Macroeconomic Theory Practice Exam
Course Introduction
Macroeconomic Theory explores the behavior and performance of an economy as a whole by examining aggregate measures such as national income, output, employment, inflation, and economic growth. The course delves into the functioning of product and labor markets, the impact of fiscal and monetary policies, and the role of government intervention. Students will learn key theoretical frameworks, including classical, Keynesian, and contemporary approaches, to analyze economic fluctuations, policy effectiveness, and the factors driving economic development and stability. Through models and real-world applications, the course provides a foundation for understanding major macroeconomic issues and the tools economists use to address them.
Recommended Textbook
The Economics of Money Banking and Financial Markets 10th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) The delivery of financial services electronically is called
A) e-business.
B) e-commerce.
C) e-finance.
D) e-possible.
Answer: C
Q2) When I purchase a corporate ________,I am lending the corporation funds for a specific time. When I purchase a corporation's ________,I become an owner in the corporation.
A) bond; stock
B) stock; bond
C) stock; debt security
D) bond; debt security
Answer: A
Q3) From 1950-2011 the price level in the United States increased more than.
A) twofold.
B) threefold.
C) sixfold.
D) ninefold.
Answer: C
Page 3
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) The primary assets of a pension fund are
A) money market instruments.
B) corporate bonds and stock.
C) consumer and business loans.
D) mortgages.
Answer: B
Q2) Typically,borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project.The difference in information is called
A) moral selection.
B) risk sharing.
C) asymmetric information.
D) adverse hazard
Answer: C
Q3) Savings and loan associations are regulated by the A) Federal Reserve System.
B) Securities and Exchange Commission.
C) Office of the Comptroller of the Currency.
D) Office of Thrift Supervision.
Answer: D
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Chapter 3: What Is Money
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Sample Questions
Q1) Small-denomination time deposits refer to certificates of deposit with a denomination of less than
A) $1,000.
B) $10,000.
C) $100,000.
D) $1,000,000.
Answer: C
Q2) Which of the following is not included in the M1 measure of money but is included in the M2 measure of money?
A) Currency
B) Traveler's checks
C) Demand deposits
D) Small-denomination time deposits
Answer: D
Q3) If an individual moves money from a money market deposit account to currency,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) An increase in the time to the promised future payment ________ the present value of the payment.
A) decreases
B) increases
C) has no effect on D) is irrelevant to
Q2) In the United States during the late 1970s,the nominal interest rates were quite high,but the real interest rates were negative. From the Fisher equation,we can conclude that expected inflation in the United States during this period was A) irrelevant.
B) low.
C) negative.
D) high.
Q3) Interest-rate risk is the riskiness of an asset's returns due to A) interest-rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the asset's maturity.
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Chapter 5: The Behavior of Interest Rates
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Q1) Everything else held constant,when stock prices become ________ volatile,the demand curve for bonds shifts to the ________ and the interest rate ________.
A) more; right; rises
B) more; right; falls
C) less; left; falls
D) less; left; does not change
Q2) In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
Q2) If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?
A) a U.S. Treasury bond
B) a municipal bond
C) a corporate bond with a rating of Aaa
D) a corporate bond with a rating of Baa
Q3) An inverted yield curve predicts that short-term interest rates
A) are expected to rise in the future.
B) will rise and then fall in the future.
C) will remain unchanged in the future.
D) will fall in the future.
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Q1) If in an efficient market all prices are correct and reflect market fundamentals,which of the following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future.
B) One investment is as good as any other because the securities' prices are correct.
C) A security's price reflects all available information about the intrinsic value of the security.
D) Security prices can be used by managers to assess their cost of capital accurately.
Q2) A stockholder's ownership of a company's stock gives her the right to
A) vote and be the primary claimant of all cash flows.
B) vote and be the residual claimant of all cash flows.
C) manage and assume responsibility for all liabilities.
D) vote and assume responsibility for all liabilities.
Q3) 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.
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Chapter 8: An Economic Analysis of Financial Structure
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Q1) The principal-agent problem
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do.
B) in financial markets helps to explain why equity is a relatively important source of finance for American business.
C) would not arise if the owners of the firm had complete information about the activities of the managers.
D) explains why direct finance is more important than indirect finance as a source of business finance.
Q2) The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.
A) owners; customers
B) owners; managers
C) managers; customers
D) managers; owners
Q3) Why does the free-rider problem occur in the debt market?
Q4) How does collateral help to reduce the adverse selection problem in credit market?
Q5) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Financial Crises
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Q1) A ________ pays out cash flows from subprime mortgage-backed securities in different tranches,with the highest-rated tranch paying out first,while lower ones paid out less if there were losses on the mortgage-backed securities.
A) Collateralized debt obligation (CDO)
B) Adjustable-rate mortgage
C) Negotiable CD
D) Discount bond
Q2) When the value of loans begins to drop,the net worth of financial institutions falls causing them to cut back on lending in a process called
A) deleveraging.
B) releveraging.
C) capitulation.
D) deflation.
Q3) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include
A) failure of the Mexican oil monopoly.
B) the ratification of the North American Free Trade Agreement.
C) increased uncertainty from political shocks.
D) decline in interest rates.
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Chapter 10: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Banks hold capital because
A) they are required to by regulatory authorities.
B) higher capital increases the returns to the owners.
C) it increases the likelihood of bankruptcy.
D) higher capital increases the return on equity.
Q2) Your bank has the following balance sheet: Assets Liabilities
Reserves $ 50 million Checkable deposits $200 million
Securities 50 million
Loans 150 million Bank capital 50 million
If the required reserve ratio is 10%,what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?
Q3) Which of the following are reported as liabilities on a bank's balance sheet?
A) Discount loans
B) Reserves
C) U.S. Treasury securities
D) Loans
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
Chapter 11: Economic Analysis of Financial Regulation
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Sample Questions
Q1) When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of
A) regulatory forbearance.
B) regulatory kindness.
C) ostrich reasoning.
D) ignorance reasoning.
Q2) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) restricted thrift institutions to making loans for home mortgages.
B) restricted the use of ATS accounts.
C) imposed restrictive interest-rate ceilings on large agricultural loans.
D) increased deposit insurance from $40,000 to $100,000.
Q3) Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government
A) regulation.
B) ownership.
C) recall.
D) forbearance.
Q4) The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.
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Chapter 12: Banking Industry: Structure and Competition
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Q1) ________ within the U.S.can make loans to foreigners but cannot make loans to domestic residents.
A) Edge Act corporations
B) International Banking Facilities
C) Universal banks
D) Euro banks
Q2) The decline in traditional banking internationally can be attributed to A) increased regulation.
B) improved information technology.
C) increasing monopoly power of banks over depositors.
D) increased protection from competition.
Q3) Sweep accounts
A) have made reserve requirements nonbinding for many banks.
B) sweep funds out of deposit accounts into long-term securities.
C) enable banks to avoid paying interest to corporate customers.
D) reduce banks' assets.
Q4) Discuss three ways in which U.S.banks can become involved in international banking.
Q5) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) In the Governing Council,the decision of what policy to implement is made by A) majority vote of the Executive Board members.
B) majority vote of the heads of the National Banks. C) consensus.
D) majority vote of all members of the Governing Council.
Q2) The Federal Open Market Committee's "balance of risks" is an assessment of whether,in the future,its primary concern will be
A) higher exchange rates or higher unemployment.
B) higher inflation or a stronger economy.
C) higher inflation or a weaker economy.
D) lower inflation or a stronger economy.
Q3) Who are the voting members of the Federal Open Market Committee and why is this committee important? Where does the power lie within this committee?
Q4) Explain the similarities and differences between the European System of Central Banks and the Federal Reserve System.
Q5) Explain two concepts of central bank independence.Is the Fed politically independent? Why do economists think central bank independence is important?
Q6) 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) Of the three players in the money supply process,most observers agree that the most important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
Q2) The monetary base minus currency in circulation equals A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
Q3) Explain two reasons why the Fed does not have complete control over the level of bank deposits and loans.Explain how a change in either factor affects the deposit expansion process.
Q4) The interest rate the Fed charges banks borrowing from the Fed is the A) federal funds rate.
B) Treasury bill rate.
C) discount rate.
D) prime rate.
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) Open market purchases raise the ________ thereby raising the ________.
A) money multiplier; money supply
B) money multiplier; monetary base
C) monetary base; money supply
D) monetary base; money multiplier
Q2) The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.
A) seasonal credit; secondary credit; primary credit
B) secondary credit; seasonal credit; primary credit
C) primary credit; seasonal credit; secondary credit
D) seasonal credit; primary credit; secondary credit
Q3) Everything else held constant,in the market for reserves,when the federal funds rate is 1%,increasing the interest rate paid on excess reserves from 1% to 2%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits
A) only during World War I.
B) during the Great Depression.
C) during World War I and World War II.
D) throughout the entire existence of the Fed.
Q2) The monetary policy strategy that suffers a lack of transparency is
A) exchange-rate targeting.
B) monetary targeting.
C) inflation targeting.
D) the implicit nominal anchor.
Q3) Which of the following is not an element of inflation targeting?
A) A public announcement of medium-term numerical targets for inflation
B) An institutional commitment to price stability as the primary long-run goal
C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
D) Increased accountability of the central bank for attaining its inflation objectives
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Chapter 17: The Foreign Exchange Market
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Q1) When the value of the dollar changes from £0.75 to £0.5,then the British pound has ________ and the U.S.dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
Q2) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar,the real depreciates from ________ per real to ________ per real.
A) $0.67; $0.50
B) $0.33; $0.50
C) $0.75; $0.50
D) $0.50; $0.67
E) $0.50; $0.75
Q3) The immediate (two-day)exchange of one currency for another is a A) forward transaction.
B) spot transaction.
C) money transaction.
D) exchange transaction.
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Chapter 18: The International Financial System
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Q1) The Bretton Woods system was one in which central banks
A) bought and sold their own currencies to keep their exchange rates fixed.
B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I.
C) agreed to limit domestic money growth to the average of the five largest industrial nations.
D) agreed to limit domestic money growth to the average of the seven largest industrial nations.
Q2) When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to ________ the domestic currency,thereby allowing the money supply to ________.
A) purchase; decline
B) sell; decline
C) purchase; increase
D) sell; increase
Q3) Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes.
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Chapter 19: Quantity Theory, inflation and the Demand for Money
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Q1) Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that
A) the speculative demand for money is interest insensitive.
B) the transactions demand for money is interest insensitive.
C) people will hold a diversified portfolio.
D) people will hold money or bonds but not both.
Q2) If initially the money supply is $2 trillion,velocity is 5,the price level is 2,and real GDP is $5 trillion,a fall in the money supply to $1 trillion
A) reduces real GDP to $2.5 trillion.
B) causes velocity to rise to 10.
C) decreases the price level to 1.
D) decreases the price level to 1 and decreases velocity to 2.5.
Q3) If the money supply is $600 and nominal income is $3,600,the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.
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Chapter 20: The Is Curve
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Q1) In the simple Keynesian framework,declines in planned investment spending that produce high unemployment can be offset by raising A) taxes.
B) government spending.
C) consumer confidence.
D) business confidence.
Q2) In the simple Keynesian model,equilibrium aggregate output is determined by A) aggregate demand.
B) aggregate supply.
C) the national demand for labor.
D) the price level.
Q3) An increase in interest rates
A) increases the value of the dollar, net exports, and equilibrium output.
B) increases the value of the dollar, reducing net exports and equilibrium output.
C) reduces the value of the dollar, net exports, and equilibrium output.
D) reduces the value of the dollar, increasing net exports and equilibrium output.
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Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Q1) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to ________ real interest rates,thereby ________ the level of equilibrium aggregate output.,everything else held constant.
A) raise; lowering B) raise; raising
C) reduce; lowering D) reduce; raising
Q2) Because prices are slow to move in the short-run,when the Federal Reserve lowers the federal funds rate,
A) nominal interest rates rise.
B) real interest rates fall.
C) inflation falls.
D) real interest rates rise.
Q3) The monetary policy (MP)curve indicates the relationship between
A) the Federal Funds Rate and the real interest rate.
B) the Federal Funds Rate and the inflation rate.
C) the inflation rate and the expected inflation rate.
D) the real interest rate the central bank sets and the inflation rate.
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) Everything else held constant,a decrease in net taxes ________ aggregate
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
Q2) Everything else held constant,when output is ________ the natural rate level,wages will begin to ________,increasing short-run aggregate supply.
A) above; fall
B) above; rise
C) below; fall
D) below; rise
Q3) Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.
Q4) The long-run aggregate supply curve is a vertical line passing through A) the natural rate of output.
B) the natural-rate price level.
C) the actual rate of unemployment.
D) the expected rate of inflation.
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Chapter 23: Monetary Policy Theory
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Q1) When the economy suffers a temporary negative supply shock,the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to
A) more stable economic activities.
B) a large deviation of output from its potential.
C) divine coincidence.
D) both B and C.
Q2) Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from
A) an employment target that was set too high.
B) the government's inability to sell bonds to the Fed.
C) an expansion in the money supply to finance federal government expenditures.
D) the excessive sale of government bonds to the public.
Q3) Which of the following is least likely to lead to inflationary monetary policy?
A) Rising unemployment
B) Expanding federal budget deficits
C) Declining oil prices
D) Conflict in the Middle East
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Chapter 24: The Role of Expectations in Monetary Policy
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Q1) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible,then
A) the public's expected inflation will remain unchanged.
B) the short-run aggregate supply curve will rise.
C) over time inflation will fall back down to the inflation target.
D) all of the above.
E) both A and B.
Q2) Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies,most economists agree that
A) stabilization policies proved more difficult in practice than many economists had expected.
B) stabilization policies proved not to be inflationary.
C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable.
D) the discretionary policymakers were right in believing that the private economy is inherently stable.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) According to the household liquidity effect,an expansionary monetary policy causes a ________ in the value of households' financial assets,causing consumer durable expenditure to ________.
A) decline; rise
B) rise; rise
C) rise; fall
D) decline; fall
Q2) The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the
A) traditional interest-rate channel.
B) Tobins' q theory.
C) wealth effects.
D) cash flow channel.
Q3) Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.
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: The ISLM Model
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Q1) 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.
Q2) Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Q3) The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.
A) IS curve
B) LM curve
C) consumption function
D) investment schedule
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