Monetary Economics
Midterm Exam
Course Introduction
Monetary Economics explores the role and functioning of money in the modern economy, focusing on the behavior of financial institutions, the determination of interest rates, and the impact of monetary policy on aggregate economic activity. The course provides an in-depth analysis of the structure and regulation of financial markets, central banking frameworks, and the mechanisms by which monetary authorities influence macroeconomic variables such as inflation, output, and employment. Students will study theoretical models and empirical evidence to understand the interactions between money supply, monetary transmission mechanisms, and economic stability, with attention to contemporary policy debates and global monetary challenges.
Recommended Textbook
Macroeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics?
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Q1) Using the data in the above table, if income is on the x-axis and the amount spent on restaurant meals is on the y-axis, the graph of the two variables would be
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
Answer: A
Q2) Suppose that the government of New York state promises to decrease taxes to a firm if it decides to stay in New York instead of moving to another state. This policy on the part of the state constitutes ________, to make the ________ of the firm remaining in New York.
A) an incentive; marginal benefit exceed the marginal cost
B) an incentive; marginal cost exceed the marginal benefit
C) a command; marginal benefit exceed the marginal cost
D) a command; marginal cost exceed the marginal benefit
Answer: A
Q3) In the figure above, what can you deduce about the slope of the curve?
Answer: The slope is positive and increasing in size as we move rightward along the curve.
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Page 3
Chapter 2: The Economic Problem
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Q1) At one point along a PPF, 50 tons of coffee and 100 tons of bananas are produced. At another point along the same PPF, 30 tons of coffee and 140 tons of bananas are produced. The opportunity cost of a ton of coffee between these points is
A) 7/5 of a ton of bananas per ton of coffee.
B) 1/2 of a ton of bananas per ton of coffee.
C) 5/7 of a ton of bananas per ton of coffee.
D) 2 tons of bananas per ton of coffee.
Answer: D
Q2) A country produces only pencils and erasers. Pencil production is allocatively efficient if the marginal ________ of a pencil equals the marginal ________ of
A) cost; benefit; an eraser
B) cost; cost; an eraser
C) benefit; benefit; an eraser
D) benefit; cost; a pencil
Answer: D
Q3) Are all points inside the production possibilities frontier unattainable?
Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed or misallocated resources at these points.
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Page 4
Chapter 3: Demand and Supply
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Q1) Consumers can use either natural gas or heating oil to warm their houses. Suppose the price of natural gas increases. Use a demand and supply diagram to show the impact of the higher price of natural gas on the market for home heating oil.
Answer: 11ea1607_da39_9441_ba9d_438d05dce0b1_TB3035_00 Natural gas and home heating oil are substitutes. The increase in the price of natural gas increases the demand for home heating oil, so the demand curve for home heating oil shifts rightward, as illustrated above. As a result, the price rises and quantity increases.
Q2) Wants, as opposed to demands
A) are the unlimited desires of the consumer.
B) are the goods the consumer plans to acquire.
C) are the goods the consumer has acquired.
D) depend on the price.
Answer: A
Q3) A relative price is the product of two money prices.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Measuring GDP and Economic Growth
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Q1) An expansion
A) follows a peak.
B) is defined as a period of negative real GDP growth. C) comes just before a trough.
D) is defined as a period of real GDP increases.
Q2) Purchasing power parity prices are used to construct GDP data that A) do not omit the underground economy.
B) can be used to make more valid comparisons between one country and another. C) is a proper measure of economic welfare.
D) adjust for differences in population.
Q3) "To calculate GDP, economists begin with total income earned and then subtract total expenditure by the four sectors of the economy." Is the previous sentence true or false? Explain your answer.
Q4) If depreciation is less than gross investment, then net investment is A) positive. B) negative.
C) zero.
D) This situation could never occur because it is impossible for depreciation to be less than gross investment.
Q5) Is it possible for nominal GDP to increase while real GDP does not change?
Page 6
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Chapter 5: Monitoring Jobs and Inflation
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Q1) Cyclical unemployment
A) is the major part of the natural unemployment rate.
B) decreases during economic expansions.
C) rises as a result of increased international competition.
D) falls when unemployment compensation payments are increased.
Q2) Unemployment caused by changes in technology is called ________ unemployment.
A) structural
B) frictional
C) techno
D) cyclical
Q3) The CPI is the average price of all goods and services produced within the economy.
A)True
B)False
Q4) The ________ is calculated as the number of people ________ divided by the labor force multiplied by 100.
A) unemployment rate; unemployed
B) employment-to-population ratio; unemployed
C) employment rate; employed
D) employment-to-population ratio; in the working age population
Page 7
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Chapter 6: Economic Growth
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Q1) The historical record for the United States over the last 100 years shows
A) mostly positive economic growth, though the Great Depression caused actual GDP to dip well below potential GDP.
B) economic growth for about half the years and economic decline for the other half.
C) growth until 1970 and then a period of constant per person real GDP.
D) continuous economic growth for each year, although at different rates, throughout the entire century.
Q2) Real GDP grows when
I.the quantities of the factors of production grow.
II.persistent advances in technology make factors of production increasingly productive. III.human capital grows.
A) only I
B) both I and III
C) only II
D) I, II, and III
Q3) The higher the real wage rate, the higher the labor force participation rate.
A)True
B)False
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8
Chapter 7: Finance, Saving, and Investment
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Sample Questions
Q1) Net investment equals
A) capital stock minus depreciation.
B) gross investment minus depreciation.
C) the total quantity of plant, equipment and buildings.
D) gross investment/depreciation.
Q2) The Ricardo-Barro effect says that
A) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.
B) government budget deficits crowd out private investment and thereby lower the real interest rate.
C) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment.
D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates.
Q3) Expected profit and the real interest rate affect investment decisions.
A)True
B)False
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9
Chapter 8: Money, the Price Level, and Inflation
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Sample Questions
Q1) Suppose prices are quoted in dollars and transactions are conducted in pesos. The dollar serves as a
A) medium of exchange.
B) store of value.
C) unit of account.
D) all of the above.
Q2) Which of the following is an example of money functioning as a unit of account?
A) Bank of America charging 7 percent on an auto loan.
B) Pepsi charging $1 for a can of soda.
C) eBay using PayPal as a method of payment.
D) Your writing a check at Target to pay for new clothes.
Q3) Checks are NOT money because they
A) are issued by banks, not by the government.
B) are merely instructions to transfer money.
C) have value in exchange but little intrinsic value.
D) are not backed by either gold or silver.
Q4) What is the relationship between money growth and inflation across countries? Does your answer support the quantity theory of money?
Q5) What is the money multiplier and what affects its size?
Q6) Explain the process by which the banking system creates money.
Page 10
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) The real exchange rate is
A) the relative price of U.S. produced goods to foreign produced goods.
B) the nominal exchange rate multiplied by the ratio of the foreign price level to the U.S. price level.
C) the money price of foreign produced goods relative to the money price of U.S. produced goods.
D) a measure of how much currency exchanges for a unit of another currency.
Q2) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008)
As a result, there was ________, holding all else the same.
A) a movement upward along the supply curve for krona
B) a leftward shift in the supply curve for krona
C) a rightward shift in the supply curve for krona
D) an increase in the quantity supplied of krona
Q3) In the foreign exchange market, how does a fall in the U.S. interest rate affect the supply of dollars?
Q4) Looking at the U.S. balance of payments for the last two decades, how have the current account and the capital account changed?
Page 11
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) In the short-run
A) the aggregate supply curve is upward sloping.
B) real GDP is always equal to potential GDP.
C) the money wage rate can change.
D) the price level does not change.
Q2) When the exchange rises, then the
A) AD curve shifts rightward.
B) AD curve shifts leftward.
C) LAS curve shifts rightward.
D) LAS curve shifts leftward.
Q3) In the short-run, real GDP can be greater than or less than potential GDP because in the short run the money wage rate is fixed.
A)True
B)False
Q4) What are the substitution effects that affect aggregate demand?
Q5) The data in the above table show that when the price level is 120, the economy
A) is in a long-run macroeconomic equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) will have falling money wage rates sometime in the future.
Page 12
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Chapter 11: Expenditure Multipliers
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Q1) If the change in autonomous investment equals $1 trillion and the change in real GDP equals $4 trillion, the multiplier equals 1/4.
A)True
B)False
Q2) In a simple economy with no income taxes or imports, prices are constant and the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion, then
A) consumption expenditure needs to increase by $500 billion.
B) saving needs to be reduced by $500 billion
C) investment needs to increase by $200 billion.
D) investment needs to increase by $100 billion
Q3) When disposal income is $5.0 trillion, consumption expenditure is $4.5 trillion. When disposal income is $6.0 trillion, consumption expenditure is $5.0 trillion. What is the marginal propensity to consume?
Q4) The marginal propensity to import is the ________ that is spent on imports.
A) fraction of an increase in real GDP
B) total amount of real GDP
C) total amount of potential GDP
D) fraction of an increase in potential GDP
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Page 13
Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) In the above figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point
A) A, that is, there is no movement.
B) B.
C) C.
D) D.
Q2) What are sources that can start a demand-pull inflation?
Q3) In a real business cycle model, labor supply
A) increases if the nominal interest rate rises.
B) is independent of the real interest rate.
C) decreases if the real interest rate rises.
D) decreases if the real interest rate falls.
Q4) If the economy is at potential GDP and the Fed increases the quantity of money, then A) potential GDP rises.
B) real GDP rises temporarily above potential GDP.
C) real GDP rises permanently above potential GDP.
D) potential GDP and real GDP both decrease.
Q5) What is the factor that leads to business cycles in the new classical cycle theory?
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Page 14
Chapter 13: Fiscal Policy
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Sample Questions
Q1) The stimulus package passed by Congress in 2009 to combat the recession is an example of
A) automatic fiscal policy.
B) discretionary fiscal policy.
C) monetary policy.
D) increased taxation.
Q2) The aggregate demand curve is shifted rightward by an increase in tax rates.
A)True
B)False
Q3) Economic data for a mythical economy in the years 2012-2016 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at full employment, the government has a
A) budget surplus.
B) balanced budget.
C) budget deficit.
D) procyclical policy.
Q4) According to tax receipt and outlay categories, what are the main components of the federal government budget?
Q5) What are some of the limitations of fiscal policy? Briefly discuss them.
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Chapter 14: Monetary Policy
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Q1) If the Fed increases the quantity of reserves, a new equilibrium is reached by a A) rightward shift of the demand for reserves curve.
B) movement down the demand for reserves curve.
C) leftward shift of the demand for reserves curve.
D) movement up the demand for reserves curve.
Q2) In the above figure, if the economy is initially at point c, the short-run effect of a hike in the federal funds rate is given by movement from point
A) c to point d, decreasing output and increasing the unemployment rate.
B) c to point d, increasing output and decreasing the unemployment rate.
C) c to point b, increasing output and decreasing the unemployment rate.
D) c to point a, keeping output and the unemployment rate constant.
Q3) If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________.
A) increase; increase
B) increase; decrease
C) decrease; increase D) decrease; decrease
Q4) What is the effect of lowering the interest rate on net exports? Explain your answer.
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Page 16
Chapter 15: International Trade Policy
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Q1) Import quotas
A) encourage freer trade.
B) are a tax on an imported good.
C) set the number of units of a good that can be imported.
D) set the minimum percentage of the value of a good that can consist of imported components.
Q2) Selling a product in a foreign nation at a price less than its cost of production is called
A) infant-industry exploitation.
B) absolute advantage.
C) dumping.
D) net exporting.
Q3) Which of the following is a TRUE statement?
A) Everyone benefits from free trade.
B) Only exporters benefit from trade.
C) All producers benefit from trade and but not all consumers benefit.
D) Free trade harms domestic producers of goods that face import competition.
Q4) What is dumping?
Q5) Explain the effects of a quota.
Q6) Define comparative advantage and discuss its role in international trade.
Page 17
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