Macroeconomics
Final Test Solutions
Course Introduction
Macroeconomics is the study of the economy as a whole, focusing on aggregate economic variables such as gross domestic product (GDP), unemployment, inflation, and overall economic growth. This course explores how national and global economic systems operate, the factors that drive economic cycles, and the impact of fiscal and monetary policy decisions made by governments and central banks. Students will learn to analyze economic indicators, understand the causes and consequences of economic fluctuations, and evaluate policy tools used to manage economic stability and growth. Through theoretical models and real-world case studies, the course aims to provide a comprehensive understanding of the forces that shape economies on a large scale.
Recommended Textbook Principles of Money Banking and Financial Markets 12th Edition by Ritter
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Chapter 1: Introducing Money, Banking, and Financial Markets
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Sample Questions
Q1) A salesperson does not
A) monitor market conditions and alter quotes so he does not get stuck with an unwanted inventory.
B) try to uncover information about securities that institutional investors are most interested in.
C) provide information to traders about the sentiment within the investment community.
D) convince bank customers to buy securities that the bank has already acquired through the activities of its traders.
Answer: A
Q2) Which of the following types of financial institutions is most likely to be a market maker in mortgage-backed securities?
A) A commercial bank
B) An investment bank
C) A savings and loan association
D) A credit union
Answer: C
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Chapter 2: The Role of Money in the Macroeconomy
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Sample Questions
Q1) Which of the following best describes the ideal quantity of money?
A) It equals the amount of spending.
B) It equals the level of GDP.
C) It equals the price level.
D) It stabilizes prices while allowing a high level of employment.
Answer: D
Q2) __________ is the narrowest and most traditional definition of money.
A) M1
B) M2
C) M3
D) M4
Answer: A
Q3) Parker bank is fully loaned up. Which of the following is not an option Parker has to obtain additional reserves?
A) Call in loans
B) Buy securities
C) Sell securities
D) Borrow through the federal funds market
Answer: B
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Page 4
Chapter 3: Financial Instruments, Markets, and Institutions
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Sample Questions
Q1) Checking accounts can be offered by
A) pension funds.
B) life insurance companies.
C) consumer finance companies.
D) savings and loan associations.
Answer: D
Q2) A wide variety of purchasers buy securities issued by all of the following government agencies except
A) Federal Home Loan Banks and Federal Land Banks.
B) the Federal National Mortgage Association.
C) the U.S. Treasury.
D) the Federal Reserve.
Answer: D
Q3) An example of direct finance would be when
A) a person purchases a certificate of deposit from a bank.
B) a person buys a life insurance policy.
C) a person buys 100 shares of stock from a corporation.
D) a bank makes a loan to a customer.
Answer: C
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Page 5
Chapter 4: Interest Rate Measurement and Behavior
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Sample Questions
Q1) Paul Oldy just purchased a $2,000 face value bond with. The bond pays $45 in interest semiannually. Paul could sell the bond today for $2,050. The current yield on this bond is __________ percent.
A) 2.25
B) 2.20
C) 4.50
D) 4.39
Q2) At the beginning of the year an investor pays $1,100 for a bond with a face value of $1,000. The bond pays a coupon payment of $60, and the investor sells it for $1,150 at the end of the year. The return is
A) 5.5 percent.
B) 6.0 percent.
C) 10.0 percent.
D) 10.5 percent.
Q3) An increase in saving by households will
A) result in a lower equilibrium interest rate. B) raise the equilibrium interest rate. C) have no effect on the equilibrium interest rate. D) lower the price of securities.
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Page 6
Chapter 5: The Term and Risk Structure of Interest Rates
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Sample Questions
Q1) If the yield on short-term securities is greater than the yield on comparable long-term securities, the yield curve will have a A) positive slope.
B) negative slope.
C) constant slope.
D) zero slope.
Q2) Compared with long-term securities, the prices of short-term securities are always A) more volatile.
B) less volatile.
C) higher.
D) lower.
Q3) Two-year securities are yielding 6 percent, and comparable one-year securities are yielding 8 percent. According to the pure expectations theory, the market expects next year's comparable one-year securities to yield
A) 14 percent.
B) 8 percent.
C) 6 percent.
D) 4 percent.
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7
Chapter 6: The Structure and Performance of Securities Markets
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Sample Questions
Q1) The spread between the bid price and the offer price is a measure of A) the underwriters' spread.
B) brokers' fees.
C) liquidity costs.
D) sunk costs.
Q2) When investment bankers underwrite new stock, they
A) sell them on one of the stock exchanges.
B) auction them off to the public.
C) sell them to commercial banks who in turn find buyers.
D) place them with ultimate investors and some intermediaries throughout the country.
Q3) The London gold fixing is an example of a(n)
A) dealer market.
B) Walrasian auction market.
C) brokered market.
D) secondary market.
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Chapter 7: The Pricing of Risky Financial Assets
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Sample Questions
Q1) In a world of certainty, the key decisions influenced by the riskless interest rate are A) risk premiums demanded by investors.
B) portfolio decisions.
C) diversification decisions.
D) consumption versus saving decisions.
Q2) The most fundamental proposition of modern portfolio theory is that
A) investment risk is reduced by investing in on security.
B) the smaller the standard deviation is, the larger is the risk of a portfolio.
C) even though an asset is risky in isolation, when combined with other assets the risk of the portfolio is less, perhaps even zero.
D) uncertain outcomes make for risky investments.
Q3) If the interest rate on a security consists only of the riskless rate, then
A) there is no uncertainty.
B) velocity is constant.
C) the money supply is fixed.
D) the price level is fixed.
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9
Chapter 8: Money and Capital Markets
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Sample Questions
Q1) On the New York Stock Exchange, the role of maintaining orderly markets is carried out by
A) dealers.
B) brokers.
C) specialists.
D) the SEC.
Q2) Compared with other bonds, convertible bonds usually have A) less liquidity.
B) a higher price.
C) a higher yield.
D) low tax payments.
Q3) Commercial paper is most commonly issued with a maturity of __________ days.
A) 5
B) 10
C) 30
D) 270
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Page 10
Chapter 9: Demystifying Derivatives
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Sample Questions
Q1) A(n)__________ is a standardized agreement that calls for the delivery of a specific underlying commodity or security at some future date at a currently agreed-upon price.
A) option contract
B) swap
C) futures contract
D) forward contract
Q2) The buyer of a put option on Boeing with a strike price of $75 and an expiration date in November 2003 has the
A) right to buy 100 shares of Boeing at $75 on or before November 1999.
B) right to sell 100 shares of Boeing at $75 on or before November 1999.
C) right to buy 100 shares of Boeing at $75 on or after November 1999.
D) right to sell 100 shares of Boeing at $75 on or after November 1999.
Q3) Futures contracts are least likely to be traded on which of the following exchanges?
A) New York Stock Exchange
B) Chicago Board of Trade
C) Chicago Mercantile Exchange
D) All of the above are equally likely to trade futures contracts.
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11
Chapter 10: Understanding Foreign Exchange
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Sample Questions
Q1) With a deficit in our balance of payments, there is an excess __________ dollars in the foreign exchange market, causing the dollar to __________.
A) demand for; appreciate
B) demand for; depreciate
C) supply of; appreciate
D) supply of; depreciate
Q2) In comparing the returns on U.S. and German Treasury securities, investors
A) should forecast the future dollar/euro exchange rate.
B) may disregard the future dollar/euro exchange rate.
C) should assume the future dollar/euro exchange rate is the same as today's.
D) should assume the euro will depreciate if the German interest rate is above the U.S. interest rate.
Q3) A(n)__________ in exports by the United States results in a(n)__________ in the supply of foreign exchange.
A) increase; increase
B) decrease; increase C) increase; decrease
D) None of the above.
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Chapter 11: The Nature of Financial Intermediation
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Sample Questions
Q1) Pension fund growth has been spurred by the recent development of "defined __________ plans," such as the __________ plan.
A) benefit; 401(k)
B) benefit; Keogh
C) contribution; 401(k)
D) contribution; Keogh
Q2) Life insurance companies, because of the __________-term nature of their liabilities, prefer to hold __________-term assets.
A) long; long
B) long; short
C) short; long
D) short; short
Q3) Financial intermediaries are specialists in the production of A) market failure.
B) information.
C) traded assets.
D) commercial paper.
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Chapter 12: Depository Financial Institutions
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Sample Questions
Q1) A package of nontraded financial instruments can be transformed into a traded financial instrument through the process of
A) collateralization.
B) repurchasing.
C) securitization.
D) underwriting.
Q2) Eurobonds are bonds that are
A) sold outside the borrowing corporation's home country. B) sold in Europe.
C) money market instruments.
D) almost always underwritten by a single bank.
Q3) Credit unions made it through the 1980s in relatively good shape because
A) most of their depositors were individuals.
B) most of their depositors were businesses.
C) they held many mortgages among their assets.
D) they held no mortgages among their assets.
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Chapter 13: Nondepository Financial Institutions
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Q1) The portfolios of property and casualty insurance companies are generally concentrated in
A) liquid assets.
B) mutual funds.
C) primary securities.
D) U.S. Treasury bonds.
Q2) Because women have a longer average life span than men, they are paid
A) higher monthly retirement benefits by a defined benefit pension plan.
B) lower monthly retirement benefits by a defined benefit pension plan.
C) the same monthly retirement benefits by a defined benefit pension plan.
D) the amount of monthly benefits paid to men and women by a defined benefit plan is determined by each company.
Q3) The "primary" market is the market for A) hostile takeovers.
B) newly-issued securities.
C) equities of "blue chip" companies.
D) league tables.
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Chapter 14: Understanding Financial Contracts
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Sample Questions
Q1) Under __________ a borrower gets advance approval from the SEC to issue securities up to a certain amount at an unspecified time in the future.
A) advance registration
B) pre-registration
C) guaranteed registration
D) shelf registration
Q2) Large companies with good credit ratings tend to rely on __________ for short-term financing.
A) the commercial paper market
B) private placements
C) finance companies
D) equity
Q3) Adverse selection is, in general, the asymmetric information problem that occurs
A) after a transaction is consummated.
B) due to a size difference in the parties to a transaction.
C) with securitization.
D) before a transaction is consummated.
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Chapter 15: The Regulation of Markets and Institutions
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Sample Questions
Q1) State chartered banks were supposed to be driven out of business by the National Currency Act of 1863 and the National Banking Act of 1864 by
A) imposing a tax on their issuance of state bank notes.
B) prohibiting them from having interstate branches.
C) prohibiting them from paying interest on demand deposits.
D) regulating the amount of interest they could pay on savings accounts.
Q2) When the Federal Reserve was formed, state-chartered banks were __________ Fed member banks.
A) automatically made
B) required to become
C) given the option to become
D) not allowed to become
Q3) The __________ policy dealt with the problem of the consequences of identification of weak banks by changing the closure rule.
A) forbearance
B) setting of "firewalls"
C) prompt corrective action
D) risk-based capital ratio
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Chapter 16: Financial System Design
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Sample Questions
Q1) Commercial bank ownership of corporate stock is prohibited by regulators in A) the United States.
B) the United Kingdom.
C) Germany.
D) Japan.
Q2) Japan and Germany are two major __________-oriented systems.
A) securities
B) equities
C) banking
D) markets
Q3) Conflict resolution of the stockholder-lender conflict in smaller market-oriented firms is most effectively accomplished by
A) financial intermediation (monitoring).
B) financial intermediation (ownership consolidation).
C) rating agencies.
D) managerial compensation.
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Chapter 17: Who's in Charge Here?
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Sample Questions
Q1) Which of the following groups within the Federal Reserve System is primarily concerned with open market operations?
A) The Federal Open Market Committee
B) The Federal Advisory Council
C) The Federal Reserve Bank presidents
D) The Board of Governors
Q2) Discount rates are __________ every two weeks by the directors of each regional Federal Reserve Bank but are __________ by the Board of Governors.
A) determined; established
B) established; determined
C) recommended; established
D) determined; recommended
Q3) With respect to reserve requirements on bank deposits, the Board of Governors can set them
A) at any level the Board desires.
B) at any level approved by the Federal Open Market Committee.
C) within the bounds of the specific limits imposed by Congress.
D) within the bounds of the specific limits set by the Secretary of the Treasury.
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Chapter 18: Bank Reserves and the Money Supply
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Sample Questions
Q1) A bank's excess reserves can be calculated as
A) total reserves times the reserve ratio.
B) demand deposits times the reserve ratio.
C) total reserves minus required reserves.
D) demand deposits minus total reserves.
Q2) A bank with excess reserves
A) cannot make new loans.
B) must make new loans.
C) may choose to make new loans equal to the amount of excess reserves.
D) can lend an amount equal to the amount of excess reserves multiplied by the inverse of the required reserve ratio.
Q3) An initial deficiency in reserves of $20 and a required reserve ratio of .5 lead to a maximum demand deposit contraction of
A) $8.
B) $40.
C) $50.
D) $80.
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Page 20
Chapter 19: The Instruments of Central Bankin
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Q1) If the Federal Reserve sells $20 million worth of government securities and the M1 multiplier is 2.5. Bank reserves will
A) fall by $20 million.
B) fall by $50 million.
C) fall by $16 million.
D) fall by $8 million.
Q2) Reserve requirements are highest for
A) transactions deposits.
B) bank borrowings from foreign branches.
C) federal funds.
D) business time deposits.
Q3) When a bank borrows from the Federal Reserve the bank
A) receives a new deposit of legal reserves at the Federal Reserve.
B) creates a new checkable deposit payable to the Federal Reserve.
C) normally will do so because it has excess reserves.
D) loses reserves equal to the amount of the loan.
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Chapter 20: Understanding Movements in Bank Reserves
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Q1) A gold sale by the U.S. Treasury
A) reduces bank reserves.
B) increases bank reserves.
C) increases Federal Reserve assets.
D) leaves bank reserves unaffected.
Q2) The Federal Reserve uses dynamic open market operations to
A) alter the money multiplier.
B) alter the growth path of bank reserves.
C) inject reserves temporarily into the system.
D) take reserves temporarily from the system.
Q3) The monetary base is equal to
A) Fed liabilities plus currency outstanding.
B) Fed liabilities minus loans to commercial banks.
C) bank reserves plus currency held by the non-bank public.
D) the M1 money supply minus Fed loans to commercial banks.
Q4) The monetary base will increase if
A) currency outstanding decreases.
B) loans by the Fed to commercial banks decrease.
C) bank reserves increase.
D) vault cash in banks increases.
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Chapter 21: Monetary Policy Strategy
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Q1) The full minutes of FOMC meetings are
A) released to the public immediately after the meeting.
B) released to the public only after the next meeting.
C) never released to the public.
D) always geared towards controlling inflation.
Q2) Total bank reserves are an example of a Federal Reserve
A) tool.
B) intermediate target.
C) operating target.
D) objective.
Q3) The FOMC directive does not contain a target
A) growth rate for M1.
B) growth rate for M2.
C) growth rate for M3.
D) federal funds interest rate.
Q4) Which of the following is an ultimate objective of the Federal Reserve?
A) Real GDP growth
B) M1 growth
C) M2 growth
D) Low interest rates
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Chapter 22: The Classical Foundations
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Q1) Money neutrality implies that changes in the money supply have an impact on
A) the unemployment rate.
B) interest rates.
C) the price level.
D) real GDP.
Q2) If the inflation rate is 5 percent and the real rate of interest is 3 percent, the nominal interest rate is
A) 8 percent.
B) 5 percent.
C) 3 percent.
D) 2 percent.
Q3) Monetarists view government intervention in the economy as
A) necessary to maintain full employment.
B) unnecessary and potentially damaging.
C) effective because it stimulates capital formation.
D) leads to consistently higher employment and output.
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Page 24
Chapter 23: The Keynesian Framework
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Q1) Keynes argued that if the economy is in a severely depressed state then __________ is constant.
A) real GDP
B) the price level
C) velocity
D) nominal GDP
Q2) In the simple Keynesian expenditure model, a marginal propensity to consume of .9 leads to an expenditure multiplier of
A) .1.
B) .9.
C) 9.
D) 10.
Q3) In the Keynesian model, an unwanted decrease in inventories leads to A) falling interest rates.
B) rising unemployment.
C) rising output.
D) falling money wages.
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Chapter 24: The ISLM World
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Q1) The LM curve shows points of equilibrium in the money market and combinations of A) inflation and unemployment.
B) aggregate supply and aggregate demand.
C) income and the interest rate.
D) money supply and money demand.
Q2) Along an IS curve as income levels __________, saving is smaller, so the interest rate must be __________ to reduce the level of investment so it will be equal to saving.
A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower
Q3) The slope of the IS curve will be steeper the __________ is the sensitivity of investment to a unit change in the interest rate and the __________ is marginal propensity to save.
A) greater; larger
B) greater; smaller
C) less; larger
D) less; smaller
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Page 26
Chapter 25: Money and Economic Stability in the ISLM World
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Q1) Monetarists argue that aggregate demand is A) vertical.
B) horizontal.
C) relatively unaffected by autonomous spending shifts. D) relatively unaffected by changes in the money supply.
Q2) Suppose the IS curve shifts back and forth. With a flat LM curve you get __________ variability in the output and __________ variability in the interest rate than you get with a steep LM curve.
A) more; more
B) more; less
C) less; more
D) less; less
Q3) In the IS-LM model, the expenditure multiplier is [1/(1-b)] when the A) LM curve is horizontal.
B) LM curve is upward-sloping.
C) LM curve is vertical.
D) IS curve is vertical.
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Page 27
Chapter 26: An Aggregate Supply and Demand Perspective on Money and Economic Stability
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Q1) Which of the following assumptions indicates that there is no trade-off between inflation and unemployment?
A) A vertical aggregate demand curve
B) A vertical Phillips Curve
C) Constant velocity
D) Constant money supply growth rate
Q2) A vertical aggregate supply curve implies __________ Phillips curve.
A) an upward-sloping
B) a downward-sloping
C) a vertical
D) a horizontal
Q3) A vertical Phillips Curve is consistent with A) a constant price level.
B) constant velocity.
C) an upward sloping aggregate supply curve.
D) a vertical aggregate supply curve.
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Chapter 27: Rational Expectations: Theory and Policy
Implications
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Q1) If wages and prices are flexible, then an anticipated change in the money supply will cause wages and prices to __________ the actual inflation rate.
A) increase at the same rate as B) increase at a higher rate than C) increase at a slower rate than D) cannot be exactly predicted
Q2) If participants in securities markets believe that an announced decrease in the money supply will reduce the rate of inflation, the likely result will be
A) higher real interest rates.
B) higher nominal interest rates.
C) lower real interest rates.
D) lower nominal interest rates.
Q3) Assuming rational expectations and complete wage and price flexibility, systematic stabilization policy impacts
A) real GDP.
B) real wages.
C) the unemployment rate.
D) the inflation rate.
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Chapter 28: Empirical Evidence on the Effectiveness of Monetary Policy
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Q1) The Federal Reserve often begins to tighten monetary policy after a trough in the business cycle because of
A) the impact lag.
B) the recognition lag.
C) bureaucratic indecision.
D) the time necessary to get Congress to act.
Q2) All of the following explain the impact lag except the time between A) a change in the money supply and a change in interest rates.
B) a change in interest rates and a change in investment.
C) a change in investment and the change in GDP.
D) a change in the economy and the use of a tool of monetary policy.
Q3) In most cases, higher interest rates cause the velocity of M1 to A) turn negative.
B) move erratically.
C) increase.
D) decline.
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Chapter 29: Tying It All Together
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Q1) An unexpected rise in the LEI should send bond prices __________ and stock prices __________.
A) up; up
B) up; down
C) down; up
D) down; down
Q2) A person with two jobs is counted __________ in the household survey and __________ in the establishment survey.
A) once; once
B) once; twice
C) twice; once
D) twice; twice
Q3) An unexpected rise in the Producer Price Index should send bond prices __________ and stock prices __________.
A) up; up
B) up; down
C) down; up
D) down; down
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