a derivative that increases in value if grape jelly prices increase
C) sell a derivative that increases in value if grape prices increase
D) sell a derivative that increases in value if grape jelly prices increase
Q3) The price at which an option may be exercised is called the A) market price.
B) equilibrium price.
C) strike price.
D) fixed price.
Q4) Describe two useful purposes served by speculators in derivatives markets.
Q5) What does it mean to "cover a short"?
Q6) Why must the spot price equal the futures price on the settlement date?
Q7) Why are forward contracts typically illiquid?
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) The largest financial market in the world is the
A) stock market.
B) bond market.
C) options market.
D) foreign exchange market.
Q2) When a country's real exchange rate appreciates
A) its nominal exchange rate must also have appreciated.
B) its nominal exchange rate must have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.
Q3) If the British pound depreciates against the U.S.dollar
A) British businesses gain by an increase in the dollar price of exports to the United States.
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain.
C) British consumers lose by an increase in the pound price of U.S. exports to Britain.
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) All of the following are factors that determine whether a country's economy can provide a high standard of living for its residents and whether that standard of living can increase over time EXCEPT
A) the ability of the country's businesses to accumulate capital.
B) the ability of the country's businesses to adopt the latest technology.
C) the ability of the country's government to provide a legal framework that protects property rights and enforces contracts.
D) the ability of the country's government to print money in response to high levels of inflation.
Q2) Small investors face
A) high transactions costs in financial markets.
B) low transactions costs in financial markets.
C) high transactions costs in financial intermediaries.
D) high information costs in financial intermediaries.
Q3) A firm's net worth is equal to the value of its
A) assets minus the value of its liabilities.
B) liabilities minus the value of its assets.
C) common stock minus the value of its outstanding bonds.
D) outstanding bonds minus the value of its common stock.
Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Banks in the United States have been prohibited from investing deposits in significant equity holdings since the passage of the
A) Bank Reform Act of 1980.
B) Securities and Exchange Acts of 1933 and 1934.
C) National Banking Acts of 1863 and 1864.
D) Sherman Antitrust Act of 1890.
Q2) On a bank's balance sheet,"borrowings" are
A) loans to households.
B) loans to businesses.
C) nondeposit liabilities.
D) U.S. Treasury securities.
Q3) Which of the following is a bank asset?
A) checkable deposits
B) savings deposits
C) borrowings in the federal funds market
D) cash items in the process of collection
Q4) What is an important difference between certificates of deposits (CDs)worth less than $100,000 compared to those worth $100,000 or more?
Q5) How does moral hazard contribute to high bank leverage?
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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Sample Questions
Q1) "Nonbank" financial institutions include all of the following EXCEPT
A) investment banks.
B) hedge funds.
C) the Federal Reserve.
D) mutual funds.
Q2) What are the two main objectives of policymakers in restoring the Glass-Steagall Act?
A) reduce risk in the financial system and reduce the size of banks
B) increase liquidity of hedge fund investors and loosen credit restrictions on small corporations
C) regulate crowdfunding and prohibit insurance companies from becoming investment banks
D) increase regulations on community banks and prohibit branch banking
Q3) Hedge funds have been criticized for
A) their heavy use of short selling.
B) their inability to mobilize a large amount of funds.
C) forcing quick price changes that reduce market inefficiencies.
D) excessive use of hedging strategies.
Q4) What information is typically included in a prospectus?
Page 13
Q5) How is the use of leverage a "double-edged sword"?
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Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) What does it mean for a money market mutual fund to "break the buck"?
A) The value of its share declines below $1.
B) It incurs losses on its investments.
C) It increases its fees to more than 1% of net asset value.
D) It is unable to meet the demand for withdrawals by investors.
Q2) The primary motive for financial innovation during the regulatory process is A) profit.
B) adherence to the new regulations.
C) return to the way business was conducted prior to the new regulations.
D) increase coordination with other financial institutions.
Q3) The original intention of the Fed's role as lender of last resort was to make loans to banks that were
A) not illiquid nor insolvent.
B) illiquid, but not insolvent.
C) insolvent, but not illiquid.
D) both illiquid and insolvent.
Q4) What are the four explanations given as to why the Fed did not intervene to stabilize the banking system during the Great Depression?
Q5) What are two ways that governments can prevent bank panics?
Q6) What are the two most common reasons for a sovereign debt crisis?
Page 14
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) Which of the following is NOT a role of Federal Reserve Banks?
A) conduct discount lending
B) serve on the FOMC
C) set the interest rate on reserves
D) manage check clearing in the banking system
Q2) In 1976,Congress passed legislation which requires most federal government agencies to give public notice before a meeting.This legislation is the
A) Increased Transparency Act.
B) No-Stone-Unturned Act.
C) Government in the Sunshine Act.
D) Dodd-Frank Act.
Q3) Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009?
A) Spain
B) Portugal
C) Greece
D) Germany
Q4) What are the primary arguments for and against the independence of the Fed?
Q5) Who serve as voting members of the Federal Open Market Committee (FOMC)?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) Which of the following decreases the M2 multiplier?
A) a decrease in the required reserve ratio
B) a decrease in the currency-to-deposit ratio
C) an increase in the nonbank public's preference for nontransaction accounts relative to checkable deposits
D) a decrease in the nonbank public's preference for money market-type accounts relative to checkable deposits
Q2) Suppose the required reserve ratio is 8% and that banks hold no excess reserves and the public does not change its currency holdings.If the Fed sells $5 million worth of securities,what happens to the amount of deposits in the banking system?
Q3) What is the most direct method the Fed uses to change the monetary base?
A) open market operations
B) changing the required reserve ratio
C) changing the federal funds rate
D) changing the level of discount loans
Q4) Briefly explain the process of multiple deposit creation.
Q5) Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet.
Page 16
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Which of the following is an intermediate target?
A) M2
B) reserves
C) unemployment rate
D) inflation rate
Q2) How many times has the Fed changed reserve requirements since 1993?
A) never
B) about once a year
C) only once
D) only twice
Q3) All of the following arguments are made against inflation targeting EXCEPT
A) rigid numerical targets would diminish the flexibility of monetary policy.
B) the Fed would need to depend on future forecasts of inflation since monetary policy acts with a lag.
C) the Fed has little influence on inflation.
D) holding the Fed accountable for low inflation may make it difficult for elected officials to monitor whether the Fed is supporting good overall economic policy.
Q4) What is meant by inflation targeting? Does the Fed engage in inflation targeting?
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Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) How did the use of the euro limit the use of monetary policy by European nations severely affected by the Financial Crisis of 2007-2009?
Q2) 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?
Q3) If the Fed sterilizes the purchase of foreign assets
A) the monetary base is left unchanged.
B) the monetary base rises by the amount of the purchase.
C) the monetary base falls by the amount of the purchase.
D) the monetary base may rise, fall, or remain unchanged depending on the reaction of domestic interest rates to the purchase.
Q4) Having a common currency in most of Europe has made it easier for all of the following EXCEPT
A) households to buy across borders.
B) businesses to sell across borders.
C) households and firms to invest across borders.
D) countries to allow their currencies to depreciate to spur exports.
Q5) What is the policy trilemma?
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Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) A rise in the real interest rate will cause which of the components of aggregate demand to decline?
A) only C
B) only C and I
C) only C, I, and NX
D) C, I, G, and NX
Q2) Make use of the misperceptions theory to explain why the short-run aggregate supply curve is upward sloping.
Q3) Suppose that many households look to the stock market to gauge how the economy is likely to perform in the future.When stock prices are rising,households will be optimistic about the future state of the economy and will increase their spending on houses and consumer durables,such as cars and furniture.When stock prices are falling,households will be pessimistic about the future and will cut back on their spending.If this view of the link between stock prices and household spending is correct,what will be the effect of a decline in stock prices on output in the new Keynesian view? Be sure to distinguish the short run from the long run.
Q4) How do new Keynesians use the existence of long-term nominal contracts to help explain the failure of prices to adjust in the short run?
Page 19
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Sample Questions
Q1) The capacity of a firm can best be described as
A) when a firm is producing maximum output.
B) a firm's production when operating normal hours using a normal sized workforce.
C) when a firm makes full use of all the space available in its factory or building.
D) when all of the firm's workers are producing at their maximum potential.
Q2) The effect of the shadow bank lending channel is to make expansionary monetary policy ________ when the expansionary policy takes the form of very low interest rates.
A) somewhat more effective
B) somewhat less effective
C) totally effective
D) completely ineffective
Q3) In a move up the IS curve
A) investment rises.
B) output falls.
C) the real interest rate falls.
D) saving rises.
Q4) How does the goods market return to equilibrium if AE is less than production?
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