Course Introduction
Monetary Economics
Pre-Test Questions
Monetary Economics explores the role of money in the economy, focusing on how monetary policy, financial institutions, and central banking influence economic variables such as inflation, interest rates, output, and employment. The course examines the theoretical foundations of money demand and supply, the mechanisms of monetary transmission, and the practical challenges of implementing monetary policy in different macroeconomic environments. Students will analyze historical and contemporary issues in monetary economics, including the impact of digital currencies, financial crises, and global financial integration, equipping them with a comprehensive understanding of the dynamic interplay between money, policy, and economic performance.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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18 Chapters
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) Borrowers who stated but did not document their incomes are referred to as A) subprime.
B) alt-A.
C) adjustable.
D) securitized.
Answer: B
Q2) In the United States,the lender of last resort is A) Fannie Mae.
B) the Federal Reserve.
C) the Federal Deposit Insurance Corporation.
D) the Securities and Exchange Commission.
Answer: B
Q3) Briefly explain the difference in how banks and peer-to-peer lenders make profits on loans.
Answer: Banks have traditionally earned profits on loans by paying a lower interest rate to depositors than they charge to borrowers.Peer-to-peer lenders make profits by charging borrowers a one-time fee and charging the people providing funds a fee for collecting the payments from borrowers.
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3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) Research has shown that nations with highly independent central banks tend to have low
A) inflation.
B) interest rates.
C) economic growth.
D) unemployment.
Answer: A
Q2) Money is a medium of exchange in that
A) money is generally accepted for buying and selling goods and services.
B) currency may be exchanged for gold at any national bank.
C) other assets may be better or worse in facilitating exchange than money.
D) it must maintain most of its value over time.
Answer: A
Q3) Which of the following makes up the largest share of M2?
A) M1
B) savings deposits
C) small time deposits
D) money market mutual fund shares
Answer: B
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Page 4
Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) If the annual interest rate is 8%,what would you expect to pay for a bond paying a lump sum of $10,000 in ten years?
A) $4,632
B) $9,259
C) $10,000
D) $21,589
Answer: A
Q2) What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?
A) 2%
B) 4%
C) 6%
D) 19%
Answer: A
Q3) Suppose a bond has a coupon of $40,face value of $1,000,and current price of $950.What is the coupon rate? What is its current yield? Report a percentage with two decimal places.
Answer: The coupon rate is $40 / $1,000 = 4.00%.The current yield is $40 / $950 = 4.21%.
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Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S.government bonds.Which of the following is NOT a likely consequence?
A) higher price of U.S. government bonds
B) lower interest rate on U.S. government bonds
C) increased demand for U.S. government bonds
D) reduced supply of U.S. government bonds
Q2) A one-year discount bond with a face value of $1,000 that is currently selling for $900 has an interest rate of
A) 5.26%.
B) 10%.
C) 11.1%.
D) 100%.
Q3) The two most important factors that cause the money demand curve to shift are
A) real GDP and the price level.
B) nominal GDP and the Fed.
C) the price level and the nominal interest rate.
D) the nominal interest rate and the money supply.
Q4) How should a financial plan of an older saver differ from that of a younger saver?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) According to the liquidity premium theory,what does a flat yield curve indicate?
A) Short-term interest rates are expected to remain stable.
B) Short-term interest rates are expected to rise.
C) Short-term interest rates are expected to fall.
D) Long-term interest rates are expected to fall.
Q2) Which bond would someone in a 35% tax bracket choose to buy: a municipal bond with an interest rate of 7% or a corporate bond with an interest rate of 10%?
Q3) How do ratings agencies earn income?
Q4) For an institutional investor,if the expectations theory is correct,the average of the expected short-term interest rates over the life of the long-term investment should be roughly equal to the interest rate on the long term investment,which would
A) result in a positive level of profits from an interest-carry-trade strategy.
B) result in an even higher-than-expected level of profits from an interest-carry-trade strategy.
C) result in a high level of negative profits (losses) from an interest-carry-trade strategy.
D) eliminate any potential profits from an interest-carry-trade strategy.
Q5) What are the economic implications of an inverted yield curve?
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) Behavioral economics can best be described as
A) the study of situations in which people's choices do not appear to be economically rational.
B) the study of human economic behavior.
C) the basis for efficient markets.
D) the study of how the economy affects human behavior.
Q2) The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk.
B) information costs.
C) liquidity.
D) all of the above.
Q3) Which of the following expressions gives the present value of future dividends for a company whose current dividend is $5.00 and whose future dividends are expected to grow at rate g?
A) [$5.00(1 - g)]/(i - g)
B) [$5.00(1 + g)]/(i + g)
C) [$5.00(1 - g)]/(i + g)
D) [$5.00(1 + g)]/(i - g)
Q4) What are the effects of the double taxation of dividends?
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Chapter 7: Derivatives and Derivative Markets
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Q1) Which of the following is NOT an advantage of a futures contract over a forward contract?
A) reduced counterparty risk
B) increased flexibility
C) lower information cost
D) increased liquidity
Q2) Why do futures have lower information costs and higher liquidity than forward contracts?
Q3) Derivative instruments are
A) assets such as bonds or common stock that derive their value from the value of the companies which issue them.
B) assets whose rates of returns must be derived from information published in financial tables.
C) assets which derive their value from underlying assets.
D) computers which display real-time financial information.
Q4) Suppose you purchase a call option to buy IBM common stock at $35 per share in September.The current price of IBM is $37 and the option premium is $4.What is the intrinsic value of the option? As the expiration date on the option approaches,what will happen to the size of the option premium?
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) The daily turnover in the foreign exchange market is
A) millions of dollars.
B) billions of dollars.
C) trillions of dollars.
D) declining in the last decade.
Q2) A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is
A) 1 yen = 8 pesos.
B) 1 peso = 8 yen.
C) 1 peso = 0.125 yen.
D) 1 yen = 20,000 pesos.
Q3) All else being equal,a decrease in foreign interest rates relative to U.S.interest rates causes the supply of dollars to ________ and the dollar will ________ relative to foreign currencies.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
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10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) Moral hazard is NOT eliminated in debt financing because A) borrowers have an incentive to assume greater risk than is in the interest of the lender.
B) firms with a great deal of debt often go bankrupt.
C) principal-agent problems are greater with debt financing than with equity financing.
D) the use of restrictive covenants tends to increase moral hazard.
Q2) Briefly explain what was done in the early years of George Washington's administration that helped the United States develop a modern financial system.
Q3) The assumption of asymmetric information means that
A) borrowers and lenders have the same information.
B) borrowers and lenders have perfect information.
C) borrowers know more than lenders.
D) lenders know more than borrowers.
Q4) The existence of adverse selection results in A) reduced market efficiency.
B) an increase in the likelihood of moral hazard.
C) an increase in market transactions.
D) higher transactions costs.
Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) What is the largest category of bank assets?
A) loans
B) reserves
C) securities
D) cash items in the process of collection
Q2) Which of the following involves banks borrowing funds from firms or other banks using the value of underlying securities as collateral?
A) federal funds
B) repurchase agreement
C) counterparty lending
D) money market account
Q3) The most important factor in determining your FICO score is
A) your history of making payments.
B) how long you have been using credit.
C) the amount you owe on loans and credit cards.
D) how many different types of credit you have.
Q4) What steps can a bank take to deal with a significant outflow of deposits?
Q5) Compare the characteristics of loans and marketable securities in terms of liquidity,risk,and information costs.
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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Q1) What does it mean for an investment bank to conduct a "road show"?
A) It involves an investment bank marketing its services to firms considering new issues.
B) It is when an investment bank goes to the SEC to seek approval for a new issue.
C) It is when firms seeking an underwriter consider alternative investment banks.
D) It involves visits to institutional investors who might want to buy the security issue.
Q2) Which of the following is an investment institution?
A) The New York Stock Exchange
B) Greater Illinois Savings and Loan
C) Prudential Insurance Company
D) Fidelity Magellan Mutual Fund
Q3) The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of A) moral hazard.
B) adverse selection.
C) failure of policyholders to keep paying their premiums.
D) excessive government regulation.
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13
Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) By the summer of 2008,about what percent of subprime mortgages were overdue by at least 30 days?
A) 10%
B) 25%
C) 34%
D) 50%
Q2) The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a
A) contagion.
B) bank run.
C) financial crisis.
D) bank panic.
Q3) Research by Reinhart and Rogoff indicate that most of the increase in national debt as a result of a financial crisis is due to
A) government bailouts of financial institutions.
B) increased spending on social welfare programs.
C) government stimulus programs.
D) sharp declines in tax revenues.
Q4) What are two ways that governments can prevent bank panics?
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Which of the following statements is NOT true?
A) The U.S. Constitution does not explicitly give the federal government the authority to establish a central bank.
B) The U.S. Constitution states that Congress has the power "To coin money [and] regulate the value thereof."
C) Congress delegated the power to coin money and regulate its value to the Federal Reserve in the Federal Reserve Act.
D) The federal courts have never upheld the constitutionality of the Federal Reserve Act.
Q2) Why might Congress benefit from the Fed being self-financed?
A) Self-financing increases Congressional control over the Fed.
B) Self-financing reduces the Fed's exposure to external pressures.
C) Self-financing gives the Fed an incentive to expand the money supply, which ultimately results in Congress having additional funds to spend.
D) Congress does not benefit from the Fed being self-financed; Congress is obliged by the Constitution to allow the Fed to be self-financed.
Q3) How are the operations of the Federal Reserve financed?
Q4) What is the primary objective of the Financial Stability Oversight Council?
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Chapter 14: The Federal Reserves Balance Sheet and the Money Supply Process
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Sample Questions
Q1) The primary assets of the Fed are
A) discount loans and reserves.
B) discount loans and government securities.
C) government securities and reserves.
D) discount loans and open market operations.
Q2) If C represents currency,D represents checkable deposits,N represents savings accounts,and MM represents money market mutual funds,which of the following equations is correct?
A) M1 = N + MM
B) M1 = D - N - MM
C) M1 = C + D + N + MM
D) M1 = C + D
Q3) During the Financial Crisis of 2007-2009,banks significantly increased their holdings of excess reserves.What impact did this have on the money multiplier? How would the Fed change the monetary base if it wanted to maintain a stable money supply?
Q4) Suppose the Fed sells $500,000 worth of securities to First National Bank.Illustrate the immediate effect on the bank's balance sheet.
Q5) Briefly explain the process of multiple deposit creation.
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Chapter 15: Monetary Policy
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Q1) What new policy tools for controlling reserve balances did the Fed introduce during the Financial Crisis of 2007-2009?
Q2) The ECB has emphasized what type of goal for monetary policy?
A) inflation targeting
B) monetary targeting
C) unclear as to inflation or monetary targeting D) exchange rate targeting
Q3) Most economists believe that a zero rate of unemployment
A) is obtainable with the correct monetary policy.
B) would result in a better functioning economy.
C) is inconsistent with a well-functioning economy. D) is obtainable only if the inflation rate is also zero.
Q4) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.
Q5) In the United States from 1981 to 1983,the money supply ________ and the inflation rate ________.
A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased
17
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Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) In the early 1930s
A) countries that abandoned the gold standard suffered severe inflation.
B) countries that tried to defend the gold standard suffered more depression than countries that abandoned the gold standard.
C) the gold standard was abandoned by every major industrial country except England.
D) the United States was the first major industrial country to abandon the gold standard.
Q2) Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?
A) Domestic interest rates will rise.
B) The foreign-exchange value of the domestic currency will rise.
C) The central bank will experience a decrease in international reserves.
D) The domestic money supply will rise.
Q3) Make use of a graph of the foreign exchange market to show how the Central Bank of Mexico can use an unsterilized intervention to increase the value of its currency,the peso,in terms of the dollar.
Q4) Discuss the problems associated with the imposition of capital controls.
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Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
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Q1) How is a monopolistically competitive firm likely to respond to fluctuations in demand in the short run?
A) by selling more or less at the posted price
B) by changing prices
C) by reducing menu costs
D) by increasing menu costs
Q2) According to AD-AS model,the primary long-run effect of increases in the money supply is
A) a higher price level.
B) higher GDP.
C) a lower price level.
D) lower GDP.
Q3) In the new Keynesian view,a monopolistically competitive firm may fail to increase the price of its product as demand increases because
A) if it does, it will lose all of its customers.
B) the cost to it of changing prices may exceed the benefit of doing so.
C) prices of monopolistically competitive firms are regulated by the federal government and may only be changed with permission.
D) for a monopolistically competitive firm, price is below marginal cost.
Page 19
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) For the goods market to be in equilibrium in a closed economy,which of the following must be TRUE?
A) Y = S + I + G
B) S + I = C + G
C) S + G = Y + C
D) S = I
Q2) Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT
A) demand shocks.
B) supply shocks.
C) changes in household expectations of inflation.
D) changes in firms' expectations of inflation.
Q3) Which of the following is the least likely to take place if the Fed responds to a negative demand shock by reducing the real interest rate?
A) The IS curve shifts to the right.
B) Output gap returns to zero.
C) Inflation returns to its previous rate.
D) The MP curve shifts down.
Q4) What three parts of the economy are represented in the IS-MP model?
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