Monetary Economics
Final Test Solutions
Course Introduction
Monetary Economics explores the role of money and financial institutions in shaping economic activity and influencing macroeconomic policy. Topics include the functions and demand for money, the structure and operation of financial markets, the behavior and regulation of central banks, and the transmission mechanisms of monetary policy. The course examines theoretical frameworks and empirical analysis to understand inflation, interest rates, and exchange rate dynamics, providing students with tools to evaluate how monetary policy impacts economic growth, stability, and global financial systems.
Recommended Textbook
The Economics of Money Banking and Financial Markets 5th Canadian Edition by Frederic S. Mishkin
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) When tax revenues are greater than government expenditures,the government has a budget ________.
A) crisis
B) deficit
C) surplus
D) revision
Answer: C
Q2) ________ markets transfer funds from people who do not have a productive use for them to people who do.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
Answer: C
Q3) The cost of borrowing is commonly referred to as the ________.
A) inflation rate
B) exchange rate
C) interest rate
D) aggregate price level
Answer: C
Page 3
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) Risk sharing is profitable for financial institutions due to ________.
A) low transactions costs
B) asymmetric information
C) adverse selection
D) moral hazard
Answer: A
Q2) A corporation acquires new funds only when its securities are sold in the ________.
A) primary market by an investment bank
B) primary market by a stock exchange broker
C) secondary market by a securities dealer
D) secondary market by a commercial bank
Answer: A
Q3) Every financial market has which of the following characteristics?
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
Answer: D
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4
Chapter 3: What Is Money
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Sample Questions
Q1) If an individual redeems a Canada savings bond for currency,________.
A) M1+ stays the same and M2 decreases
B) M1+ increases and M2 increases
C) M1+ increases and M2 stays the same
D) M1+ stays the same and M2 stays the same
Answer: B
Q2) The measures of money supply used by the Bank of Canada are ________ indices.
A) simple-sum
B) complex
C) multiplicative
D) accurate
Answer: A
Q3) If an individual moves money from a notice deposit to a chequing account,________.
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: D
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Page 5
Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) Comparing a discount bond and a coupon bond with the same maturity,________.
A) the coupon bond has the greater effective maturity
B) the discount bond has the greater effective maturity
C) the effective maturity cannot be calculated for a coupon bond
D) the effective maturity cannot be calculated for a discount bond
Q2) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
Q3) A fully amortized loan is another name for ________.
A) a simple loan
B) a fixed-payment loan
C) a commercial loan
D) an unsecured loan
Q4) Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.
Page 6
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Chapter 5: The Behaviour of Interest Rates
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Sample Questions
Q1) The price of gold should be ________ to the expected inflation rate.
A) positively related
B) negatively related
C) inversely related
D) unrelated
Q2) The opportunity cost of holding money is ________.
A) the level of income
B) the price level
C) the interest rate
D) the discount rate
Q3) When the price of a bond is ________ the equilibrium price,there is an excess demand for bonds and price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
Q4) Everything else held constant,would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) 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 federal government bond
B) A provincial bond
C) A corporate bond with a rating of Aaa
D) A corporate bond with a rating of Baa
Q2) The collapse of the subprime mortgage market ________.
A) did not affect the corporate bond market
B) increased the perceived riskiness of Treasury securities
C) reduced the Baa-Aaa spread
D) increased the Baa-Aaa spread
Q3) When interest rates on 1-2-3-4-5 year bonds are 2.0,2.1,2.3,2.4,and 2.5 percent respectively,what information do we derive on future economic growth and real output?
Q4) A key assumption in the segmented markets theory is that bonds of different maturities ________.
A) are not substitutes at all
B) are perfect substitutes
C) are substitutes only if the investor is given a premium incentive
D) are substitutes but not perfect substitutes
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Sample Questions
Q1) Mean reversion refers to the fact that ________.
A) small firms have higher than average returns
B) stocks that have had low returns in the past are more likely to do well in the future
C) stock returns are high during the month of January
D) stock prices fluctuate more than is justified by fundamentals
Q2) The theory of rational expectations,when applied to financial markets,is known as ________.
A) monetarism
B) the efficient markets hypothesis
C) the theory of strict liability
D) the theory of impossibility
Q3) Using the Gordon growth model,a stock's price will increase if ________.
A) the dividend growth rate increases
B) the growth rate of dividends falls
C) the required rate of return on equity rises
D) the expected sales price rises
Q4) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club.Should you act on this information? Why or why not?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Regulation of the financial system ________.
A) occurs only in Canada
B) protects the jobs of employees of financial institutions
C) protects the wealth of owners of financial institutions
D) ensures the stability of the financial system
Q2) One purpose of regulation of financial markets is to ________.
A) limit the profits of financial institutions
B) increase competition among financial institutions
C) promote the provision of information to shareholders, depositors and the public
D) guarantee that the maximum rates of interest are paid on deposits
Q3) The free-rider problem occurs because ________.
A) people who pay for information use it freely
B) people who do not pay for information use it
C) information can never be sold at any price
D) it is never profitable to produce information
Q4) Explain how government regulation can lessen asymmetric information problems but not eliminate them using Enron as an example.
Q5) Explain how high net worth and collateral reduce the problem of moral hazard.
Q6) Explain the difference between net worth and collateral.
Page 10
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Chapter 9: Financial Crises
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Q1) The "democratization of credit" was attributed to ________.
A) the subprime mortgage market
B) the 2000-2001 recession
C) growth of prime mortgages
D) asset-price gaps
Q2) The risk of asset-backed commercial paper depends on ________.
A) unsecured promissory notes
B) the underlying securities
C) commercial paper
D) Treasury bills
Q3) Banking crises or bank panics have started when ________.
A) there is a reduction of the adverse selection and moral hazard problems
B) there have been periods of low interest rates
C) depositors withdraw their funds from banks
D) when information is made available to investors
Q4) During the ABCP saga,The Bank of Canada ________.
A) shut down all non-bank sponsored conduits
B) refused to accept ABCPs as collateral for loans to banks
C) provided liquidity as a lender to the market
D) was bailed out by the CDIC
Page 11
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Chapter 10: Economic Analysis of Financial Regulation
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Q1) Because banks engage in regulatory arbitrage,the Basel Accord on risk-based capital requirements may result in ________.
A) reduced risk taking by banks
B) reduced supervision of banks by regulators
C) increased fraudulent behavior by banks
D) increased risk taking by banks
Q2) The primary rationale for deposit insurance is ________.
A) protecting depositors from bank insolvency
B) increasing creditworthiness of subprime mortgages
C) increasing barriers to entry in the banking industry to promote financial stability
D) altering risk profiles of both banks and depositors
Q3) Banking crises have occurred throughout the world.What similarities do we find when we look at the different countries?
Q4) Consumer protection legislation includes legislation to ________.
A) reduce discrimination in credit markets
B) require banks to make loans to everyone who applies
C) reduce the amount of interest that bank's can charge on loans
D) require banks to make periodic reports to the Better Business Bureau
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Page 12
Chapter 11: Banking Industry: Structure and Competition
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Sample Questions
Q1) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 5.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.
A) 7; 20
B) 4; 11.5
C) 4; 18
D) 5; 10
Q2) According to Edward Kane,because the banking industry is one of the most ________ industries in America,it is an industry in which ________ is especially likely to occur.
A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation
Q3) Which of the following are true statements?
A) Schedule I and Schedule II banks have different powers.
B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary.
C) Any widely held and regulated Canadian financial institution, other than a bank, may own 100 percent of a bank.
D) Schedule I banks have the same powers than Schedule II banks.
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Chapter 12: Nonbank Finance
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Sample Questions
Q1) Finance companies are ________.
A) as heavily regulated as banks
B) unregulated compared to banks
C) federally regulated
D) nationally regulated
Q2) Property insurance companies ________.
A) cover losses of real property
B) pay a sum of money if noncatastrophic events occur
C) provide income if a person dies, is incapacitated by illness, or retires
D) protect against legal liability exposures
Q3) To provide loans to new and established farmers for any agricultural or farm-related operation the government has created ________.
A) Farm Debit Canada
B) Farm Credit Canada
C) Farm Export Development Canada
D) Canada Farming Corporation
Q4) Describe the underwriting process.
Q5) How does the economic concept of adverse selection apply to the lending activities of insurers? Provide an example.
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Chapter 13: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Which of the following bank assets is the most liquid?
A) Consumer loans
B) Reserves
C) Cash items in process of collection
D) Government securities
Q2) Bankers' concerns regarding the optimal mix of excess reserves,secondary reserves,borrowings from the Bank of Canada,and borrowings from other banks to deal with deposit outflows is an example of ________.
A) liability management
B) liquidity management
C) managing interest rate risk
D) managing credit risk
Q3) Which of the following is not an example of a backup line of credit?
A) loan commitments
B) overdraft privileges
C) standby letters of credit
D) mortgages
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
Q5) What is a loan sale and how does it work?
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Chapter 14: Risk Management With Financial Derivatives
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Q1) If you buy in February a bond future contract for 125 that matures on June 30 of the same year,and at the maturity date the same future sells for 105,you have a ________ of $________.
A) loss; 20000
B) loss; 20
C) profit; 20000
D) profit; 20
Q2) Options on futures contracts are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
Q3) Which of the following features of futures contracts were not designed to increase liquidity?
A) Standardized contracts
B) Traded up until maturity
C) Not tied to one specific type of bond
D) Can be closed with off setting trade
Q4) What is an interest-rate futures contract? How does it differ from an interest-rate forward contract?
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Chapter 15: Central Banks and the Bank of Canada
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Q1) What are the main functions of the Bank of Canada? describe them briefly.
Q2) The strongest argument for an independent Bank of Canada rests on the view that subjecting the Bank to more political pressures would impart ________.
A) an inflationary bias to monetary policy
B) a deflationary bias to monetary policy
C) a disinflationary bias to monetary policy
D) a countercyclical bias to monetary policy
Q3) Which goal has been set jointly by the Bank and the Department of Finance?
A) Currency stability
B) GDP growth
C) Price stability
D) Employment growth
Q4) Advocates of Bank of Canada independence fear that subjecting the Bank to direct government control would ________.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) Both B and C of the above.
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Page 17
Chapter 16: The Money Supply Process
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Sample Questions
Q1) If the money supply is equal to $400 billion and the monetary base is equal to $100 billion,the money multiplier is equal to ________.
A) 4
B) 0.25
C) 5
D) cannot be determined
Q2) The monetary base minus currency in circulation equals ________.
A) reserves
B) the borrowed base
C) the nonborrowed base
D) advances to banks
Q3) The government agency that oversees the banking system and is responsible for the conduct of monetary policy in Canada is ________.
A) the Bank of Canada
B) the Department of Finance
C) the Canada Customs and Revenue Agency
D) the House of Parliament
Q4) Who are the three players in the money supply process? Describe their roles.
Q5) How do changes in the desired reserve ratio affect the money multiplier?
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Chapter 17: Tools of Monetary Policy
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Q1) The overnight interest rate ________.
A) is the shortest-term rate available
B) forms the base of any term structure of interest rates relation
C) is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
D) Only A and B of the above.
Q2) The primary indicator of the stance of monetary policy in the U.S.is the ________.
A) federal funds rate
B) discount rate
C) overnight rate
D) prime rate
Q3) The overnight interest rate is also known as the ________.
A) the bank rate
B) the policy rate
C) reference rate
D) the growth rate of M2
Q4) What are the advantages of SPRAs and SRAs?
Q5) What is the function of the ACSS?
Q6) What are the advantages and disadvantages of the Bank's lending policy?
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Chapter 18: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) The rate of inflation tends to remain constant when ________.
A) the unemployment rate is above the NAIRU
B) the unemployment rate equals the NAIRU
C) the unemployment rate is below the NAIRU
D) the unemployment rate increases faster than the NAIRU increases
Q2) Interest rates are difficult to measure because ________.
A) data on them are not available in a timely manner
B) real interest rates depend on the hard-to-determine expected inflation rate
C) they fluctuate too often to be accurate
D) they cannot be controlled by the Bank of Canada
Q3) Which of the following criteria need not be satisfied for choosing an intermediate target?
A) The variable must be measurable.
B) The variable must be controllable.
C) The variable must be predictable.
D) The variable must be stable.
Q4) What are the disadvantages inflation targeting?
Q5) What are the advantages of monetary targeting?
Page 20
Q6) Price stability is often the primary goal of central banks.Describe the five other goals of monetary policy
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Page 21
Chapter 19: The Foreign Exchange Market
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Q1) ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________,everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
Q2) Explain how productivity affects exchange rates in the long-run
Q3) When the exchange rate for the Mexican peso changes from 9 pesos to the Canadian dollar to 10 pesos to the Canadian dollar,then the Mexican peso has ________ and the Canadian dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
Q4) What is the theory of purchasing power parity? Why cannot it not fully explain exchange rates?
Q5) What are the factors that affect exchange rates in the long-run?
Q6) Explain the interest parity condition.
Q7) Explain how trade barriers affect the exchange rates in the long-run
Page 22
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Chapter 20: The International Financial System
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Q1) If a central bank does not want to see its currency ________ in value,it may pursue expansionary monetary policy to lower the domestic interest rate,thereby ________ its currency.
A) fall; strengthening B) fall; weakening C) rise; strengthening D) rise; weakening
Q2) Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will ________.
A) appreciate
B) depreciate
C) either appreciate, depreciate, or remain constant
D) not be affected
Q3) Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would ________.
A) hurt consumers in their country by making foreign goods more expensive
B) hurt domestic businesses by making foreign goods cheaper in their country
C) increase inflation in their country
D) decrease the wealth of the country
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Page 23
Chapter 21: Quantity Theory, inflation, and the Demand for Money
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Q1) In March 2007,the inflation rate in Zimbabwe reached ________.
A) over 1500 percent
B) over 150 percent
C) over 15 percent
D) over 15000 percent
Q2) The effect of money on the economy is called ________.
A) monetary supply
B) monetary policy
C) fiscal policy
D) monetary demand
Q3) Velocity is defined as ________.
A) P + M + Y
B) (P ×M)/Y
C) (Y ×M)/P
D) (P × Y)/M
Q4) One part of monetizing the debt is for the central bank to ________.
A) conduct an open market purchase
B) conduct an open market sale
C) increasing the overnight rate
D) decreasing the overnight rate
Page 24
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Chapter 22: The Is Curve
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Q1) Points on the IS curve satisfy ________ market equilibrium.
A) money
B) goods
C) stock
D) bond
Q2) Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________,which are influenced by emotional waves of optimism and pessimism-factors he referred to as "animal spirits."
A) unplanned investment spending
B) actual investment spending
C) planned investment spending
D) autonomous consumer expenditures
Q3) The Keynesian framework indicates that government can play an important role in determining aggregate output by ________.
A) changing the level of government spending or taxes
B) raising consumer confidence
C) raising investor confidence
D) changing the money supply and interest rates
Q4) What are the factors that can shift the IS curve to the right?
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Chapter 23: The Monetary Policy and Aggregate Demand
Curves
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Q1) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
Q2) 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
Q3) The Bank of Canada controls the overnight rate by ________.
A) varying the settlement balances it provides to the banking system
B) dictating terms of the LVTS
C) managing government savings
D) borrowing from the provincial government
Page 26
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Chapter 24: Aggregate Demand and Supply Analysis
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Q1) Suppose the economy is producing at the natural rate of output.An open market sale of bonds by the Bank of Canada will cause ________ in real GDP in the short run and ________ in the inflation rate in the short run,everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Q2) The aggregate demand-aggregate supply framework indicates that the long-run effect of a ________ in the money supply is an increase in ________,everything else held constant.
A) fall; aggregate output
B) fall; the inflation rate
C) rise; aggregate output
D) rise; the inflation rate
Q3) Explain how not following the Taylor principle leads to unstable inflation
Q4) Consider the following aggregate demand curve Y= 22-1p and a short-run aggregate supply curve given by: p=4+3(Y-10).Find the equilibrium output and inflation rate.
Q5) What is the shape of the long-run aggregate supply curve? Why?
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Chapter 25: Monetary Policy Theory
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Q1) When the Bank of Canada has an interest rate target,________ output might lead to a ________ money supply.
A) higher; higher
B) higher; lower
C) higher; stable
D) lower; lower
Q2) What is reverse causation and how does it relate to reduced-form evidence on monetary policy transmission?
Q3) Early Keynesians believed that ________ interest rates during the Great Depression indicated that monetary policy was ________.
A) high; easy
B) high; tight
C) low; easy
D) low; tight
Q4) In the new classical model,show graphically and explain how an expected monetary expansion that is less than expected reduces real output in the short run.What is the long-run result?
Q5) Explain what we call structural model evidence in describing the transmission mechanism of monetary policy.
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Chapter 26: The Role of Expectations in Monetary Policy
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Q1) Explain why the Bank of Canada had a credibility problem during the 1970s.
Q2) Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is 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
D) all of the above
E) both A and C
Q3) With a negative aggregate supply shock,monetary policy credibility can ________.
A) produce a better outcome
B) set inflation equal to zero
C) determine the effective interest rate
D) prevent financial malfeasance
Q4) The Lucas critique is an attack on the usefulness of ________.
A) conventional econometric models as forecasting tools
B) conventional econometric models as indicators of the potential impacts on the economy of particular policies
C) rational expectations models of macroeconomic activity
D) the relationship between the quantity theory of money and aggregate demand
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Chapter 27: Transmission Mechanisms of Monetary Policy
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Q1) What are the advantages of structural model evidence if the structure is correct?
Q2) What is the statistical evidence of early monetarists on the importance of money?
Q3) Evidence that is based on a variable having its effect on another variable through channels rather than a direct effect is known as ________.
A) indirect-model evidence
B) organizational-model evidence
C) reduced-form evidence
D) structural-model evidence
Q4) Early Keynesians believed that ________ interest rates during the Great Depression indicated that monetary policy was ________.
A) high; easy
B) high; tight
C) low; easy
D) low; tight
Q5) Explain what we call structural model evidence in describing the transmission mechanism of monetary policy.
Q6) What are the advantages of reduced-form evidence?
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Chapter 28: The ISLM Model
Available Study Resources on Quizplus for this Chatper
107 Verified Questions
107 Flashcards
Source URL: https://quizplus.com/quiz/30973
Sample Questions
Q1) Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess demand of money which will cause the interest rate to
A) right; fall
B) right; rise
C) left; fall
D) left; rise
Q2) The LM curve will be vertical and fiscal policy ineffective when ________.
A) the demand for money is unaffected by changes in the interest rate
B) the demand for money is unaffected by changes in income
C) investment is unaffected by changes in the interest rate
D) investment is unaffected by changes in income
Q3) In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.
A) increase; increase
B) not change; not change
C) increase; not change
D) not change; increase
Q4) Describe the key assumption that drives Keynes's ISLM model.
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