Monetary Economics
Test Preparation
Course Introduction
Monetary Economics explores the role of money and financial institutions in shaping economic activity, both at the national and international levels. This course examines key concepts such as the functions and demand for money, the workings of central banks, the formulation and effects of monetary policy, and various monetary theories, including classical, Keynesian, and modern approaches. Students analyze the transmission mechanisms through which monetary policy influences inflation, output, and employment, as well as topics like currency markets, exchange rates, and financial crises. Through theoretical models, empirical evidence, and case studies, the course provides a comprehensive understanding of how money impacts economic stability and growth.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) What characterizes a competitive equilibrium?
A) Markets are rationed.
B) Governments stay out of the market.
C) Economic agents are price-takers.
D) It is costly to experiment with policies.
Answer: C
Q2) The two most important American business cycle events of the twentieth century were
A) the Great Depression and stagflation.
B) World War II and the Great Depression.
C) the productivity slowdown and the Great Depression.
D) government budget deficits and World War II.
Answer: B
Q3) In the long run,the quantity of money
A) does not matter.
B) influences GDP.
C) influences unemployment.
D) influences the business cycle.
Answer: A
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Page 3
Chapter 2: Measurement
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Sample Questions
Q1) In the labor force,we include.
A) hospitalized people.
B) unemployed people.
C) students,
D) people on social security.
Answer: B
Q2) Acme Steel Co. produces 1000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal,which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's contribution to GDP is
A) $15,000.
B) $20,000.
C) $30,000.
D) $45,000.
Answer: A
Q3) An example of a flow would be the
A) rate at which water goes down the drain.
B) amount of water in a bathtub.
C) percentage of pollutants in tap water.
D) pressure of water in a pipe.
Answer: A
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Chapter 3: Business Cycle Measurement
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Sample Questions
Q1) Which of the following is not a correct characterization of the U.S. business cycle?
A) Employment lags GDP.
B) Consumption is coincident.
C) Money lags GDP.
D) Investment is coincident.
Answer: C
Q2) The official dating of the most recent recession places its timing as
A) 2007.
B) 2007-2009.
C) 2008.
D) 2008-2009.
Answer: D
Q3) Seasonal adjustment tends to
A) smooth a time series with an important seasonal component.
B) accentuate seasonal fluctuations.
C) take out the deviations from trend in a time series.
D) make a time series acyclical.
Answer: A
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Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Sample Questions
Q1) The marginal rate of substitution
A) is minus the slope of the indifference curve.
B) can be computed by measuring the curvature of the indifference curve.
C) cannot be deduced from the properties of the indifference curve.
D) can only be computed if we know the prices of all goods.
Q2) The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when
A) there are constant returns to scale.
B) there are increasing returns to scale.
C) there are decreasing returns to scale.
D) the marginal product of labor is increasing in the amount of labor input.
Q3) In the (consumption,leisure)space,indifference curves as we have assumed them have the property of presenting the highest levels of satisfaction
A) in the north-east corner.
B) in the south-east corner.
C) in the north-west corner.
D) in the south-west corner.
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Page 6
Chapter 5: A Closed-Economy One-Period Macroeconomic Model
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Q1) A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that
A) anyone can be made better off.
B) no one can be made worse off.
C) someone can be made better off without making someone else worse off.
D) someone can be made better off without making everyone else worse off.
Q2) Which feature of the business cycle does the one-period model replicate with shocks to government expenditures?
A) procyclical employment
B) procyclical consumption
C) procyclical real wages
D) countercyclical prices
Q3) Changes in total factor productivity are plausible causes of business cycles because A) of the welfare theorems.
B) the U.S. government is following supply-side economic policy.
C) the model matches many stylized facts.
D) prices are countercyclical.
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Page 7
Chapter 6: Search and Unemployment
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Q1) In the DMP model,
A) Firms maximize profits.
B) Firms determine how much effort they should put into filling job vacancies.
C) Firms decide whether or not to enter the labor market by posting vacancies.
D) Firms decide whether or not to retain or fire workers.
Q2) If N is the working-age population,Q is the labor force,and U is the number of unemployed,then the employment/population ratio is measured as
A) N/Q
B) U/Q
C) (Q-U)/N
D) Q/N
Q3) In the DMP model,an increase in the unemployment insurance benefit does not,under any circumstances
A) increase the vacancy rate.
B) increase the unemployment rate.
C) reduce labor market tightness.
D) reduce the size of the labor force.
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8
Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) The per-worker production function relates output per worker
A) to capital per worker.
B) to the participation rate.
C) to production per worker.
D) in different countries.
Q2) The Solow model emphasizes the role of which of the following factors of production?
A) land
B) labor
C) capital
D) natural resources
Q3) The Malthusian model predicts that
A) population will keep increasing.
B) the standard of living will keep increasing.
C) health improvements increase the standard of living.
D) population control improves the standard of living.
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9
Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Q1) According to the endogenous growth model with human capital,what can we say about countries with more efficient schools?
A) They are richer.
B) They are richer and grow faster.
C) They are richer and grow more slowly.
D) They grow faster.
Q2) The endogenous growth model predicts that
A) there is convergence in incomes per capita across countries.
B) output per capita is constant.
C) rich countries will always become poor.
D) differences in per capital incomes across countries persist forever.
Q3) Convergence means that
A) if poor countries grow fast, then fast growing countries are poor.
B) all countries grow at the same rate.
C) all countries tend towards the same per capita income.
D) the savings rate is positively related to per capita income.
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) An increase in first-period income results in
A) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving.
B) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving.
C) a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving.
D) an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.
Q2) The government's present value budget constraint states that
A) taxes must equal government spending in each period.
B) the present value of government spending must be equal to the present value of consumers' disposable incomes.
C) the present value of government spending must be equal to the present value of taxes.
D) the government may run deficits each and every year, as long as the deficits are sufficiently small.
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11
Chapter 10: Credit Market Imperfections: Credit Frictions,
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Sample Questions
Q1) In the United States
A) Social security is bankrupt.
B) Social security is implemented through individual savings accounts.
C) Social security is fully-funded.
D) Social security is pay-as-you-go.
Q2) When there are credit-market imperfections,an increase in government debt may be advantageous because it
A) discourages credit-constrained consumers from borrowing too much.
B) allows credit-constrained consumers to consume more.
C) eliminates the problems that cause credit-market imperfections.
D) encourages more private saving.
Q3) Limited commitment means
A) one cannot credibly promise something.
B) one saves only part of what is optimal.
C) only some households are allowed to save.
D) there is rationing on the credit market.
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12
Chapter 11: A Real Intertemporal Model with Investment
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Sample Questions
Q1) The condition,MRS?,'C' = w ',describes the representative consumer's
A) investment decision.
B) consumption - savings decision.
C) current period work - leisure decision.
D) future period work - leisure decision.
Q2) If the interest rate goes up,what happens to the investment demand curve?
A) It shifts to the right.
B) It shift to the left.
C) It stays put.
D) We cannot tell.
Q3) What could result in an increase of consumption demand and a decrease in labor supply?
A) a drop in current taxes
B) an increase in future taxes
C) a decrease in total factor productivity
D) an increase in government expenses
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13
Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) If an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variables,we say that
A) the Fisher relationship holds.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.
Q2) In the intertemporal model with money,the optimal amount of money is A) equal to total output.
B) equal to consumption and investment.
C) zero.
D) irrelevant as long as it is not zero.
Q3) The demand for money will fall for each of the following reasons,except A) more ATMs.
B) higher real GDP.
C) lower interest rates on transactions accounts at banks.
D) more risky banks.
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14
Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) In the real business cycle model,a persistent increase in total factor productivity
A) increases the real wage and increases the price level.
B) increases the real wage and decreases the price level.
C) decreases the real wage and increases the price level.
D) decreases the real wage and decreases the price level.
Q2) A reduction in financial liquidity,producing deficient liquid assets
A) shifts the output supply curve to the right.
B) shifts the output demand curve to the right.
C) shifts the output supply curve to the left.
D) shifts the output demand curve to the left.
Q3) In real business cycle theory,the persistence of shocks to total factor productivity is justified by
A) the fact that some capital depreciates every period.
B) the behavior of Solow residuals.
C) the fact that Taylor rules have been used in post-war United States.
D) the fact that capital takes some time to build.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Q1) According to New Keynesian theory,fluctuations in the target interest rate are not a good explanation of the business cycle because the model predicts that
A) consumption is constant.
B) labor is countercyclical.
C) average labor productivity is countercyclical.
D) output is countercyclical.
Q2) The output gap is
A) the difference between target output and realized output.
B) the difference between initial output and final output.
C) the difference between market-clearing output and actual output.
D) the difference between forecasted output and past output.
Q3) Under a liquidity trap in the New Keynesian model,
A) prices cannot be sticky.
B) monetary policy is ineffective.
C) the economy is always efficient.
D) fiscal policy is ineffective.
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Chapter 15: International Trade in Goods and Assets
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Q1) In a two-period model,as long as wealth effects are small,an increase in the world real interest rate
A) increases consumption and increases the current account surplus.
B) increases consumption and decreases the current account surplus.
C) decreases consumption and increases the current account surplus.
D) decreases consumption and decreases the current account surplus.
Q2) In a two-period model,holding everything else constant,an increase in future taxes
A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.
Q3) In a two-period model with default,if the nation defaults on its debts in the future period
A) there are no consequences.
B) it bears a cost v.
C) collateral is seized.
D) it faces a higher interest rate.
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Chapter 16: Money in the Open Economy
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Sample Questions
Q1) The Bretton Woods Agreement
A) fixed the value of the U.S. dollar relative to gold.
B) fixed the value of the U.S. dollar relative to the euro.
C) required foreign central banks to hold certain minimum amounts of gold as foreign exchange reserves.
D) required member nations, other than the United States, to disband their central banks.
Q2) The real exchange rate is the
A) domestic currency price of foreign currency.
B) foreign currency price of domestic currency.
C) price of domestic goods in terms of foreign goods.
D) price of foreign goods in terms of domestic goods.
Q3) For a country with a fixed exchange rate,foreign exchange reserves are
A) an asset of the domestic government.
B) a liability of the domestic government.
C) held by private banks.
D) are unnecessary.
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18
Chapter 17: Money, Inflation, and Banking
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Q1) An asset's liquidity depends upon
A) the absolute size of its value and how long it takes to sell the asset at market value.
B) how long it takes to sell the asset at market value and the costs of selling the asset.
C) the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately.
D) the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value.
Q2) If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables,we say that
A) the classical dichotomy fails.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) The Phillips curve shifts because
A) private behavior adapts to monetary policy.
B) expected inflation changes.
C) the central bank attempts to exploit the Phillips curve.
D) all of the above.
Q2) The Phillips curve shifts because
A) fiscal policy changes over time.
B) of total factor productivity shocks.
C) of economic development.
D) none of the above.
Q3) In the Friedman-Lucas money surprise model
A) If actual inflation is higher than anticipated inflation, then output must be above its trend value.
B) If actual inflation is higher than anticipated inflation, then output must be below its trend value.
C) money is neutral.
D) monetary policy does not work.
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Page 20