Macroeconomic Policy Exam
Questions
Course Introduction
Macroeconomic Policy explores the strategies and tools governments and central banks use to influence the performance of a national economy. The course examines fiscal policy, including government spending and taxation, and monetary policy, such as interest rate adjustments and money supply management. Students will analyze the effects of these policies on economic growth, inflation, unemployment, and income distribution. Key topics include policy design and implementation, policy trade-offs and constraints, policy effectiveness in open economies, and recent case studies of macroeconomic policy responses to global economic events.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) Evidence from business cycle fluctuations in the United States indicates that
A)a negative relationship between money growth and general economic activity exists.
B)recessions are usually preceded by declines in bond prices.
C)recessions are usually preceded by dollar depreciation.
D)recessions are usually preceded by a decline in the growth rate of money.
Answer: D
Q2) The basic concepts used in the analytic framework of this text include all of the following EXCEPT
A)the not-for-profit nature of most financial institutions.
B)a basic supply and demand analysis to explain the behavior of financial markets.
C)an approach to financial structure based on transaction costs and asymmetric information.
D)the concept of equilibrium.
Answer: A
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Page 3
Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) Every financial market has the following characteristic.
A)It determines the level of interest rates.
B)It allows common stock to be traded.
C)It allows loans to be made.
D)It channels funds from lenders-savers to borrowers-spenders.
Answer: D
Q2) Which of the following is NOT a contractual savings institution?
A)a life insurance company
B)a pension fund
C)a savings and loan association
D)a fire and casualty insurance company
Answer: C
Q3) Distinguish between a foreign bond and a Eurobond.
Answer: A foreign bond is sold in a foreign country and priced in that country's currency. A Eurobond is sold in a foreign country and priced in a currency that is not that country's currency.
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Chapter 3: What Is Money
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Sample Questions
Q1) A disadvantage of ________made from precious metals is that it is very heavy and hard to transport from one place to another.
A)commodity money
B)fiat money
C)electronic money
D)paper money
Answer: A
Q2) If the price level doubles,the value of money
A)doubles.
B)more than doubles,due to scale economies.
C)rises but does not double,due to diminishing returns.
D)falls by 50 percent.
Answer: D
Q3) Why are most of the U.S. dollars held outside of the United States?
Answer: Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk.
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Chapter 4: The Meaning of Interest Rates
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Sample Questions
Q1) A coupon bond that has no maturity date and no repayment of principal is called a
A)consol.
B)cabinet.
C)Treasury bill.
D)Treasury note.
Q2) Since the early 1950s,nominal interest rates and real interest rates in the United States
A)do not always move in the same direction.
B)always increase proportionally.
C)are never moving in the same direction.
D)are of no interest to decision makers.
Q3) The ________ of a coupon bond and the yield to maturity are inversely related.
A)price
B)par value
C)maturity date
D)term
Q4) If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2,200,is the yield to maturity greater or less than 5%? Why?
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Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) Everything else held constant,an increase in expected inflation,lowers the expected return on ________ compared to ________ assets.
A)bonds;financial
B)bonds;real
C)real estate;financial
D)real estate;real
Q2) The riskiness of an asset is measured by
A)the magnitude of its return.
B)the absolute value of any change in the asset's price.
C)the standard deviation of its return.
D)risk is impossible to measure.
Q3) Everything else held constant,if interest rates are expected to fall in the future,the demand for long-term bonds today ________ and the demand curve shifts to the ________.
A)rises;right
B)rises;left
C)falls;right
D)falls;left
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Chapter 6: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.
A)increase;less B)increase;more C)decrease;less D)decrease;more
Q2) Junk bonds,bonds with a low bond rating,are also known as A)high-yield bonds. B)investment grade bonds. C)high quality bonds. D)zero-coupon bonds.
Q3) An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,everything else held constant.
A)increase;increase B)reduce;reduce C)increase;reduce D)reduce;increase
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Sample Questions
Q1) In a one-period valuation model,a decrease in the required return on investments in equity causes a(n)________ in the ________ price of a stock.
A)increase;current
B)increase;expected sales
C)decrease;current
D)decrease;expected sales
Q2) A stock's price will fall if there is
A)a decrease in perceived risk.
B)an increase in the required rate of return.
C)an increase in the future sales price.
D)current dividends are high.
Q3) Using the Gordon growth model,if D1 is $.50,ke is 7%,and g is 5%,then the present value of the stock is
A)$2.50.
B)$25.
C)$50.
D)$46.73.
Q4) What rights does ownership interest give stockholders?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Solutions to the moral hazard in equity contracts include all of the following EXCEPT
A)government regulations to increase information.
B)the use of financial intermediaries.
C)the use of debt contracts.
D)government ownership of resources.
Q2) Because of the adverse selection problem
A)good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks.
B)lenders may refuse loans to individuals with high net worth,because of their greater proclivity to "skip town."
C)lenders are reluctant to make loans that are not secured by collateral.
D)lenders will write debt contracts that restrict certain activities of borrowers.
Q3) The recent Enron and Tyco International scandals are an example of A)the free-rider problem.
B)the adverse selection problem.
C)the principal-agent problem.
D)the "lemons problem."
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10
Chapter 9: Banking and the Management of Financial Institutions
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Sample Questions
Q1) If a bank has excess reserves greater than the amount of a deposit outflow,the outflow will result in equal reductions in
A)deposits and reserves.
B)deposits and loans.
C)capital and reserves.
D)capital and loans.
Q2) For banks
A)return on assets exceeds return on equity.
B)return on assets equals return on equity.
C)return on equity exceeds return on assets.
D)return on equity is another name for net interest margin.
Q3) Risk that is related to the uncertainty about interest rate movements is called A)default risk.
B)interest-rate risk.
C)the problem of moral hazard.
D)security risk.
Q4) Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1,000 in cash into her checking account and another individual withdraws $750 in cash from her checking account.
Page 11
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Chapter 10: Economic Analysis of Financial Regulation
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Sample Questions
Q1) The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.
Q2) The federal agencies that examine banks include
A)the Federal Reserve System.
B)the Internal Revenue Service.
C)the SEC.
D)the U.S. Treasury.
Q3) The Depository Institutions Deregulation and Monetary Control Act of 1980
A)separated investment banks and commercial banks.
B)restricted the use of ATS accounts.
C)imposed restrictive usury ceilings on large agricultural loans.
D)increased deposit insurance from $40,000 to $100,000.
Q4) To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.
A)FDIC
B)SEC
C)Federal Reserve
D)ATM
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Page 12
Chapter 11: Banking Industry: Structure and Competition
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Sample Questions
Q1) Both ________ and ________ were financial innovations that occurred because of interest rate volatility.
A)adjustable-rate mortgages;commercial paper
B)adjustable-rate mortgages;financial derivatives
C)sweep accounts;financial derivatives
D)sweep accounts;commercial paper
Q2) Mutual savings banks are owned by A)shareholders.
B)partners.
C)depositors.
D)foreign investors.
Q3) The most significant change in the economic environment that changed the demand for financial products in recent years has been
A)the aging of the baby-boomer generation.
B)the dramatic increase in the volatility of interest rates.
C)the dramatic increase in competition from foreign banks.
D)the deregulation of financial institutions.
Q4) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
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Chapter 12: Financial Crises
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Sample Questions
Q1) Agency problems in the subprime mortgage market included all of the following EXCEPT
A)homeowners could refinance their houses with larger loans when their homes appreciated in value.
B)mortgage originators had little incentives to make sure that the mortgagee is a good credit risk.
C)underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back.
D)the evaluators of securities,the credit rating agencies,were subject to conflicts of interest.
Q2) One of the concerns about the Orderly Liquidation Authority is that it would legitimize federal bailouts of large financial entities and thus increase the ________ problem.
A)too-big-to-fail
B)regulatory forbearance
C)lemons
D)fiduciary
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The ability of a central bank to set monetary policy instruments is
A)political independence.
B)goal independence.
C)policy independence.
D)instrument independence.
Q2) The Federal Reserve Bank of ________ houses the open market desk.
A)Boston
B)New York
C)Chicago
D)San Francisco
Q3) On paper,the Bank of Canada has ________ instrument independence and ________ goal independence when compared to the Federal Reserve System.
A)less;less
B)less;more
C)more;less
D)more;more
Q4) What is the theory of bureaucratic behavior and how can it be used to explain the behavior of the Federal Reserve?
Q5) Make the case for and against an independent Federal Reserve.
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) Which of the following are NOT assets on the Fed's balance sheet?
A)securities
B)discount loans
C)cash items in the process of collection
D)deferred availability cash items
Q2) The monetary base minus currency in circulation equals
A)reserves.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.
Q3) Assuming initially that the required reserve ratio = 15%,the currency-deposit ratio = 40%,and the excess reserve ratio = 5%,an increase in the excess reserve ratio to 10% causes the M1 money multiplier to ________,everything else held constant.
A)increase from 2.15 to 2.33
B)decrease from 2.33 to 2.15
C)increase from 1.54 to 1.67
D)decrease from 1.67 to 1.54
Q4) Explain why the simple deposit multiplier overstates the true deposit multiplier.
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Page 16
Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement ________ the demand for reserves,lowering the federal funds interest rate,everything else held constant.
A)rise;decreases
B)rise;increases
C)decline;increases
D)decline;decreases
Q2) ________ are the most important monetary policy tool because they are the primary determinant of changes in the ________,the main source of fluctuations in the money supply.
A)Open market operations;monetary base
B)Open market operations;money multiplier
C)Changes in reserve requirements;monetary base
D)Changes in reserve requirements;money multiplier
Q3) The quantity of reserves demanded equals
A)required reserves plus borrowed reserves.
B)excess reserves plus borrowed reserves.
C)required reserves plus excess reserves.
D)total reserves minus excess reserves.
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) During World War II,whenever interest rates would ________ and the price of bonds would begin to ________,the Fed would make open market purchases.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall
Q2) Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant,this could cause ________ bubble.
A)an irrational exuberance
B)a credit-driven
C)a stock
D)a debt-driven
Q3) Due to the lack of timely data for the price level and economic growth,the Fed's strategy
A)targets the exchange rate,since the Fed can control this variable.
B)targets the price of gold,since it is closely related to economic activity.
C)uses an intermediate target,such as an interest rate.
D)stabilizes the consumer price index,since the Fed can control the CPI.
Page 18
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.
A)right;appreciate
B)right;depreciate
C)left;appreciate
D)left;depreciate
Q2) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________,everything else held constant.
A)An increase;appreciate
B)An increase;depreciate
C)A decrease;appreciate
D)A decrease;depreciate
Q3) Higher tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.
A)depreciate;short
B)appreciate;short
C)depreciate;long
D)appreciate;long
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Page 19
Chapter 18: The International Financial System
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Sample Questions
Q1) A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.
A)inflow;devalue
B)inflow;revalue
C)outflow;devalue
D)outflow;revalue
Q2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base,everything else held constant.
A)sale;purchase
B)sale;sale
C)purchase;sale
D)purchase;purchase
Q3) The seignorage for a government is greater for ________ than for ________.
A)dollarization;a currency board
B)dollarization;exchange-rate targeting
C)dollarization;monetary targeting
D)dollarization;inflation targeting
E)exchange-rate targeting;dollarization
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Page 20
Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) If people expect nominal interest rates to be higher in the future,the expected return to bonds ________,and the demand for money ________.
A)rises;increases
B)rises;decreases
C)falls;increases
D)falls;decreases
Q2) The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed
A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.
Q3) As interest rates rise,the expected absolute return of money ________,money's expected return relative to bonds ________.
A)does not change;decrease
B)rises;decrease
C)does not change;increase
D)falls;decrease
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Chapter 20: The Is Curve
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Sample Questions
Q1) There are two types of investment: ________ investment-the spending by business firms on equipment and structures,and planned spending on residential houses-and ________ investment-spending by business firms on additional holdings of raw materials,parts,and finished goods.
A)planned;gross
B)planned;inventory
C)fixed;gross
D)fixed;inventory
Q2) In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain negative,firms will continue to ________ production,and output will continue to ________.
A)lower;fall
B)lower;rise
C)raise;fall
D)raise;rise
Q3) The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand?
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22
Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Sample Questions
Q1) Everything else held constant,an increase in government spending will cause
A)aggregate demand to increase.
B)aggregate demand to decrease.
C)the quantity of aggregate demand to increase.
D)the quantity of aggregate demand to decrease.
Q2) The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were
A)upward movements along the monetary policy curve.
B)downward movement along the monetary policy curve.
C)upward shifts of the monetary policy curve.
D)downward shifts of the monetary policy curve.
Q3) Based on the Taylor Principle,a central bank's endogenous response of raising interest rates when inflation rises
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.
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Page 23
Chapter 22: Aggregate Demand and Supply Analysis
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Q1) Which of the followings is NOT true about the word "autonomous" that economists use?
A)Changes in autonomous components are associated with movements along a curve.
B)Changes in autonomous components are associated with shifts of a curve.
C)The autonomous component of a variable is exogenous.
D)The autonomous component of a variable is independent of other variables in the model.
Q2) Everything else held constant,an autonomous monetary policy tightening ________ aggregate ________.
A)increases;demand B)decreases;demand C)decreases;supply
D)increases;supply
Q3) Which of the following increases aggregate supply in the short-run,everything else held constant?
A)an increase in the price of crude oil
B)a successful wage push by workers
C)expectations of a higher inflation
D)a technological improvement that increases worker productivity
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Chapter 23: Monetary Policy Theory
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Sample Questions
Q1) The economist who proposed that,"Inflation is always and everywhere a monetary phenomenon" was
A)John Maynard Keynes.
B)John R. Hicks.
C)Milton Friedman.
D)Franco Modigliani.
Q2) When output is below potential and the policy rate has hit the floor of zero,if policymakers do nothing,output will ________ and inflation will ________.
A)rise;fall
B)fall;fall
C)fall;rise
D)rise;rise
Q3) To say that inflation is a monetary phenomenon seems to beg the question
A)Why does inflationary monetary policy occur?
B)Why do politicians seek reelection?
C)Why is the Fed independent?
D)Why does the U.S. Treasury print so much money?
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Page 25
Chapter 24: The Role of Expectations in Monetary Policy
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Sample Questions
Q1) Lucas argues that when policies change,expectations will change thereby
A)changing the relationships in econometric models.
B)causing the government to abandon its discretionary stance.
C)forcing the Fed to keep its deliberations secret.
D)making it easier to predict the effects of policy changes.
Q2) Potential weaknesses of nominal GDP targeting include
A)it requires accurate estimates of potential GDP growth,which are not easy to achieve.
B)it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling.
C)real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy.
D)it focuses not only on controlling inflation but also explicitly on stabilizing real GDP.
Q3) Approaches to establishing central bank credibility include
A)continued success at keeping inflation under control.
B)central bank independence.
C)appointment of a more conservative central banker.
D)all of the above.
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26
Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) Monetarists directly study the link between money and economic activity using A)structural models.
B)reduced-form models.
C)scientific models.
D)experimental models.
Q2) During the Great Depression,Tobin's q
A)rose dramatically,as did real interest rates.
B)fell to unprecedentedly low levels.
C)stayed fairly constant,in contrast to most other economic measures.
D)rose only slightly,in spite of Hoover's attempts to prop it up.
Q3) The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions. Monetarists tend to focus on
A)structural-model evidence,while Keynesians focus on reduced-form evidence.
B)reduced-form evidence,while Keynesians focus on structural-model evidence.
C)reduced-form evidence,while Keynesians focus on direct-model evidence.
D)structural-model evidence,while Keynesians focus on direct-model evidence.
Q4) Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.
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Chapter 26: Financial Crises in Emerging Market Economies
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Sample Questions
Q1) The mismanagement of financial liberalization in emerging market countries can be understood as a severe
A)principal/agent problem.
B)asymmetric information problem.
C)lemons problem.
D)free-rider problem.
Q2) At the time of the South Korean financial crisis,the merchant banks were
A)almost virtually unregulated.
B)subject to heavy government regulation.
C)engaged in long-term lending to the corporate sector.
D)restricted to long-term foreign borrowing.
Q3) Severe fiscal imbalances can directly trigger a currency crisis since
A)investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency.
B)the government may stop printing money.
C)the government may have to cut back on spending.
D)the currency must surely increase in value.
Q4) What two key factors trigger speculative attacks leading to currency cries in emerging market countries?
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Chapter 27: The ISLM Model
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Q1) Despite an expansionary monetary policy,an economy experiences a recession. Everything else held constant,the recession could occur in spite of the rightward shift of the LM curve if
A)consumer confidence decreases sharply.
B)there is an investment boom.
C)the money supply increases.
D)taxes are cut.
Q2) Because inflation was not a serious problem during the Great Depression,Keynes's analysis assumed
A)that unemployment also was not a problem.
B)that the money supply was fixed.
C)that the price level was fixed.
D)that monetary policy is not effective.
Q3) An autonomous increase in money demand,other things equal,shifts the ________ curve to the ________.
A)IS;right
B)IS;left
C)LM;left
D)LM;right
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