Money and Banking Midterm
Exam
Course Introduction
Money and Banking explores the fundamental principles of monetary systems and the role of financial institutions in the economy. This course examines the nature and functions of money, the structure and operations of banking systems, and the influence of central banks on interest rates and credit supply. Key topics include money creation, financial markets, the regulation of banks, monetary policy, and the impact of banking on economic stability and growth. Students will gain insight into the relationship between money, banking, and macroeconomic outcomes, preparing them for further study or careers in finance, economics, and related fields.
Recommended Textbook
Macroeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics?
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Q1) The branch of economics that deals with the analysis of the whole economy is called A) macroeconomics.
B) marginal analysis.
C) microeconomics.
D) metroanalysis.
Answer: A
Q2) You notice that when the inflation rate increases, the interest rate tends to increase. This observation indicates that
A) there might be false causality between inflation and the interest rate.
B) higher inflation rates must cause a higher interest rate.
C) a scatter diagram of the inflation rate and the interest rate will show a positive relationship.
D) the variables have an inverse relationship.
Answer: C
Q3) Most income in the United States is earned by business owners as profit.
A)True
B)False
Answer: False
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3
Chapter 2: The Economic Problem
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Q1) What factors generate economic growth?
Answer: Two key factors create economic growth: Technological change and capital accumulation, including the accumulation of additional human capital. Both technological change and capital accumulation shift the nation's PPF outward.
Q2) Explain the difference between marginal cost and marginal benefit.
Answer: Marginal benefit is the benefit someone in society obtains when another unit of a good or service is produced. Marginal cost is the cost to someone in society of producing another unit of a good or service.
Q3) The above table shows the number of pencils or pens that could be produced by Don and Bob in an hour. This schedule shows that
A) Don has an absolute advantage in the production of pencils, and Bob has an absolute advantage in the production of pens.
B) Bob has an absolute advantage in the production of pencils, and Don has an absolute advantage in the production of pens.
C) Don has a comparative advantage in the production of both pencils and pens.
D) Bob has a comparative advantage in the production of pencils.
Answer: D
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Page 4
Chapter 3: Demand and Supply
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Q1) Suppose the market for Blu-rays has the demand and supply schedules shown in the table above. Suppose a decrease in the price of a Blu-ray player increases the quantity of disks demanded at each price by 20 million. What are the new equilibrium price and equilibrium quantity of Blu-rays?
Answer: The initial equilibrium price is $11.50 and the initial equilibrium quantity is 30 million disks per month. The decrease in the price of a Blu-ray player increases the demand by 25 million disks. As a result, the equilibrium price rises to $12.00 and the equilibrium quantity increases to 45 million disks.
Q2) Doctors find that one aspirin per day reduces the risk of heart attacks. Demand for aspirin will
A) increase, so that equilibrium price and equilibrium quantity will increase.
B) decrease, so that equilibrium price and equilibrium quantity will increase.
C) increase, so that equilibrium price will decrease and equilibrium quantity will increase.
D) increase, but the new equilibrium price and quantity are indeterminate.
Answer: A
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Chapter 4: Measuring GDP and Economic Growth
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Q1) Using the above figure, during which of the following periods does the price of crude oil have a downward trend?
A) May to July
B) May to November
C) July to October
D) October to December
Q2) ________ refers to a period when the ________ decreases.
A) Recession; growth rate of nominal GDP
B) Recession; growth rate of output per person
C) Productivity growth slowdown; growth rate of real GDP
D) Productivity growth slowdown; growth rate of output per person
Q3) According to the BEA, in the second quarter of 2011 nominal GDP was $15 trillion and in the second quarter of 2012 nominal GDP was $15.6 trillion. Based solely on this information, from the second quarter of 2011 to the second quarter of 2012
A) real GDP may have increased, decreased, or stayed the same.
B) real GDP definitely increased.
C) real GDP definitely decreased.
D) prices definitely increased.
Q4) What is the relationship between actual and potential real GDP?
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Chapter 5: Monitoring Jobs and Inflation
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Q1) The employment-to-population ratio is
A) 67 percent.
B) 64 percent.
C) 50 percent.
D) 62 percent.
Q2) Of the following sequences of price levels, which CORRECTLY represents a 5 percent inflation rate?
A) 100, 100, 100, 100
B) 100, 105, 105, 105
C) 100, 105, 110, 115
D) 100, 105, 110.25, 115.76
Q3) In an economy, 23 million people are employed and 2 million are unemployed, but 5 million part-time workers would prefer full-time work. What is the unemployment rate?
A) 23.2 percent
B) 6.7 percent
C) 8 percent
D) 25 percent
Q4) Explain the difference between frictional and structural unemployment.
Q5) What is a "marginally attached worker"?
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Chapter 6: Economic Growth
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Q1) At the full-employment equilibrium in the labor market
A) there is no unemployment.
B) there are no job vacancies.
C) there is neither a shortage nor a surplus of labor.
D) the money wage rate equals the real wage rate.
Q2) Labor productivity rises
A) if the amount of capital per worker increases.
B) in the absence of technological progress.
C) if firms invest in hiring more workers rather than buying more capital.
D) if the amount of capital per worker decreases.
Q3) New growth theory
A) dates from the 18th century.
B) concludes that economic growth is temporary.
C) states that economic growth arises from people's choices.
D) asserts that population growth is the source of economic growth.
Q4) In the above figure, if the real wage is $20 per hour, a labor
A) shortage will occur and the real wage will rise.
B) shortage will occur and the real wage will fall.
C) surplus will occur and the real wage will rise.
D) surplus will occur and the real wage will fall.
Page 8
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Chapter 7: Finance, Saving, and Investment
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Q1) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit rises, the amount of loanable funds demanded will be
A) less than $450 billion.
B) $450 billion.
C) between $300 billion and $450 billion.
D) greater than $450 billion.
Q2) This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________.
A) $1.3 billion; $1.6 billion
B) $1.0 billion; $1.3 billion
C) $1.3 billion; $1.0 billion
D) $1.0 billion; $0.7 billion
Q3) Which of the following will shift the supply of loanable funds curve leftward?
A) a decrease in the real interest rate
B) a decrease in real wealth
C) a decrease in disposable income
D) a decrease in expected future income
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Page 9
Chapter 8: Money, the Price Level, and Inflation
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Q1) The quantity theory of money is the idea that in the long run
A) the quantity of money is determined by banks.
B) the quantity of money serves as a good indicator of how well money functions as a store of value.
C) the quantity of money determines real GDP.
D) an increase in the growth rate of the quantity of money leads to an equal increase in the inflation rate.
Q2) Which of the following is NOT an asset of the Federal Reserve System?
A) mortgage-backed securities
B) reserves of depository institutions
C) U.S. government securities
D) None of the above are correct because they are all assets of the Federal Reserve.
Q3) Of the following, the riskiest assets held by commercial banks are A) reserves.
B) U.S. government bonds.
C) U.S. government Treasury bills. D) loans.
Q4) Does the Federal Reserve conduct both the nation's monetary policy and its fiscal policy?
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) Airbus is an European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, the A) demand curve for euros shifts rightward.
B) demand curve for euros shifts leftward.
C) supply curve for euros shifts rightward.
D) quantity demanded for euros decreases.
Q2) If U.S. imports increase, the sum of the balance of payments accounts (the sum of the current account plus capital and financial account plus official settlements account) A) becomes negative.
B) becomes positive.
C) becomes negative or positive depending on the government budget deficit or surplus.
D) does not change.
Q3) In the foreign exchange market, how does the quantity of U.S. dollars demanded respond to a change in the U.S. exchange rate? Why is there this response?
Q4) What is a "debtor nation?" Is the United States a debtor nation?
Q5) What balance of payment account records foreign investment between countries?
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) If you have $5,000 in wealth and the price level decreases by 20 percent, then
A) the $5,000 will buy fewer goods and services.
B) the $5,000 will buy more goods and services.
C) the real value of the $5,000 decreases.
D) the real value of the $5,000 remains constant.
Q2) In the above figure, if aggregate demand does not change, the long-run equilibrium will be at the price level of ________ and real GDP of ________.
A) 100; $15.5 trillion
B) 120; $16 trillion
C) 100; $16 trillion
D) 110; $15.5 trillion
Q3) Which of the following events will increase long-run aggregate supply?
A) an increase in the interest rate
B) an increase in resource prices
C) a decrease in expected profit
D) an advance in technology
Q4) What are the factors that can shift the short-run aggregate supply curve but not the long-run aggregate supply curve? Explain your answer.
Q5) What is the difference between a recessionary gap and an inflationary gap?
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Chapter 11: Expenditure Multipliers
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Q1) Taking into account the upward-sloping short-run aggregate supply curve, the short-run effect of an increase in government expenditure on real GDP is that
A) real GDP increases by more in the short run than in the long run.
B) real GDP increases by the same amount in the short run as in the long run.
C) real GDP increases by less in the short run than in the long run.
D) real GDP does not change in the short run because the price level increases.
Q2) Suppose that the slope of the AE curve is 0.67. Then a $100 increase in autonomous spending means equilibrium expenditure will
A) decrease by $200.
B) increase by $200.
C) decrease by $300.
D) increase by $300.
Q3) The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if a)exports increase from $1.75 trillion to $2.25 trillion.
b)government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion.
c)investment increases from $1.2 trillion to $2.3 trillion.
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) Demand-pull inflation is an inflation that results from an initial ________.
A) increase in aggregate demand
B) decrease in aggregate demand
C) increase in wage rates
D) increase in natural resource prices
Q2) Describe how a demand-pull inflation can occur.
Q3) A leftward shift in the short run aggregate supply curve
A) is the result of the Fed increasing the quantity of money.
B) is the result of a rise in the price of a key resource.
C) is the result of consumer expenditures exceeding available output.
D) increases both the price level and real GDP.
Q4) Along the long-run Phillips curve
A) actual inflation is greater than expected inflation.
B) actual inflation is equal to expected inflation.
C) actual inflation is less than expected inflation.
D) None of the above answers is correct.
Q5) What is the factor that leads to business cycles in the monetarist cycle theory?
Q6) Explain how the expected inflation rate affects the short-run Phillips curve. Be sure to mention the role played by the money wage rate.
Q7) Explain how the short-run and long-run Phillips curves are related.
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Chapter 13: Fiscal Policy
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Q1) By its very definition, every budget deficit is structural in nature.
A)True
B)False
Q2) Suppose that the government increases taxes. One effect of this change is that it decreases
A) disposable income, which decreases consumption expenditure and aggregate demand.
B) government expenditure, which decreases aggregate demand.
C) the size of the government expenditure multiplier.
D) disposable income which then decreases aggregate supply.
Q3) What is the difference between discretionary fiscal policy and automatic fiscal policy?
Q4) Ignoring any supply-side effects, how does the magnitude of the government expenditure multiplier compare to the magnitude of the tax multiplier? Explain your answer.
Q5) Needs-tested spending ________ during recessions and ________ during expansions.
A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases
Page 15
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Chapter 14: Monetary Policy
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Q1) Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should
A) lower the federal funds rate.
B) raise the federal funds rate.
C) increase the government's budget deficit.
D) decrease the government's budget deficit.
Q2) Which of the following increases the quantity of money?
A) an individual's cash withdrawal from a bank
B) an individual's purchase of a government security from the Fed
C) the Fed's purchase of a government security
D) an increase in the government's budget deficit
Q3) The short-run effect of lowering the federal funds rate
A) raises the price level and increases real GDP.
B) raises the price level and decreases real GDP.
C) lowers the price level and increases real GDP.
D) lowers the price level and decreases real GDP.
Q4) A decrease in the supply of loanable funds decreases the real interest rate.
A)True
B)False
Q5) Describe how open market operations change the quantity of money.
Page 16
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Chapter 15: International Trade Policy
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Q1) An assumption behind the infant-industry argument for tariff protection is that
A) foreign competitors are selling output below average cost.
B) the domestic industry will be facing an upward adjustment in its average cost.
C) the domestic industry will eventually gain a comparative advantage in producing the good.
D) the market needs additional competition to satisfy consumer demand.
Q2) Tariffs and import quotas both result in
A) lower levels of domestic production.
B) the domestic government gaining revenue.
C) lower levels of imports.
D) higher levels of domestic consumption.
Q3) "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect?
Q4) A difference between a quota and a tariff is that with a quota the
A) person who has the right to import the good captures an extra gain.
B) exporting government collects an extra gain in the form of revenue.
C) importing government collects an extra gain in the form of revenue.
D) domestic consumers are not harmed.
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