Macroeconomic Policy Test Questions
Course Introduction
Macroeconomic Policy examines the tools and strategies governments and central banks use to influence a nations overall economic performance. This course explores key topics such as fiscal policy, monetary policy, and exchange rate management, analyzing how these policies can stabilize economic growth, control inflation, manage unemployment, and address balance of payments issues. Students will engage with both theoretical frameworks and real-world case studies to understand the policy-making process and assess the effectiveness of policy interventions in different economic contexts.
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MandB 3 3rd Edition by Dean Croushore
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Chapter 1: Money and the Financial System
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Sample Questions
Q1) In the long run, the only economic variable that the Federal Reserve can affect is
A)inflation.
B)output.
C)unemployment.
D)the exchange rate.
Answer: A
Q2) Buying stocks gives an investor
A)a very low but safe return.
B)ownership in corporations.
C)the riskiest asset available in the market.
D)a pure and random speculative gamble.
Answer: B
Q3) More than half of all U.S.dollars can be found
A)in foreign countries.
B)in the United States.
C)in the underground economy.
D)in bank vaults.
Answer: A
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Chapter 2: The Financial System and the Economy
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Sample Questions
Q1) The financial system consists of
A)all the securities, intermediaries, and markets that exist to match savers and borrowers.
B)all transactions occurring in the goods market during a financial year.
C)all markets that exist to match the buyers and suppliers of various factors of production.
D)all transactions involving the government.
Answer: A
Q2) In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers, debt holders, and stockholders?
A)(1) debt holders; (2) workers; (3) stockholders
B)(1) stockholders; (2) workers; (3) debt holders
C)(1) workers; (2) debt holders; (3) stockholders
D)(1) workers; (2) stockholders; (3) debt holders
Answer: C
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4
Chapter 3: Money and Payments
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Sample Questions
Q1) The set of mechanisms used for making transactions is called the A)outside money mechanism.
B)payments system.
C)inside money system.
D)standard of deferred payments.
Answer: B
Q2) When people keep money for some period instead of spending it or investing it, money is serving the role of a A)medium of exchange.
B)unit of account.
C)store of value.
D)standard of deferred payment.
Answer: C
Q3) The main source of the U.S.coin shortage in 1999 was A)increased demand for coins from foreign countries.
B)a new law allowing coins to be melted for their metal content.
C)the introduction of the state quarter program.
D)the introduction of the Sacagawea golden dollar.
Answer: C
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Page 5
Chapter 4: Present Value
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Sample Questions
Q1) John spends $4,000 on a perpetuity that pays $150 each year.The yield to maturity of this perpetuity is
A)1.5%.
B)3.75%.
C)6.2 %.
D)15%.
Q2) The equation that allows us to compare dollar amounts to be received at different dates is the
A)present-value formula.
B)Taylor rule.
C)interest-rate parity equation.
D)Roy's identity
Q3) Consider a one-year discount bond that has a present value of $3,000.If the annual rate of discount is 5 percent, calculate the future value of the bond (the amount the bond pays in one year).
Q4) Consider a perpetuity that pays $300 every year.If the rate of discount is 6 percent, calculate the present value of the bond.
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Chapter 5: The Structure of Interest Rates
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Sample Questions
Q1) The relationship between interest rates with differing times to maturity is known as the ___________of interest rates.
A)term structure
B)term curve
C)yield curve
D)yield structure
Q2) Which of the following statements is true?
A)The yield curve slopes downward when the term spread is positive.
B)Researchers suggest that the smaller the term spread, the higher the chance is of a recession in the coming year.
C)The yield curve slopes upward when the term spread is negative
D)Researchers suggest that the larger the spread, the higher the chance is of a recession in the coming year.
Q3) Which of the following is true of the analysis of the term structure of interest rates?
A)It assumes that investors in longterm securities face high transaction costs.
B)It assumes that investors can predict shortterm interest rates accurately.
C)It assumes that the yield curve is always flat.
D)It assumes that investors in bonds have a preferred habitat.
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Chapter 6: Real Interest Rates
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Sample Questions
Q1) If your after-tax realized real interest rate was 1 percent over the past year and the inflation rate was 3 percent, what was the nominal interest rate on your one-year bond if your tax rate was 15 percent?
A)4.45 percent
B)4.7 percent
C)5.0 percent
D)5.25 percent
Q2) Realized real interest rates in the United States were the highest in the A)1960s.
B)1970s.
C)1980s.
D)1990s.
Q3) Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?
A)Eliminating taxation of interest
B)Introducing inflation-indexed bonds
C)Taxing only real interest income, not nominal interest income
D)Reducing inflation to zero
Q4) How can the expected inflation rate be measured?
Page 8
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Chapter 7: Stocks and Other Assets
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Sample Questions
Q1) An investor buys stock for $10,000 at the beginning of the year.She earns dividends of $300 during the course of the year.At the end of the year, the stock is worth $10,800.The tax rate on dividends and capital gains is 15 percent. The inflation rate is 3 percent.What is the investor's after tax real return if she sells the stock at the end of the year?
A)6.35 percent.
B)6.95 percent.
C)7.55 percent.
D)8.15 percent.
Q2) The S&P 500 stock index is an index of
A)all the companies whose shares trade at a price more than $500.
B)all the companies whose shares trade on the New York Stock Exchange.
C)500 major companies whose shares trade in U.S.markets.
D)the largest 500 companies in the world.
Q3) An index of thirty major U.S.industrial companies is the
A)NASDAQ index.
B)NYSE index.
C)Dow Jones Industrial Average.
D)S&P 500.
Q4) Write a formula for the equity premium.
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Chapter 8: How Banks Work
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Sample Questions
Q1) A bank offers credit cards with a 25 percent interest rate, when its competitors' cards have just a 15 percent interest rate.Despite the high rate, the bank finds itself losing money because many of its customers fail to repay the balances on their cards.The bank's losses are most likely to have occurred because of
A)bad management.
B)the lock-in effect.
C)redlining.
D)adverse selection.
Q2) A financial intermediary that accepts deposits from savers, and makes loans to borrowers is a
A)stock exchange.
B)bond market.
C)bank.
D)finance company.
Q3) In which of the following ways can a bank increase its reserves?
A)Give out more loans
B)Sell securities
C)Reduce interest rate on time deposits
D)Increase service charges for safety vault facility
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Page 10
Chapter 9: Governments Role in Banking
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Sample Questions
Q1) Prior to the passage of the McFadden Act in 1927, what characterized a national bank?
Q2) According to the Consumer Financial Protection Bureau, banks must not offer mortgage loans to households for whom the monthly mortgage payments costs more than of their income.
A)20 percent
B)35 percent
C)43 percent
D)50 percent
Q3) Which of the following is a factor considered by authorities in evaluating the mergers of banks?
A)The level to which the new bank increases competition in the market
B)The number of employees in the new bank
C)The adequacy of the financial and managerial resources of the new bank
D)The value of the total assets owned by the new bank
Q4) The Herfindahl-Hirschman Index (HHI) is used to
A)calculate whether or not a bank has met its reserve requirements.
B)determine if a merger reduces competition in a banking market.
C)measure the capital adequacy of a bank.
D)find which bank has the lowest spread.
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Chapter 10: Economics Growth and Business Cycles
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Sample Questions
Q1) Describe classical economists.
Q2) If output grew 2.8 percent last year and labor productivity grew 1.1 percent, then by how much did hours worked grow over the year?
A)1.1 percent
B)1.3 percent
C)1.7 percent
D)3.9 percent
Q3) In the country of Aargh, in the equation for TFP, Y = A × K<sup>a</sup> × L<sup>1?a</sup>, the coefficient is a = 0.2.The capital stock is growing 6 percent per year, employment is growing 1 percent per year, and output is growing 4 percent per year.In the country of Blargh, the coefficient is a = 0.25, the capital stock is growing 10 percent per year, employment is growing 2 percent per year, and output is growing 5 percent per year.In which country is TFP growing the fastest? In which country is output per worker growing the fastest? Explain your answer and show all your calculations.
Q4) Explain how a sudden change in productivity could lead to a change in economic output.Give an example.
Q5) Explain the four major theories of the causes of the business cycle.
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Chapter 11: Modeling Money
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Sample Questions
Q1) Suppose, the money-demand equation is given by M<sup>D</sup> = P × [(0.25 × Y) ? (15 × i)], where P is the price level, Y is the level of output in billions, and i is the interest rate in percentage points.Initially, P= 2, Y = $500, and i = 3.If Y rises to $600 and the price level does not change, by how much should the Fed change the money supply if it wants to keep the nominal interest rate unchanged? Should the money supply rise or fall, and by how much? Use the liquidity-preference framework and show a diagram of this situation.
Q2) A variable that is determined within a model is called
A)a dynamic variable.
B)a static variable.
C)an endogenous variable.
D)an exogenous variable.
Q3) In the ATM model of money, the opportunity cost of holding money is determined by A)the rate of inflation.
B)the cost of going to an ATM.
C)the charges levied on every ATM transaction.
D)the nominal interest rate and the possibility of having her money stolen.
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Page 13
Chapter 12: The Aggregate-Demandaggregate-Supply Model
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Sample Questions
Q1) If there is no policy action in an economy that is producing an output below its full-employment level, then
A)the output returns to full-employment level quickly.
B)the price level declines slowly.
C)the price level rises quickly.
D)the output stays below full-employment for a short period, then rises quickly.
Q2) Full-employment output is the amount of output produced when the economy is A)in recession.
B)above the natural rate of unemployment.
C)utilizing all of its labor and capital.
D)in equilibrium.
Q3) Which of the following equations is true of aggregate demand?
A)Aggregate demand = consumption + investment - government spending - net exports
B)Aggregate demand = consumption - investment - government spending - net exports
C)Aggregate demand = consumption + investment + government spending + net exports
D)Aggregate demand = consumption - investment + government spending + net exports
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Chapter 13: Modern Macroeconomic Models
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Sample Questions
Q1) A model that focuses on what is happening at just one point in time is known as
A)a dynamic model.
B)a static model.
C)a general-equilibrium model.
D)a partial-equilibrium model.
Q2) Economic research over the last 20 years suggests that expectations are best modeled as_____ variables?.
A)?dummy
B)?ordinal
C)?endogenous
D)?preference
Q3) A model that incorporates time and uncertainty in which prices, wages, and interest rates adjust to bring all markets to equilibrium and which allows economic agents to make decisions in their own interest is known as
A)A dynamic, stochastic, generalequilibrium model
B)A structural macroeconomic model
C)A businesscycle model
D)A statistical model
Q4) Describe the new neoclassical synthesis.
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Chapter 14: Economic Interdependence
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Sample Questions
Q1) Under relative purchasing-power parity,
A)the exchange rate equals the ratio of price indexes in two countries.
B)interest-rate parity holds.
C)absolute purchasing-power parity also holds.
D)a currency depreciates relative to another currency by the amount by which the inflation rate is higher in the first country than in the second country.
Q2) If the supply of dollars in exchange for euro increases,
A)the dollar depreciates against the euro.
B)the dollar appreciates against the euro.
C)the exports of U.S.to Europe becomes costlier.
D)the demand for European goods increase in the U.S.
Q3) Assume that the only good traded between Mexico, the U.S., and Canada is chicken, which is produced by all three countries.If the cost of producing a pound of chicken is 5 pesos in Mexico, 1 U.S.dollar in the U.S., and 2 Canadian dollars in Canada, and if the law of one price holds, what are each of the exchange rates between the three countries?
Q4) Explain how a shock in one country can be transmitted to other countries.List three ways this can happen and give an example of each.
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Chapter 15: The Federal Reserve System
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Sample Questions
Q1) When a central bank is not independent, the main economic variable that is affected is
A)unemployment.
B)output growth.
C)inflation.
D)consumption spending.
Q2) What step does the Board of governors of the Fed take to ensure that the Fed does not built itself into an inefficient bureaucracy?
Q3) Each of the following helps the Federal Reserve to be independent of the federal government except
A)the fourteen-year terms of the governors.
B)the establishment of the Fed in the Constitution.
C)the staggered terms of the governors.
D)the independence of the Fed's income.
Q4) In the Federal Open Market Committee,
A)the Federal Reserve Bank of Kansas City always votes.
B)the Federal Reserve Bank of Washington always votes.
C)the Federal Reserve Bank of San Francisco always votes.
D)the Federal Reserve Bank of New York always votes.
Q5) Describe the roles of the Federal Reserve governors other than the chairman.
Page 17
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Chapter 16: Monetary Control
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Sample Questions
Q1) If the Fed decides to tighten monetary policy, it uses _____to_____ the money supply.
A)defensive open-market operations; decrease B)dynamic open-market operations; increase
C)defensive open-market operations; increase D)dynamic open-market operations; decrease
Q2) Suppose the M1 multiplier is currently 2.23 and the M2 multiplier is currently 7.95.If banks decide to increase the ratio of excess reserves they hold relative to the amount of transaction accounts they hold, how will the multipliers for M1 and M2 be affected (in qualitative, not quantitative, terms)?
Q3) If the federal funds rate equals the primary credit discount rate, the Fed is likely to ____securities in the open market, which will cause the federal funds rate to_____ . A)buy; increase B)buy; decrease C)sell; decrease D)sell; increase
Q4) What are the nontraditional policies suggested by Ben Bernanke for a central bank caught in a liquidity trap?
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Page 18
Chapter 17: Monetary Policy: Goals and Tradeoffs
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Sample Questions
Q1) If actual output is $11.7 trillion and potential output is $12.8 trillion, then the output gap is approximately
A)+9.4 percent.
B)+8.6 percent.
C) 8.6 percent.
D) 9.4 percent.
Q2) The equation for the Phillips curve in an economy is ? = ?<sup>e</sup> ? 0.5(U ? 5), If the inflation rate is 4 percent and the unemployment rate is 6 percent, then the expected inflation rate in the economy must be
A)2.5 percent.
B)4.0 percent.
C)4.5 percent.
D)5.0 percent.
Q3) The unemployment rate minus the natural rate of unemployment is known as the A)nominal rate of unemployment.
B)ideal unemployment rate.
C)unemployment gap.
D)non-accelerating inflation rate of unemployment (NAIRU).
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Chapter 18: Rules for Monetary Policy
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Q1) Why do monetarists favor the use of a nonactivist rule for monetary policy?
Q2) A money-growth rule that responds to the state of the economy is____ rule.
A)a lagging
B)a leading
C)a nonactivist
D)an activist
Q3) The Fed eases policy when it
A)decreases both the money growth and the federal funds rate.
B)decreases the money growth and increases the federal funds rate.
C)increases both the money growth and the federal funds rate.
D)increases the money growth and decreases the federal funds rate.
Q4) The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,
A)the central bank should raise the nominal interest rate by 1 percentage point.
B)the central bank should lower the nominal interest rate by 1 percentage point.
C)the central bank should raise the nominal interest rate by 0.5 percentage points.
D)the central bank should lower the nominal interest rate by 0.5 percentage points.
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