Monetary Economics
Exam Materials
Course Introduction
Monetary Economics explores the role of money and monetary institutions in the modern economy, focusing on how central banks manage money supply and interest rates to influence economic activity. The course covers key concepts such as the demand and supply for money, the creation of money by the banking system, and the effects of monetary policy on inflation, output, and employment. Students will examine the theoretical foundations of monetary economics, analyze the effectiveness of different policy tools, and study real-world cases such as financial crises and currency fluctuations. Emphasis is also placed on contemporary debates regarding central bank independence, the zero lower bound, and digital currencies.
Recommended Textbook
Macroeconomics 12th Edition by Rudiger Dornbusch Dr
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Chapter 1: Introduction
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Q1) Potential GDP is the value of GDP that can be calculated if we assume that A)there are no measurement errors
B)the unemployment rate is zero
C)the inflation rate is zero
D)GDP has been adjusted for inflation
E)the capital stock is working at full capacity and we have full employment
Answer: E
Q2) In the simple macro model of this chapter, the long-run AS-curve is
A)horizontal
B)vertical
C)upward-sloping
D)assumed to be completely price elastic
E)either B or C, depending on how fast prices adjust
Answer: B
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3
Chapter 2: National income accounting
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Q1) The difference between gross domestic investment and net domestic investment is equal to A)unwanted inventory changes
B)the difference between NDP and national income
C)the addition to the capital stock
D)the difference between GDP and NDP
E)none of the above
Answer: D
Q2) Assume nominal GDP was $16.0 trillion in Year 1 and $17.6 trillion in Year 2.If Year 1 is the base year, then
A)the GDP-deflator is 110
B)prices increased on average by 10 percent
C)real GDP has not changed
D)none of the above can be true
E)both A and B are true, but only if C is true
Answer: E
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Chapter 3: Growth and accumulation
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Q1) In a neoclassical growth model in which a one-time advance in technology occurs we could expect
A)the level of saving and investment to increase until a new and higher steady-state capital-labor ratio is reached
B)the level of income per capita to increase but the steady-state growth rate of output to remain unaffected
C)the level of output for any given capital-labor ratio to increase
D)all of the above
E)none of the above
Answer: D
Q2) From 1973 to 1992, by how much more did GDP grow in Japan than in the United States?
A)10%
B)22%
C)36%
D)54%
E)66%
Answer: C
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Chapter 4: Growth and policy
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Q1) A comparison of per-capita GDP in China and India over the last five decades indicates that
A)increases in physical capital contributed more to growth in China than in India
B)increases in physical capital contributed more to growth in India than in China
C)India's per-capita GDP grew more than China's due to lower population growth
D)while per-capita GDP of the two countries increased at about the same rate, India's total factor productivity increased much more than China's
E)while China's total factor productivity increased much more than India's, the per-capita GDP in both countries increased at about the same rate
Q2) A key assumption in an endogenous growth model with both labor and capital inputs in the production function is that
A)the share of capital is larger than the share of labor
B)the share of capital and labor have to be equal
C)better technology is a byproduct of more capital investment
D)there are no external returns to capital
E)long-run growth comes solely from technological progress
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Chapter 5: Aggregate supply and demand
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Q1) In an AD-AS diagram with an upward-sloping AS-curve, if a tax decrease is combined with money expansion,
A)output will remain relatively unaffected but interest rates will decrease
B)output will remain relatively unaffected but interest rates will definitely increase
C)aggregate demand, the price level, and output will all decrease
D)aggregate demand, the price level, and output will all increase
E)the price level will increase but we can't say what will happen to output or interest rates
Q2) The AD-curve has a negative slope since
A)firms will produce less if they have to lower their prices
B)lower prices mean higher real wages so firms can no longer afford to produce as many goods and services
C)a decrease in the price level increases real money balances, leading to lower interest rates and increased spending
D)lower prices drive up the demand for goods since buyers fear future market shortages
E)lower prices increase consumer confidence, which encourages spending
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Chapter 6: Aggregate supply and the phillips curve
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Q1) According to the Phillips curve relationship, if unemployment is at the natural rate, then
A)the rate of inflation is zero
B)nominal wages will always be equal to real wages
C)the labor supply will be totally price elastic
D)prices will always immediately adjust to changes in money supply
E)none of the above
Q2) The most likely long-run result of a tax cut would be
A)lower unemployment but higher prices and interest rates
B)lower interest rates but no change in unemployment
C)higher levels of consumption, investment, and employment
D)more consumption and less investment, with output remaining unchanged
E)higher prices and interest rates, resulting in a less consumption and investment
Q3) The misery index for the United States
A)increased steadily from 1950 to 1990, but has since declined
B)is closely but inversely related to the successes of the incumbent party
C)is closely and positively related to the successes of the incumbent party
D)is only loosely and inversely related to the successes of the incumbent party
E)none of the above
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Chapter 7: Unemployment
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Q1) An employed person is defined as a person who during a reference week
A)had a job but was not working due to family or personal reasons
B)had a job but was not working due to maternity or paternity leave
C)did at least one hour of work as a paid employee
D)all of the above
E)none of the above
Q2) Which of the following statements is FALSE?
A)the availability of unemployment benefits reduces the natural rate of unemployment
B)the natural rate of unemployment can be reduced by policies designed to affect the composition of the labor force
C)high rates of unemployment often have a way of perpetuating themselves
D)the unemployment rate among white males 20 years and older is lower than the overall unemployment rate
E)even when the economy is at the full-employment level of output, some frictional unemployment still exists
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Chapter 8: Inflation
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Q1) Which of the following is FALSE, if an increase in the inflation rate cannot be perfectly anticipated?
A)there will be a redistribution of income and wealth
B)debtors will benefit while creditors will lose
C)the holder of an indexed government bond will lose
D)the government will gain real tax revenue
E)the real value of government debt will decline
Q2) If you had $3,000 in a savings account that paid 5% interest compounded annually, how much would you have in your account after five years?
A)$3,484
B)$3,629
C)$3,750
D)$3,829
E)$4,224
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Chapter 9: Policy preview
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Q1) Which of the following is FALSE?
A)in the long run, a central bank can effectively limit inflation
B)in the long run, a central bank can do fairly little to stimulate real GDP
C)in the long run, monetary policy has no effect on nominal GDP
D)unless inflation is very high, stimulating the economy does more to enhance economic welfare than controlling inflation
E)a central bank can lower the inflation rate but only by allowing for a loss in real GDP, at least in the short run
Q2) The rule that tells a central bank how to set interest rates in response to changes in economic activity is known as the
A)federal funds rule
B)interest rate rule
C)monetary growth rule
D)Taylor rule
E)Friedman rule
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Chapter 10: Income and spending
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Q1) Which of the following will NOT happen if the income tax rate (t) is increased?
A)the expenditure multiplier and consumption will both decrease
B)disposable income, saving, and consumption will all decrease
C)consumption and income both will decrease, but saving will increase
D)the full-employment budget surplus will increase
E)autonomous spending will stay the same but national income will decrease
Q2) Assume a model with income taxes in which imports increase proportionally to national income. Which of the following is FALSE?
A) the expenditure multiplier will increase with an increase in the marginal propensity to import
B) the expenditure multiplier will increase with a decrease in the marginal propensity to save
C) the expenditure multiplier will decrease with an increase in the marginal propensity to save
D) the expenditure multiplier will decrease with an increase in the marginal income tax rate
E) the expenditure multiplier will decrease with an increase in the marginal propensity to import
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Chapter 11: Money, interest, and income
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Q1) The slope of the AD-curve will become flatter if
A)money demand becomes more income inelastic
B)money demand becomes more interest elastic
C)investment becomes more interest elastic
D)the marginal propensity to save increases
E)both A and C
Q2) In an IS-LM model, a decrease in the level of government purchases will result in
A)a decrease in the level of consumption
B)an increase in the level of investment
C)an increase in real money balances
D)a decrease in money supply
E)both A and B
Q3) In an IS-LM model, a decrease in autonomous saving will
A)decrease income but increase the interest rate
B)shift the LM-curve to the left
C)shift the IS-curve to the left
D)increase both income and the interest rate
E)decrease both income and the interest rate
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Chapter 12: Monetary and fiscal policy
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Q1) The LM-curve is vertical when
A)the interest elasticity of investment is zero
B)the central bank keeps nominal money supply constant
C)we are in the classical case
D)we are in the liquidity trap
E)none of the above
Q2) One side effect of expansionary fiscal policy is that
A)higher interest rates cause a change in the composition of GDP
B)higher interest rates significantly increase private saving
C)consumption spending is crowded out
D)the Fed has to reinforce the policy through open market sales
E)all of the above
Q3) A change in which of the following will NOT shift the IS-curve?
A)autonomous investment
B)autonomous money demand
C)autonomous consumption
D)autonomous net exports
E)autonomous saving
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14
Chapter 13: International linkages
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Q1) If a country has a balance-of-payments surplus, we know for sure that
A)the current account shows a surplus
B)the capital account shows a surplus
C)the sum of the current and capital accounts shows a surplus
D)net exports are positive
E)all of the above have to be true
Q2) In a model with perfect capital mobility and flexible exchange rates, an increase in exports
A)has no lasting effect on the equilibrium output level
B)leads to an inflow of funds from abroad
C)leads to a currency appreciation and an increase in imports
D)temporarily increases domestic interest rates
E)all of the above
Q3) If a French citizen buys 100 shares of IBM stock on the New York Stock Exchange, the transaction will be recorded as
A)a surplus item in the capital account
B)a deficit item in the capital account
C)a surplus item in the current account
D)a deficit item in the current account
E)a decrease in France's GDP
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Chapter 14: Consumption and saving
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Q1) If you are age 20, have no accumulated wealth, and have an expected average annual income of $36,000, how much should you consume each year if you want to retire at age 65 and expect to live until age 80? You desire to leave no estate and to consume an equal amount in each of the next 60 years.
A)$36,000
B)$31,000
C)$27,000
D)$22,000
E)$20,000
Q2) Actual consumption behavior exhibits both "excess smoothness" and "excess sensitivity," which means that
A)consumption responds too strongly to surprise changes in income
B)consumption responds too little to predictable changes in income
C)consumption always follows a random walk
D)consumption always adjusts with long lags
E)none of the above
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16
Chapter 15: Investment spending
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Q1) According to the accelerator model, as GDP declines and the economy enters a recession, we should expect the level of net investment to
A)increase at a decreasing rate
B)decrease but remain positive
C)become zero
D)become negative
E)increase due to undesired inventories
Q2) If Tobin's q is greater than 1, then a firm should
A)lower its desired capital stock
B)issue more stocks to finance new capital investment
C)pay out more dividends to stockholders
D)borrow more funds from banks to finance new capital investment
E)lower its level of investment spending
Q3) According to the accelerator model,
A)the level of investment spending is proportional to the level of GDP
B)the change in investment spending is proportional to the change in GDP
C)the change in investment spending is proportional to the level of GDP
D)the level of investment spending is proportional to the change in GDP
E)none of the above
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Page 17
Chapter 16: The demand for money
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Q1) According to the quantity theory of money, an increase in the money supply will result in
A)an increase in nominal GDP
B)an increase in velocity of equal magnitude
C)a decrease in velocity of equal magnitude
D)a decrease in money demand
E)a proportional increase in real GDP
Q2) The Baumol-Tobin square-root formula predicts that if banks levy hefty fees for withdrawals made from savings accounts, then
A)the income velocity of M1 will most likely increase
B)the amount of money balances held as M1 will most likely decrease
C)the income velocity of M2 will most likely decrease
D)the amount of money balances held as M2 will most likely be unaffected
E)all of the above
Q3) The precautionary demand for money will increase with
A)increased use of credit cards
B)higher interest rates
C)a decrease in the desire to avoid risk
D)harsher consequences for unpaid bills
E)none of the above
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Chapter 17: The fed, money, and credit
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Q1) Which of the following occurred in the U.S.between 2006 and 2013?
A)required bank reserves increased from $42.77 billion to $111.42 billion
B)excess bank reserves increased from $1.82 billion to $1,519.46 billion
C)the monetary base increased from $801.96 billion to $2,740.90 billion
D)all of the above
E)none of the above
Q2) If the Fed imposed a 100% reserve requirement, it would imply that
A)the Fed had no control over money supply
B) the Fed would no longer be able to conduct any open market operations
C) the money multiplier would be equal to one
D)the money multiplier would be equal to zero
E)banks would become completely obsolete
Q3) If the Fed decreases the reserve requirement,
A)market interest rates will go up
B)national income is likely to decrease at least in the short run
C)the Fed is probably trying to fight inflation
D)bank profits are likely to increase
E)all of the above
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Chapter 18: Policy
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Q1) Active stabilization policy may actually destabilize the economy since policy makers
A)do not know the exact length of policy lags
B)often do not know whether a disturbance is permanent or transitory
C)base their decisions on incomplete information about the economy
D)cannot take into account how individuals' expectations are affected by policy changes
E)all of the above
Q2) Which of these economists proposed that economic policy should be confined primarily to maintaining a constant long-run money supply growth rate?
A)Stanley Fischer
B)Milton Friedman
C)John Maynard Keynes
D)Paul Samuelson
E)John Taylor
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20
Chapter 19: Financial markets and asset prices
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Q1) If a consol (perpetual bond) pays $250 a year and yields 5%, what is its present discounted value?
A)$5,000
B)$2,500
C)$1,250
D)$1,000
E)it cannot be determined with this information
Q2) Which of the following statements is FALSE?
A)the timing of large stock market swings can often be predicted
B)changes in stock values tend to affect the value of pensions for many people
C)rates of return in financial markets feed back into goods markets
D)asset prices and interest rates are inversely related
E)many people see stock market volatility as a sign of market efficiency
Q3) If the current market interest rate rises from 4% to 5%, the price of a ten-year maturity bond will
A)fall more than the price of a two-year maturity bond
B)fall less than the price of a two-year maturity bond
C)rise more than the price of a two-year maturity bond
D)rise less than the price of a two-year maturity bond
E)not be affected, and neither will the price of a two-year maturity bond
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Chapter 20: The national debt
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Q1) From 1962-69, defense spending was, on average, about 8.7 percent of GDP but by 2000-09 this average percentage had changed to
A)12.8 percent of GDP
B)10.2 percent of GDP
C)5)6 percent of GDP
D)4)9 percent of GDP
E)3)8 percent of GDP
Q2) A country is likely to be faced with a debt crisis when
A)its debt-to-GDP ratio goes above 60 percent
B)its debt-to-GDP ratio goes above 100 percent
C)the interest rate on its debt reaches double digits
D)its creditors believe that there is little chance that they will be paid back
E)its government fails to implement austerity measures in times of high deficits
Q3) From 1960 to 2010, the share of total government spending in GDP
A)remained fairly stable
B)increased from about 15 percent to about 25 percent
C)increased from about 23 percent to about 35 percent
D)18.8 percent of GDP
E)20.4 percent of GDP
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Page 22
Chapter 21: Recession and depression
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Q1) When we look at inflation-adjusted home prices in the U.S.from 1910-2010, we see that
A)in real terms homes were more expensive in the 1930s than in the 1990s
B)the sharpest increase in home prices occurred right after World War II
C)the sharpest increase in home prices occurred from the late 1990s to about 2006
D)from 2000-2006, nominal housing prices increased sharply but real housing prices decreased slightly
E)none of the above
Q2) Which of the following occurred in the U.S.during the period from 1929 to 1933?
A)the CPI increased nearly 35%
B)the stock market fell nearly 50%
C)the unemployment rate rose from 3% to 12%
D)output fell nearly 30%
E)all of the above
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23
Chapter 22: Inflation and hyperinflation
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Q1) In 2011, the increase in the U.S.monetary base was
A)more than 4% of GDP
B)more than 3% of GDP
C)almost 3% of GDP
D)only 2% of GDP
E)less than 1% of GDP
Q2) In order to stop hyperinflation a government can
A)introduce new money and ensure that the money growth remains stable
B)peg the exchange rate of the new money that is introduced to that of a stable foreign currency
C)allow the use of another country's currency as a medium of exchange
D)all of the above
E)none of the above
Q3) From 1983-88, which of these countries had the HIGHEST average inflation rate?
A)Argentina
B)Bolivia
C)Colombia
D)Mexico
E)Peru
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Page 24
Chapter 23: International adjustment and interdependence
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Q1) Assume that domestic nominal interest rates decrease while domestic real interest rates increase.We can
A)expect an outflow of capital to countries abroad
B)expect a loss in competitiveness
C)assume that the domestic inflation rate has probably increased
D)expect a depreciation of the domestic currency
E)all of the above
Q2) The short-run effects of lower U.S.income taxes may include
A)an appreciation of the Japanese yen versus the U.S. dollar
B)a decrease in the trade imbalance with Japan
C)a decrease of imports into the U.S.
D)a decrease in U.S. net exports
E)all of the above
Q3) Substantial intervention in foreign exchange markets by a central bank in an attempt to maintain an exchange rate is called
A)sterilization
B)synchronization
C)dirty floating
D)managed neutralization
E)open market operations
25
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Chapter 24: Advanced topics
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Q1) The so-called DSGE models assume that
A)what happens in the future depends to a large degree on the decisions that economic agents make in the present
B)people have rationally designed long?term plans and adapt fairly easily to unexpected shocks to the economy
C)markets tend to clear even though they are not always all perfectly competitive
D)the forward?looking behavior of economic agents is the result of their rational expectations
E)all of the above
Q2) Which of the following is a key assumption in Mankiw's model of price stickiness?
A)people have adaptive expectations
B)the private benefits from changing prices are smaller than the social benefits
C)GDP will never return to trend after a disturbance
D)firms do not have enough market power to set their own prices
E)markets always clear immediately
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