Intermediate Macroeconomics
Test Questions
Course Introduction
Intermediate Macroeconomics builds upon foundational economic principles to provide a deeper analysis of aggregate economic behavior, focusing on national income determination, economic growth, business cycles, and fiscal and monetary policy. The course examines key macroeconomic models, including the IS-LM model, the Aggregate Demand-Aggregate Supply (AD-AS) framework, and introduces dynamic theories of consumption, investment, and unemployment. Students will analyze both short-run fluctuations and long-run growth, exploring the effects of government interventions, international trade, and open economy considerations. Emphasis is placed on applying theoretical tools to understand real-world economic issues, equipping students with the analytical skills necessary for more advanced economic studies.
Recommended Textbook
Money Banking and Financial Markets 5th Edition by Stephen Cecchetti
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Chapter 1: An Introduction to Money and the Financial System
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Sample Questions
Q1) The statement "risk requires compensation" implies that people:
A) do not take risk.
B) only accept risk when they absolutely have to.
C) will only accept risk when they are rewarded for doing so.
D) avoid risk at all cost.
Answer: C
Q2) What is the primary function of U.S. regulatory agencies in the U.S. financial system?
Answer: To provide wide-ranging financial regulation-rules for the operation of financial institutions and markets-and supervision -oversight through examination and enforcement.
Q3) Identify which item is not one of the six parts of the financial system.
A) Financial instruments
B) Central banks
C) Credit cards
D) Financial institutions
Answer: C
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Chapter 2: Money and the Payments System
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Q1) Explain why credit cards are not considered money even though people seem to use them like money.
Answer: A credit card isn't money for a few reasons. One, it is not an asset. The use of a credit card actually creates a liability for the user. A credit card is a promise by a bank to lend the cardholder money with which to make purchases. The store supplying the goods being purchased receives money, but the money that is used does not belong to the buyer. The credit card provides the cardholder with access to someone else's money.
Q2) You purchase a good by writing a check for $1,000. Considering the financial payments system this check follows, when is the check money? Explain.
Answer: The check itself is never money; rather it is the balances on deposit that represent money. Therefore the $1,000 was money when it was in your checking account and that $1,000 will be money again when the Federal Reserve credits the reserve account of the bank receiving the check (and debits your bank's reserve account).
Q3) What does it mean to say that an asset is "liquid"?
Answer: An asset is liquid when it can be converted into a means of payment, quickly without suffering a loss in value.
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Chapter 3: Financial Instruments, Financial Markets, and Financial Institutions
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Sample Questions
Q1) A collection of assets is known as a(n):
A) asset-backed security.
B) derivative.
C) futures contract.
D) portfolio.
Answer: D
Q2) Financial markets:
A) enable buyers and sellers to exchange financial instruments but not risk.
B) enable buyers and sellers to exchange risk by buying and selling financial instruments.
C) only allow the transfer of risk through derivative securities.
D) do not allow for the transfer of risk but do help reduce it.
Answer: B
Q3) Which of the following statements is most correct?
A) All banks are financial intermediaries, but not all financial intermediaries are banks.
B) Financial intermediaries must be public corporations.
C) All financial intermediaries are insurance companies.
D) Financial intermediaries are government agencies.
Answer: A
Page 5
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Chapter 4: Future Value, Present Value and Interest Rates
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Sample Questions
Q1) Which of the following statements is most correct?
A) We can always compute the ex post real interest rate but not the ex ante real rate.
B) We cannot compute either the ex post or ex ante real interest rates accurately.
C) We can accurately compute the ex ante real interest rate but not the ex post real rate.
D) None of the statements are correct.
Q2) The value of $100 left in a certificate of deposit for four years that earns 4.5% annually will be:
A) $120.00
B) $119.25
C) $117.00
D) $145.00
Q3) Doubling the future value will cause the:
A) present value to double.
B) present value to decrease.
C) present value to increase by less than 100%.
D) interest rate, i, to decrease.
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Chapter 5: Understanding Risk
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Sample Questions
Q1) You buy an asset for $2,500. The asset will return $3,300 half of the time and $2,700, the other half. The expected return is 20% (a gain of $500) and the standard deviation is 12% ($300). How would using $1,250 of borrowed funds change the expected return and standard deviation specifically?
Q2) An investment will pay $2,000 a quarter of the time; $1,600 half of the time and $1,400 a quarter of the time. The standard deviation of this asset is:
A) $600
B) $1,650
C) $47,500
D) $217.94
Q3) Systematic risk:
A) is the risk eliminated through diversification.
B) represents the risk affecting a specific company.
C) cannot be eliminated through diversification.
D) is another name for risk unique to an individual asset.
Q4) How are the decisions of government policy makers, such as the Federal Reserve, related to risk and an individual investor's portfolio?
Q5) Explain the rapid rise in popularity of mutual funds.
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Chapter 6: Bonds, Bond Prices, and the Determination of Interest Rates
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Sample Questions
Q1) At the time the government of Bulgrovia issued new bonds, they issued them at a price that reflected the risk-free rate because investors had no concerns regarding default risk, so did not require a risk premium. That risk-free rate was 4%. These bonds currently have one year to maturity and you notice the yield is 20%. Can you calculate the probability that the Bulgrovian government will default?
Q2) If interest rates are expected to fall, bond prices will:
A) fall as the demand for bonds decreases.
B) remain constant until interest rates actually change.
C) fall as people fear capital losses in the future.
D) increase due to the demand for bonds increasing.
Q3) The holding period return on a bond:
A) can never be more than the yield to maturity.
B) will equal the yield to maturity if the bond is purchased for face value and sold at a lower price.
C) will be less than the yield to maturity if the bond is sold for more than face value.
D) will be less than the yield to maturity if the bond is sold for less than face value.
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Chapter 7: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) If a bond's rating improves, we would expect:
A) the demand for this bond to increase, all other factors constant.
B) the demand for and the yield of this bond to increase, all other factors constant.
C) the demand for this bond to decrease, and its yield to increase, all other factors constant.
D) both the demand for and the price of the bond to decrease, all other factors constant.
Q2) The bond rating of a security reflects the:
A) size of the coupon payment relative to the face value.
B) likelihood the lender/borrower will be repaid by the borrower/issuer.
C) return a holder is likely to receive.
D) size of the coupon rate relative to other interest rates.
Q3) Investors usually obtain bond ratings from:
A) private bond-rating agencies.
B) the annual tax returns of the issuer.
C) the U.S. government from publicly available information.
D) public Information made available by the bond issuers.
Q4) Briefly describe the two different types of junk bonds (high-yield bonds).
Q5) What is meant by a subprime mortgage?
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Chapter 8: Stocks, Stock Markets and Market Efficiency
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Sample Questions
Q1) This is a two-part question: We have a firm that needs $1000 to obtain a new machine for its business. It can either issue stock or bonds, or some combination of both. If it issues bonds it will have to pay $8.00 in interest for every $100 borrowed. Finally, assume the company will earn $150 in good years and $75 in bad years, with equal probability. The first part of the question is to (a) determine the payment to the equity holders under the following three scenarios: (i) the first is the firm uses 0% debt financing; (ii) the second is the firm uses 50% debt financing, and (iii) the third finds the firm using 80% debt financing. The second part of the question is to (b) determine the expected equity return (%) under each scenario.
Q2) The dividends that stockholders receive are:
A) fixed by contract and paid annually.
B) distributions from profits.
C) paid before all other obligations of the company are met.
D) always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings.
Q3) Is the efficient markets hypothesis (EMH) responsible for the financial crisis of 20072009?
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Chapter 9: Derivatives: Futures, Options, and Swaps
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Sample Questions
Q1) Interest-rate swaps are:
A) exchanges of equity securities for debt securities.
B) agreements between two parties to exchange periodic interest-rate payments over some future period.
C) agreements involving swapping of option contracts.
D) agreements that allow both parties to convert floating interest rates to fixed interest rates.
Q2) Comparing an option to a futures contract it would be correct to say:
A) the risk involved in each is equal.
B) a futures contract carries more risk than the option contract.
C) an option contract carries more risk than the futures contract.
D) neither involves risk; they are tools to eliminate risk.
Q3) The intrinsic value of a call option:
A) is the difference between the option price and the interest rate.
B) must be less than or equal to zero.
C) is the greater of zero or the difference between the price of the underlying asset and the strike price.
D) will be negative if the time value of the option is negative.
Q4) Identify four factors that will cause the value of call options to increase.
Q5) Explain the concept of notional principal used in swaps.
Page 11
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Chapter 10: Foreign Exchange
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Q1) Which of the following statements is most correct?
A) If the U.S. $ depreciates relative to the yen, then it is likely also depreciating relative to the euro.
B) If the U.S. $ is appreciating relative to the euro, the euro is likely depreciating relative to the yen.
C) If the U.S. $ is depreciating relative to the euro it is likely depreciating relative to all currencies.
D) If the U.S. $ is appreciating relative to the yen, the yen is depreciating relative to the U.S. $.
Q2) Considering foreign exchange transactions:
A) the U.S. dollar is exchanged in roughly 50% of all currency transactions.
B) all transactions involve the use of the U.S. dollar.
C) most of these transactions are handled in New York.
D) more transactions are handled in London than anywhere else.
Q3) Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.
Q4) Considering the foreign exchange market, identify four causes for an increase in the supply of dollars.
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Chapter 11: The Economics of Financial Intermediation
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Q1) Financial intermediaries, through their ability to lower transaction costs:
A) reduce the opportunity cost of specialization.
B) decrease the efficiency of an economy.
C) allow for people to be more self-sufficient.
D) make collecting and processing information unprofitable.
Q2) Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:
A) adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction.
B) moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction.
C) adverse selection and moral hazard, both of which occur after the transaction.
D) adverse selection and moral hazard, both of which occur before the transaction.
Q3) Most credit cards charge a relatively high rate of interest, yet many people carry them, including people who would be considered low-risk borrowers. Our discussion of adverse selection said that low-risk borrowers should have been discouraged from these. What gives?
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Chapter 12:Depository Institutions: Banks and Bank Management
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Q1) A bank develops specialized skills in analyzing companies from one specific industry. This contributes significantly to the bank achieving economies of scale because a large portion of its total loan portfolio is made up of companies in this industry. What are the long-run profit prospects for this bank? Explain.
Q2) A bank's net interest margin is calculated by taking net interest income and:
A) dividing it by the bank's capital.
B) dividing it by the bank's assets.
C) dividing it by the sum of the bank's assets and capital.
D) subtracting taxes.
Q3) Commercial banks differ from credit unions in the following way:
A) credit unions focus on consumer loans while commercial banks primarily make loans to businesses.
B) credit unions make loans and accept deposits while commercial banks just make loans.
C) commercial banks cannot make auto loans to individuals, just to businesses while credit unions can do both.
D) credit unions do not have to hold reserves while commercial banks do.
Q4) Why would a bank usually want to minimize the amount of excess reserves it has on hand?
Page 14
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Chapter 13:Financial Industry Structure
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Sample Questions
Q1) With the U.S. Social Security System, the burden of funding the system rests on:
A) the current workers.
B) the retirees.
C) the federal government.
D) the Social Security Administration.
Q2) An Edge Act Corporation is:
A) a company created so a U.S. bank can operate in more than one state.
B) a subsidiary of a bank created to provide insurance and securities services.
C) a company created by a non-bank corporation used to purchase and operate banks.
D) a subsidiary of a domestic bank that is established specifically to engage in international banking transactions.
Q3) The interest rate at which banks lend each other Eurodollars is known as:
A) the international federal funds rate.
B) the London Interbank Offered Rate.
C) the discount rate.
D) the International Prime Rate.
Q4) There are two current trends in the financial industry which run in opposite directions. What are they?
Q5) What is the basic difference(s) between term and whole life insurance?
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Chapter 14: Regulating the Financial System
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Q1) Explain how bank regulators seem to face a bit of a paradox regarding preventing monopoly power by banks and spurring competition.
Q2) Briefly describe the combination of strategies used by government officials to protect investors and ensure the stability of the financial system.
Q3) A bank run involves:
A) illegal activities on the part of the bank's officers.
B) a bank being forced into bankruptcy.
C) a large number of depositors withdrawing their funds during a short time span.
D) a bank's return on assets being below the acceptable level.
Q4) The creation of the Federal Reserve in 1913:
A) provided the opportunity for lender of last resort but not the guarantee that it would be used.
B) guaranteed the Federal Reserve would always act as lender of last resort.
C) eliminated bank panics in the U.S.
D) was in response to the Great Depression in the U.S.
Q5) What were the positive effects of the 1988 Basel Accord? What were its shortcomings?
Q6) How does the lender of last resort potentially create a moral hazard problem?
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Chapter 15: Central Banks in the World Today
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Q1) Many governments give their central bank control over issuing currency because:
A) printing currency can be profitable for a government so government officials may have a strong incentive to print too much.
B) having large amounts of currency can lead to lower rates of inflation.
C) central banks use the profits from issuing currency to finance their operations.
D) the only way to distribute currency to banks is through the central bank.
Q2) Which of the following statements is true?
A) Printing currency can be a profitable venture for a government.
B) Printing currency, while necessary, is a losing venture for a government.
C) Printing too much money usually leads to lower prices.
D) In the modern economy the amount of money created has no effect on prices.
Q3) The operational components required for truly independent central banks include:
A) a budget controlled by Congress.
B) the ability to have policies reversed.
C) monetary policies that cannot be reversed by anyone outside of the central bank.
D) the chairperson of the bank being answerable only to the President.
Q4) Explain why inflation degrades the information content of prices.
Q5) What are the specific objectives of most central bankers?
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Chapter 16: The Structure of Central Banks: The Federal
Reserve and the European Central Bank
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Q1) Comparing the European and the U.S. central bank systems, the Governing Council of the European system resembles:
A) the Board of Governors.
B) the Presidents of the Regional Federal Reserve Banks.
C) the FOMC.
D) the Chairman of the Board of Governors of the Fed.
Q2) In the meetings of the Governing Council of the European Central Bank, formal votes are:
A) taken and published immediately.
B) not taken, since formal voting could get in the way of good policy.
C) taken but not published for five years.
D) taken and released two years after the meetings.
Q3) The Chairman of the Board of Governors:
A) serves a four-year term that cannot be renewed.
B) is selected from the Board of Governors, appointed by the U.S. President.
C) serves the same four-year term as the U.S. President.
D) serves an eight-year term.
Q4) How are the locations of the twelve regional Federal Reserve Banks and the corresponding districts explained?
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Q5) In what ways do the regional Federal Reserve Banks influence monetary policy?
Chapter 17: The Central Bank Balance Sheet and the Money
Supply Process
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Q1) Each of the following items would appear as assets on the central bank's balance sheet, except:
A) loans.
B) securities.
C) currency.
D) foreign exchange reserves.
Q2) If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will:
A) not change.
B) increase by $100,000.
C) decrease.
D) increase but by less than $100,000.
Q3) Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base:
A) does not change but the quantity of M2 will decrease.
B) increases as does the quantity of M2.
C) decreases as does the quantity of M2.
D) does not change and neither does M2.
Q4) Why do most central banks publish their balance sheets so frequently?
Page 19
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Chapter 18:Monetary Policy: Stabilizing the Domestic Economy
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Q1) What are the advantages from the 2002 change in the Fed's lending policy?
Q2) Secondary credit provided by the Fed is designed for:
A) banks who qualify for a lower interest than what is available under primary credit.?
B) banks that are in trouble and cannot obtain a loan from anyone else.?
C) banks that want to borrow without putting up collateral.?
D) foreign banks.
Q3) The key to the success of forward guidance as a monetary policy tool is:
A) timing.
B) a favorable exchange rate.
C) transparency.
D) credibility.
Q4) The Taylor rule is: ?
A) the monetary policy setting formula followed explicitly by the FOMC.?
B) an approximation that seeks to explain how the FOMC sets their target.?
C) an explicit tool used by the ECB but not the Fed.?
D) a rule adopted by Congress to make the Fed's monetary policy more accountable to the public.
Q5) State and briefly define the tools of monetary policy available to the Federal Reserve.
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Chapter 19:Exchange Rate Policy and the Central Bank
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Q1) When a country operates with a currency board, the central bank's sole objective is to:
A) focus on domestic monetary policy.
B) maintain the domestic interest rate.
C) maintain the exchange rate.
D) maintain the target inflation rate.
Q2) If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as:
A) the inflation rate in country B - the inflation rate in country A.
B) the inflation rate in country A - the inflation rate in country B.
C) the inflation rate in country A times the inflation rate in country B.
D) the inflation rate in country A divided by the inflation rate in country B.
Q3) A speculative attack on a country with a fixed exchange rate occurs when:
A) financial market participants believe the government will have to devalue its currency.
B) financial market participants believe the government has a large excess of international reserves.
C) financial market participants believe the currency is undervalued.
D) the country converts its gold reserves into foreign exchange.
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Chapter 20:Money Growth, Money Demand and Modern Monetary Policy
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Q1) In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period:
A) the velocity of money should have been stable.
B) money demand as well as velocity should have also been shifting and volatile.
C) it should have been easy for the Fed to predict the velocity of money.
D) the Fed was actually targeting the short-term interest rate.
Q2) Which of the following statements is most correct?
A) The current rate of inflation is the result of money growth.
B) Money growth is the result of inflation.
C) There is no clear link between high, sustained inflation and the monetary aggregates.
D) It is impossible to have high, sustained inflation without monetary accommodation.
Q3) To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying:
A) the supply of money is not stable.
B) the money market is always in disequilibrium.
C) money demand is stable.
D) money demand is not stable.
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Chapter 21:Output, Inflation, and Monetary Policy
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Q1) What are the determinants of the potential output for an economy?
Q2) Discuss what happens to the monetary policy reaction curve if the Fed were to lower their inflation target and why?
Q3) In the short run, the point on the aggregate demand curve where an economy will end up depends on:
A) the money supply.
B) the long-run rate of inflation.
C) potential output.
D) the short-run aggregate supply curve.
Q4) An inflation rate below the target rate will result in:
A) a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
B) a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
C) a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.
D) a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.
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Chapter 22:Understanding Business Cycle Fluctuations
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Q1) More than once in our history government officials tried to slow rapidly rising inflation by instituting wage and price controls, in essence, making it illegal to raise prices. In terms of the model, which includes aggregate demand, short-run aggregate supply and long-run aggregate supply, describe what the intended result of the officials would be and what the likely result may be.
Q2) The assumption that prices and wages are flexible implies that the:
A) short-run aggregate supply curve is irrelevant.
B) short-run aggregate supply curve shifts slowly in response to deviations of current output from potential output.
C) long-run aggregate supply curve is irrelevant.
D) long-run aggregate supply curve could not shift.
Q3) Explain why understanding short-run fluctuations in output and inflation requires that we study shifts in dynamic aggregate demand and short-run aggregate supply.
Q4) Why do increases in potential output allow monetary policymakers to think "opportunistically" about disinflation?
Q5) What is opportunistic disinflation and what provides the opportunity? Explain how the process works.
Q6) Why can monetary policymakers neutralize demand shocks but not supply shocks?
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Chapter 23: Modern Monetary Policy and the Challenges
Facing Central Bankers
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Q1) Decreases in the real interest rate will result in a(n):
A) increase in net exports because it will lead to a depreciation of the dollar.
B) decrease in net exports because it will lead to a depreciation of the dollar.
C) increase in net exports because it will lead to an appreciation of the dollar.
D) decrease in net exports because it will lead to an appreciation of the dollar.
Q2) If the target federal funds rate reaches the lower bound the FOMC:
A) must stop purchasing securities since they cannot lower nominal rates below the lower bound.
B) would likely shift their focus to purchasing longer-term securities.
C) would likely raise the required reserve rate.
D) would likely raise the discount rate.
Q3) The challenges facing policymakers today include each of the following, except:
A) the economy's sustainable growth rate is highly stable.
B) nominal interest rates cannot fall below the effective lower bound (somewhat below zero).
C) stock and property values are subject to booms and busts.
D) the structure of the economy and financial system continues to evolve.
Q4) Why might the supply of loans increase as interest rates fall?
Page 25
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