Monetary Economics
Test Questions
Course Introduction
Monetary Economics examines the role of money and financial institutions in shaping economic activity, policy, and stability. The course covers the functions and demand for money, the mechanics of money supply, and the conduct of monetary policy by central banks. Students explore theories of interest rates, inflation, and the impacts of monetary policy on output and employment. Analytical and empirical tools are applied to understand contemporary monetary challenges, including financial crises, central bank independence, and the effectiveness of unconventional policy instruments.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introducing Money and the Financial System
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Q1) All of the following are examples of risky mortgages that became more common in the 2000s EXCEPT
A) alt-A mortgages.
B) adjustable-rate mortgages with low rates for a few years and then higher rates in later years.
C) mortgages requiring down payments of at least 20%.
D) subprime mortgages.
Answer: C
Q2) Which of the following is NOT a financial intermediary?
A) mutual fund
B) bank
C) stock exchange
D) insurance company
Answer: C
Q3) The financial system provides risk sharing by allowing
A) borrowers to obtain funds either directly or indirectly.
B) savers to earn interest tax-free.
C) borrowers to convert liabilities into assets.
D) savers to hold many assets.
Answer: D
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Chapter 2: Money and the Payments System
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Q1) If money is declared to be legal tender,it must be
A) minted from a precious metal.
B) acceptable to citizens of foreign countries.
C) possible to exchange it for an equivalent amount of precious metal.
D) accepted to settle private transactions and it must be accepted for the payment of taxes.
Answer: D
Q2) Which of the following is included in M1,but not in M2?
A) currency
B) checking account deposits
C) travelers checks
D) Everything in M1 is in M2.
Answer: D
Q3) The use of checks in transactions
A) entails lower information costs than the use of currency.
B) entails fewer steps than settling transactions with currency.
C) avoids the cost of transporting currency back and forth.
D) entails fewer steps and lower information costs than settling transactions with currency.
Answer: C
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to
A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities.
B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities.
C) their inability to issue new mortgages.
D) more rapid pre-payment of mortgages.
Answer: A
Q2) Though Treasury bonds may have little default risk,what type of risk exists when current interest rates are low?
A) price risk
B) refinancing risk
C) interest-rate risk
D) present value risk
Answer: C
Q3) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
Answer: The yield to maturity equals $40 / $800 = 5%.
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Chapter 4: Determining Interest Rates
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Q1) If there is an excess demand for bonds at a given price of bonds,then
A) the interest rate will fall.
B) the interest rate will rise.
C) the price of bonds will fall.
D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
Q2) When nominal interest rates fall on financial assets such as U.S.Treasury bills,the amount of interest that households and firms
A) gain by holding money decreases.
B) lose by holding money decreases.
C) lose by holding money increases.
D) lose or gain by holding money does not change.
Q3) Since Germany is a large open economy,the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in
A) a decline in the world real interest rate.
B) a shift to the right in the German supply of loanable funds curve.
C) an increase in the real interest rate in the United States.
D) a shift to the left in the German demand for loanable funds curve.
Q4) What is a black swan event?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) The liquidity premium theory holds that investors
A) always choose the bond with the highest expected return, regardless of maturity.
B) require a term premium to compensate them for investing in a less preferred maturity.
C) view bonds of different maturities as perfect substitutes.
D) view bonds of different maturities as completely unsubstitutable.
Q2) Which of the following statements about junk bonds is FALSE?
A) Given the likelihood of default, it is never profitable to purchase junk bonds.
B) They pay higher interest rates than investment grade bonds due to higher perceived risk.
C) Prior to the 1970s, corporations were unable to issue junk bonds.
D) In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds.
Q3) In which of the following periods was the yield curve inverted?
A) February 2004
B) February 2007
C) February 2010
D) The yield curve was not inverted during any of these periods.
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) Suppose Exxon-Mobil announces that its profits in the third quarter of 2016 were $40 billion.This will cause the price of Exxon-Mobil stock to A) rise.
B) fall.
C) remain unchanged.
D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.
Q2) Financial securities are exchanged by dealers linked by computers in a A) stock exchange.
B) public exchange.
C) financial exchange.
D) over-the-counter market.
Q3) If market participants have rational expectations
A) they can assume the stock prices they observe represent the fundamental values of those stocks.
B) they know to purchase stocks that are priced below their fundamental value.
C) they will achieve higher returns than those with adaptive expectations.
D) they can earn above-average returns on their investments.
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) The fee charged by the seller of an option is referred to as the A) market price.
B) option premium.
C) futures fee.
D) call price.
Q2) During the financial crisis of 2007-2009,the VIX
A) remained relatively stable.
B) fell to zero.
C) recorded negative values for the first time in history.
D) reached a level of 80.
Q3) Why may some investors prefer forward contracts to futures?
Q4) Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act?
A) Swaps must be traded through a clearinghouse.
B) The value of swap contracts are limited to no more than $8 billion.
C) Dealers are required to deposit a fraction of the value of the contract with the clearinghouse.
D) Data on trades must be publicly available.
Q5) What are the information costs associated with forward contracts?
Q6) How do exchanges seek to reduce default risk in the futures market?
Page 9
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Chapter 8: The Market for Foreign Exchange
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Q1) A depreciating nominal exchange rate results from
A) a depreciating real exchange rate.
B) a low domestic inflation rate relative to the foreign inflation rate.
C) an appreciating real exchange rate.
D) a large government budget deficit.
Q2) According to the theory of purchasing power parity,if the inflation rate in England is greater than the inflation rate in Japan
A) the law of one price has been violated.
B) the nominal value of the pound will appreciate against the yen.
C) the nominal value of the yen will appreciate against the pound.
D) the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.
Q3) 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.
Q4) What are three reasons that the interest-rate parity condition may not always hold?
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Q1) How does adverse selection affect the participation of small- and medium-sized firms in the stock market?
Q2) Moral hazard problems arise when
A) lenders have difficulty in distinguishing between good and lemon firms.
B) a downturn in economic activity makes repaying loans difficult for borrowers.
C) borrowers have an incentive to act in ways that do not reflect the lender's interests.
D) borrowers default on loans.
Q3) One method that lenders use to mitigate the adverse selection problem is to
A) charge higher interest rates to less creditworthy borrowers.
B) monitor closely the behavior of borrowers after a loan is made.
C) ration credit.
D) provide default insurance.
Q4) How does the principal-agent problem increase the possibility of moral hazard?
Q5) What are the reasons why disclosure by the SEC does not eliminate the information costs of adverse selection?
Q6) How does adverse selection in financial markets affect the method by which firms raise funds?
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Q7) How does adverse selection affect the willingness of corporations to issue stock?
Chapter 10: The Economics of Banking
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Q1) How does moral hazard contribute to high bank leverage?
Q2) Which of the following is NOT a nontransaction deposit?
A) a money market deposit account
B) a certificate of deposit
C) a savings account
D) a NOW account
Q3) The FDIC was created in
A) 1863.
B) 1913.
C) 1934.
D) 1991.
Q4) Since most banks have positive gaps and negative duration gaps,an increase in market interest rates will
A) increase bank profits and increase bank capital.
B) increase bank profits and decrease bank capital.
C) decrease bank profits and increase bank capital.
D) decrease bank profits and decrease bank capital.
Q5) Compare the characteristics of loans and marketable securities in terms of liquidity,risk,and information costs.
Q6) How can banks measure interest-rate risk?
Page 12
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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Q1) Underwriting involves
A) insuring the life or health of individuals.
B) guaranteeing a price for new capital to the issuing firm.
C) selling stock more cheaply than conventional stockbrokers.
D) issuing stock and using the proceeds to buy bonds.
Q2) The largest institutional participants in capital markets are A) pension funds.
B) insurance companies.
C) consumer finance companies.
D) business finance companies.
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.
Q4) What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?
Q5) How do defined-contribution plans differ from defined-benefit plans?
Q6) What type of economic research do analysts at investment banks conduct? Page 13
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Chapter 12: Financial Crises and Financial Regulation
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Q1) What does it mean for a money market mutual fund to "break the buck"?
A) The value of its share declines below $1.
B) It incurs losses on its investments.
C) It increases its fees to more than 1% of net asset value.
D) It is unable to meet the demand for withdrawals by investors.
Q2) Losses in which holding resulted in BNP Paribas not allowing investors to redeem shares from three of its investment funds?
A) mortgage-backed securities
B) Lehman Brothers
C) Bear Stearns
D) real estate investment trusts
Q3) If banks were required to hold 100% reserves,this would
A) put banks out of business.
B) put depositors at greater risk of losing their money.
C) prevent banks from making risky loans.
D) eliminate bank runs.
Q4) What are the two most common reasons for a sovereign debt crisis?
Q5) What are the primary reasons for and against a policy of "too big to fail."
Q6) Why do bank panics normally lead to recessions?
Q7) Describe the four stages of the financial regulatory pattern.
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Chapter 13: The Federal Reserve and Central Banking
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Q1) The margin requirement set by the Federal Reserve is the A) proportion of the purchase price of a security that an investor must pay in cash. B) difference between the interest rate banks may charge on loans and the interest rate they receive from deposits.
C) same thing as the required reserve ratio on deposits.
D) difference banks must maintain between the value of their assets and the value of their liabilities.
Q2) What are the limitations to the Fed's independence?
Q3) The movement to set up a central bank in the United States was spurred by the financial panic that occurred in A) 1816.
B) 1907.
C) 1929.
D) 1987.
Q4) What is included in the public statement released by the FOMC following the conclusion of its meeting?
Q5) What are the three books to which the FOMC has access and what information is included in each?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Q1) Open market operations generally involve
A) the Fed making discount loans to depository institutions.
B) the Fed buying and selling common stock in order to affect the liquidity of the stock market.
C) the Fed buying and selling U.S. government securities.
D) private investors buying and selling securities directly on exchanges, rather than through brokers.
Q2) If currency outstanding equals $500 million,checkable deposits equal $2 billion,reserves equal $200 million,and the required reserve ratio is 0.10,the money multiplier equals
A) 1.14.
B) 3.57.
C) 4.35.
D) 5.
Q3) Although open market operations and discount loans both change the monetary base,the Fed has
A) greater control over open market operations than over discount loans.
B) greater control over discount loans than over open market operations.
C) very little control over either discount loans or open market operations.
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D) complete control over both discount loans and open market operations.
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Chapter 15: Monetary Policy
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Q1) Which of the following is considered to be a goal of monetary policy?
A) a low federal budget deficit
B) fair wages
C) price stability
D) an end to poverty
Q2) The Open Market Trading Desk is
A) another name for the Federal Open Market Committee.
B) an organization of private traders in government securities.
C) the area on the floor of the New York Stock Exchange set aside for bond trading.
D) linked electronically to a group of private securities firms that the Fed has selected to participate in open market operations.
Q3) Inflation is an economic problem because it
A) leads inevitably to unemployment.
B) makes prices less useful as signals for resource allocation.
C) leads to recession.
D) results in rapid increases in the money supply.
Q4) On which type of unemployment can monetary policy have the most effect? Why?
Q5) What is the difference between defensive and dynamic open market operations?
Q6) Jow does the interest paid on reserves set a floor for the federal funds rate?
Page 18
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Chapter 16: The International Financial System and Monetary Policy
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Q1) If the Fed wants to reduce the value of the dollar,it will
A) sell foreign assets and buy dollars.
B) sell dollars and buy foreign assets.
C) buy foreign assets and also buy dollars.
D) sell foreign assets and also sell dollars.
Q2) Deliberate actions by a central bank to influence the exchange rate are known as A) current account actions.
B) foreign-exchange market interventions.
C) dollar-value operations.
D) foreign-commerce maneuvers.
Q3) The gold standard probably made the Great Depression more severe in the United States because
A) the value of gold declined sharply during those years.
B) the existence of the gold standard kept prices from falling.
C) the money supply in the United States increased rapidly as gold flowed into the country.
D) the Fed attempted to reduce gold outflows by raising the discount rate.
Q4) Why do some economists think a global savings glut contributed to the U.S.running a current account deficit in the 2000s?
Q5) 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) Which of the following is NOT a characteristic of competitive markets?
A) They produce a standardized product.
B) Purchases and sales of individual traders are small relative to the total volume traded.
C) Prices adjust quickly.
D) There are relatively few sellers.
Q2) Economists generally agree that in the long run,changes in aggregate demand affect
A) aggregate output but not the price level.
B) the price level but not aggregate output.
C) both the price level and aggregate output.
D) neither the price level nor aggregate output.
Q3) If in the short run prices did not respond at all to changes in aggregate demand,the short-run aggregate supply curve would
A) be vertical.
B) be horizontal.
C) slope up.
D) slope down.
Q4) How does an increase in the price level lead to a higher interest rate?
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Q5) What are the seven key factors that cause the aggregate demand curve to shift?
Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) 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.
Q2) Use the following data to calculate equilibrium real GDP: C = 0.75Y,I = $2 trillion,G = $1 trillion and NX = -$0.5 trillion.
Q3) The MP curve represents
A) the Fed's monetary policy actions in setting a target for the federal funds rate.
B) the relationship between the money supply and the price level.
C) a relationship between the real interest rate and manufacturing production.
D) the relationship between real interest rates and potential GDP.
Q4) In a closed economy,the total quantity of goods demanded equals the sum of A) consumption spending, investment spending, and government spending.
B) consumption spending, national saving, and taxes.
C) consumption spending, government spending, and taxes.
D) investment spending, national saving, and taxes.
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