Intermediate Macroeconomics
Final Exam Questions
Course Introduction
Intermediate Macroeconomics delves into the theoretical frameworks and analytical tools used to understand the behavior of aggregate economies. Building on introductory concepts, the course explores topics such as national income determination, economic growth, business cycles, unemployment, inflation, fiscal and monetary policy, and the role of government and central banks. Students critically assess how markets and institutions interact on a macroeconomic scale, using mathematical models and real-world data to examine contemporary economic issues and policy debates. The course equips students with the skills to analyze macroeconomic outcomes and evaluate the implications of economic policy in both closed and open economies.
Recommended Textbook Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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18 Chapters
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Page 2
Chapter 1: Introducing Money and the Financial System
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Q1) Economists define money as
A) cash in circulation.
B) deposits in commercial banks.
C) anything that people are willing to accept in payment for goods and services or to pay off debts.
D) bonds issued by large corporations.
Answer: C
Q2) Economists define risk as
A) the difference between the interest rate borrowers pay and the interest rate lenders receive.
B) the chance that the value of financial assets will change from what you expect.
C) the ease with which an asset can be exchanged for other assets or for goods and services.
D) the difference between the return on common stock and the return on corporate bonds.
Answer: B
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3
Chapter 2: Money and the Payments System
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Q1) The narrowest money measure is
A) currency plus non-interest bearing checking accounts.
B) currency plus all checking accounts.
C) currency plus all deposits at financial institutions.
D) definitive money.
Answer: B
Q2) Why does the payments system continue to change over time?
Answer: New forms of payments are introduced that increase the efficiency of the payments system by reducing transactions costs.
Q3) All of the following are problems associated with commodity money EXCEPT
A) it is a cumbersome form of payments system.
B) commodities tend to have little value in and of themselves.
C) its value is dependent on its purity.
D) costs are incurred in certifying the purity and weight of commodity money.
Answer: B
Q4) According to the Fed,what are the five most desirable outcomes for a payments system?
Answer: Speed,Security,Efficiency,Smooth international transactions,and Effective collaboration among participants in the system
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) A discount bond resembles a simple loan in that
A) the interest on neither is taxable.
B) the borrower repays in a single payment.
C) both represent assets to the borrowers who issue them.
D) both have par values greater than their face values.
Answer: B
Q2) Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40.Which of the following is TRUE?
A) current yield > coupon rate
B) current yield < coupon rate
C) Coupon rate has risen.
D) Coupon rate has declined.
Answer: A
Q3) Which of the following will lead to a higher interest rate on a loan?
A) lower inflation
B) lower opportunity cost
C) increased perceived risk of default
D) reduced likelihood of borrower not paying the loan
Answer: C
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Investors value liquidity in an asset because
A) liquid assets tend to have high rates of return.
B) liquid assets incur lower selling costs.
C) liquid assets incur lower tax liabilities.
D) whereas liquid assets have high information costs, their low risk offsets this.
Q2) If the federal government decreases its spending and doesn't decrease taxes,the bond supply shifts to the
A) left and the equilibrium interest rate rises.
B) left and the equilibrium interest rate falls.
C) right and the equilibrium interest rate rises.
D) right and the equilibrium interest rate falls.
Q3) The demand curve for bonds would be shifted to the left by an
A) increase in wealth.
B) increase in expected returns on bonds.
C) increase in expected inflation.
D) increase in the liquidity of bonds relative to other assets.
Q4) How can diversification reduce idiosyncratic risk but not systematic risk?
Q5) What is a black swan event?
Q6) Assess the impact on the bond market of the rise in Internet trading of stocks.
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 existence of rating agencies has
A) lowered returns on corporate bonds.
B) raised returns on corporate bonds.
C) left returns on corporate bonds largely unaffected.
D) raised returns on both corporate bonds and Treasury securities.
Q2) Currently,a three-year Treasury note pays 4.75%.Assuming that your tax rate is 20%,what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead?
A) 0.95%
B) 3.8%
C) 5.7%
D) 15.25%
Q3) Steve Forbes has run for president twice on a program of a "flat tax." Under a flat tax,there would be only one tax bracket for the federal income tax and most tax deductions and tax exemptions would be eliminated.Suppose that Forbes wins the 2020 presidential election.What would be the likely impact on the market for municipal bonds?
Q4) How does the liquidity premium theory explain an upward-sloping yield curve during normal economic times?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) The required return on equity for an individual stock includes which of the following?
A) systemic risk
B) idiosyncratic risk
C) risk-free interest rate
D) all of the above
Q2) The rate of return of a stock held for one year equals
A) the change in the price of the stock.
B) the dividend yield plus the rate of capital gain.
C) the rate of capital gain minus the dividend yield.
D) the dividend yield minus the rate of capital gain.
Q3) Suppose Apple announces that its earnings for the fourth quarter of 2016 rose to $2 billion.As a result of this announcement the price of Apple's stock does not change.The best explanation of this is
A) market participants were expecting Apple's earnings to be greater than $2 billion.
B) market participants expected Apple's earnings to be $2 billion.
C) market participants expected Apple's earnings to be less than $2 billion.
D) market participants have adaptive expectations.
Q4) What are the differences between common stock and preferred stock?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Q1) Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act?
A) Swaps must be traded through a clearinghouse.
B) The value of swap contracts are limited to no more than $8 billion.
C) Dealers are required to deposit a fraction of the value of the contract with the clearinghouse.
D) Data on trades must be publicly available.
Q2) An options contract
A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time.
B) is another name for a futures contract.
C) may be written for debt instruments, but not for equities.
D) may be written for equities, but not for debt instruments.
Q3) As the time of delivery in a futures contract gets closer
A) the futures price gets closer to the spot price.
B) the futures price generally rises further above the spot price.
C) the futures price generally falls further below the spot price.
D) the futures and spot prices remain the same as they were when the contract was first created.
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Page 9
Chapter 8: The Market for Foreign Exchange
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Q1) A tariff is a
A) limit on the volume of foreign goods that can be brought into the country.
B) tax on goods purchased from other countries.
C) tax on goods exported to other countries.
D) subsidy by governments to firms that produce goods for export to other countries.
Q2) 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.
Q3) What is an advantage of using options instead of forward contracts when hedging against exchange-rate risk?
Q4) What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?
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Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Q1) If banks experience higher costs in making loans,they may decide to
A) engage in credit rationing rather than raise interest rates in an attempt to increase adverse selection.
B) engage in credit rationing rather than raise interest rates in an attempt to not increase adverse selection.
C) raise interest rates rather than engage in credit rationing in an attempt to decrease adverse selection.
D) raise interest rates rather than engage in credit rationing in an attempt to eliminate adverse selection.
Q2) All of the following are consequences of adverse selection on good firms EXCEPT
A) the cost of external financing increases.
B) firms need to rely more on internal funds.
C) firms need to rely more on accumulated profits.
D) firms will only be able to attain financing from the government.
Q3) Financial intermediaries emerged
A) to make loans to governments.
B) to provide a market for municipal bonds.
C) to reduce transactions costs for small savers and borrowers.
D) to reduce transactions costs for traders in stocks and bonds.
Page 11
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Chapter 10: The Economics of Banking
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Q1) What are the different forms of bank borrowings?
Q2) Which of the following is a name for when a bank promises to lend funds to a borrower to pay off its commercial paper?
A) loan commitment
B) standby letter of credit
C) securitization
D) loan sale
Q3) The process by which banks screen potential applicants by eliminating bad risks and to obtain a pool of creditworthy borrowers is called
A) gap analysis.
B) duration analysis.
C) credit-risk analysis.
D) liquidity analysis.
Q4) If you have a checking account at First National Bank,the account is
A) an asset to both you and First National.
B) a liability to both you and First National.
C) an asset to First National and a liability to you.
D) an asset to you and a liability to First National.
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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Q1) In 1981,the first of the large investment banks to convert from a partnership to a corporation was
A) Lehman Brothers.
B) Bear Stearns.
C) Salomon Brothers.
D) AIG.
Q2) What services are finance companies able to offer consumers and businesses that banks do NOT offer?
Q3) Which of the following is likely to be more of a problem after the introduction of deposit insurance?
A) moral hazard
B) adverse selection
C) contagion
D) bank runs
Q4) An important service provided by underwriters is
A) lowering of information costs.
B) dealing with problems of moral hazard.
C) insuring firms against loss from fire.
D) insuring firms against loss from employee theft.
Q5) What type of economic research do analysts at investment banks conduct?
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Chapter 12: Financial Crises and Financial Regulation
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Q1) In what year did the economy return to normal conditions following the Great Depression?
A) 1933
B) 1937
C) 1941
D) 1945
Q2) The recession of 2007-2009 was
A) most severe recession ever experienced in the United States.
B) the first recession since the 1930s to be accompanied by a financial crisis.
C) caused by a stock market crash.
D) limited to the economy of the United States.
Q3) Describe the debt-deflation process.
Q4) Who was effectively in charge of the Fed during the early 1930s?
A) Secretary of Treasury
B) Head of the Federal Reserve Bank of New York
C) Comptroller of the Currency
D) no one
Q5) What are the primary reasons for and against a policy of "too big to fail."
Q6) Describe the four stages of the financial regulatory pattern.
Q7) How does deflation affect those with debt?
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Chapter 13: The Federal Reserve and Central Banking
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Q1) What is the main reason the Fed operates in a political arena?
A) It lacks a constitutional mandate.
B) The members of the Board of Governors must run for reelection every fourteen years.
C) The members of the Board of Governors are typically prominent politicians.
D) It is under the direct control of Congress.
Q2) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) eliminated the requirement that banks hold reserve deposits with the Fed. B) required all state banks to join the Federal Reserve System.
C) required all banks to maintain reserve deposits with the Fed.
D) prohibited nonmember banks from receiving discount loans.
Q3) Which of the following is NOT a way in which power was divided up in the Federal Reserve System?
A) between bankers and business interests
B) among states and regions
C) between importers and exporters
D) between government and the private sector
Q4) What was the original intent of the Federal Reserve Act of 1913?
Q5) How do individuals become members of the Board of Governors?
Q6) How are the operations of the Federal Reserve financed?
Page 15
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Chapter 14: The Federal Reserves Balance Sheet and the Money
Supply Process
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Q1) Reserve deposits are
A) assets for financial institutions, but liabilities for the Fed.
B) liabilities for financial institutions, but assets for the Fed.
C) assets for both financial institutions and the Fed.
D) liabilities for both financial institutions and the Fed.
Q2) 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
Q3) Which of the following equations is correct?
A) M = m(B<sub>non</sub> + ER)
B) M = m(B<sub>non</sub> + BR)
C) M = m(C + BR)
D) M = C + R
Q4) Suppose the required reserve ratio is 10%,the excess reserves-to-deposit ratio is 10%,and the currency-to-deposit ratio is 20%.If the Fed buys $50 million worth of securities,what will happen to the money supply?
Q5) Briefly explain the process of multiple deposit creation.
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Chapter 15: Monetary Policy
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Q1) Which of the following best describes a policy of inflation targeting?
A) It's an inflexible rule that requires the central bank to always achieve a specified inflation rate.
B) It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession.
C) It allows the central bank the flexibility of setting different inflation targets each year.
D) It requires central banks to target current inflation rather than inflation forecasts.
Q2) When all workers who want jobs have them and the demand for and supply of labor are in equilibrium
A) the unemployment rate will be zero.
B) unemployment is at its natural rate.
C) the economy will be experiencing high rates of inflation.
D) frictional unemployment will be zero.
Q3) Suppose banks incur heavy losses and become more cautious,increasing their demand for reserve.Make use of a graph of the federal funds market to show how the Fed can use open market operations to maintain the same federal funds rate.
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Chapter 16: The International Financial System and Monetary Policy
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Q1) Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?
Q2) If the Fed wants to reduce the value of the dollar,it will
A) sell foreign assets and buy dollars.
B) sell dollars and buy foreign assets.
C) buy foreign assets and also buy dollars.
D) sell foreign assets and also sell dollars.
Q3) Make use of a graph of the foreign exchange market to show how the Central Bank of Mexico can use an unsterilized intervention to increase the value of its currency,the peso,in terms of the dollar.
Q4) The gold standard probably made the Great Depression more severe in the United States because
A) the value of gold declined sharply during those years.
B) the existence of the gold standard kept prices from falling.
C) the money supply in the United States increased rapidly as gold flowed into the country.
D) the Fed attempted to reduce gold outflows by raising the discount rate.
Q5) How does a sterilized intervention by the Fed in foreign exchange markets differ from an unsterilized intervention?
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Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
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Q1) If the expected price level increases at the same time that the federal government cuts taxes,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) the price level will increase, but aggregate output may either increase or decrease.
Q2) Which of the following is most likely to have an impact on the growth of productivity?
A) a decrease in the price level
B) a decrease in real money balances
C) an increase in the labor supply
D) improvements in worker training
Q3) When output exceeds its full-employment level
A) the short-run aggregate supply curve shifts to the left.
B) wages fall.
C) the short-run aggregate supply curve shifts to the right.
D) aggregate supply exceeds aggregate demand.
Q4) How do new Keynesians use menu costs to help explain price stickiness in the short run?
Page 19
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) All of the following help provide the basis for the Fed controlling the real interest rate in the IS-MP model EXCEPT
A) the Fed controls the federal funds rate through open market operations.
B) if expected future inflation remains stable, changes in nominal interest rates reflect changes in real interest rates.
C) short-term and long-term interest rates tend to move together.
D) the Fed's increased use of TIPS in conducting monetary policy.
Q2) In a closed economy,the goods market is in equilibrium when
A) Y = S + I + G.
B) C + S = I + G.
C) C + I = S + G.
D) Y = C + I + G.
Q3) How can the difference between the current unemployment rate and the natural rate of unemployment help explain changes in inflation?
Q4) Which interest rate is most relevant in determining aggregate expenditures?
A) federal funds rate
B) short-term real interest rate
C) long-term nominal interest rate
D) long-term real interest rate
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