Principles of Macroeconomics
Chapter Exam Questions
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that shape the behavior of economies on a large scale. The course examines key topics such as national income, economic growth, unemployment, inflation, and fiscal and monetary policy. Students learn to analyze how government policies and global events influence economic stability and growth. By exploring aggregate supply and demand, money and banking systems, and international trade, students gain a comprehensive understanding of how economic decisions affect countries and populations on both a local and global level.
Recommended Textbook
The Economics of Money Banking and Financial Markets 5th Canadian Edition by Frederic S. Mishkin
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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Q1) A key factor in producing high economic growth is ________.
A) eliminating foreign trade
B) well-functioning financial markets
C) high interest rates
D) stock market volatility
Answer: B
Q2) To calculate the growth rate of a variable,you will ________.
A) calculate the percentage change from one time period to the next
B) calculate the difference between the two variables
C) add the ending value to the beginning value
D) divide the increase by the number of time periods
Answer: A
Q3) Compared to interest rates on long-term bonds,interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
Answer: A
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Chapter 2: An Overview of the Financial System
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Q1) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called
A) commercial paper
B) a negotiable certificate of deposit
C) a municipal bond
D) federal funds
Answer: B
Q2) Prices of money market instruments undergo the least price fluctuations because of ________.
A) the short terms to maturity for the securities
B) the heavy regulations in the industry
C) the price ceiling imposed by government regulators
D) the lack of competition in the market
Answer: A
Q3) Distinguish between a foreign bond and a Eurobond.
Answer: A foreign bond is sold in a foreign country and priced in that country's currency
A Eurobond is sold in a foreign country and priced in a currency that is not that country's currency
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Page 4
Chapter 3: What Is Money
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Q1) Money is ________.
A) anything that is generally accepted in payment for goods and services or in the repayment of debt
B) a flow of earnings per unit of time
C) the total collection of pieces of property that are a store of value
D) always based on a precious metal like gold or silver
Answer: A
Q2) The decade during which the growth rates of monetary aggregates diverged the most is ________.
A) the 1960s
B) the 1970s
C) the 1980s
D) the 1990s
Answer: D
Q3) Income is a ________ and wealth is a ________.
A) stock; flow
B) flow; stock
C) variable; constant
D) constant; variable
Answer: B
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Chapter 4: Understanding Interest Rates
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Q1) Your friend tells you that she bought a 10-year to maturity discount bond that she plans to hold until maturity in order to finance her daughter's university education.She also tells you that she is worried that due to interest-rate-risk she may suffer significant capital losses if interest rates increase.Are her fears justified?
Q2) The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
Q3) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a ________.
A) simple loan
B) fixed-payment loan
C) coupon bond
D) discount bond
Q4) How is current yield defined? How can it be used to determine yield to maturity for long-term bonds?
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6
Chapter 5: The Behaviour of Interest Rates
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Q1) In the Keynesian liquidity preference framework,an increase in the interest rate causes the demand curve for money to ________,everything else held constant.
A) shift right
B) shift left
C) stay where it is
D) invert
Q2) Everything else held constant,if the expected return on bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent,then the expected return of holding GE stock ________ relative to bonds and the demand for GE stock
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Q3) Using the liquidity preference framework,what will happen to interest rates if the Bank of Canada increases the money supply?
Q4) Everything else held constant,would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?
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7
Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) Which of the following statements is true?
A) Because coupon payments on tax-exempt bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An decrease in tax rates will increase the demand for U.S Treasury bonds, lowering their interest rates.
C) Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption.
D) An decrease in tax rates will increase the supply of U.S Treasury bonds, lowering their interest rates.
Q2) The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is ________.
A) interest rate risk
B) inflation risk
C) moral hazard
D) default risk
Q3) Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient
Market Hypothesis
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Q1) Periodic payments of net earnings to shareholders are known as ________.
A) capital gains
B) dividends
C) profits
D) interest
Q2) Evidence in support of the efficient markets hypothesis includes ________.
A) the failure of technical analysis to outperform the market
B) the small-firm effect
C) the January effect
D) excessive volatility
Q3) If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are ________.
A) obviously formed irrationally
B) still considered to be formed rationally
C) formed adaptively
D) formed equivalently
Q4) What rights does ownership interest give stockholders?
Q5) Describe the Price Earnings Valuation method for stocks.
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Q1) A key finding of the economic analysis of financial structure is that ________.
A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses
B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets
C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets
D) economists do not have a very good explanation for why securities markets are so heavily regulated
Q2) How does collateral help to reduce the adverse selection problem in credit market?
Q3) How does a mutual fund lower transactions costs through economies of scale?
Q4) Net worth can perform a similar role to ________.
A) diversification
B) collateral
C) intermediation
D) economies of scale
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Chapter 9: Financial Crises
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Q1) The two key factors that trigger speculative attacks on emerging market currencies are ________.
A) deterioration in bank balance sheets and severe fiscal imbalances
B) deterioration in bank balance sheets and low interest rates abroad
C) low interest rates abroad and severe fiscal imbalances
D) low interest rates abroad and rising asset prices
Q2) The risk of asset-backed commercial paper depends on ________.
A) unsecured promissory notes
B) the underlying securities
C) commercial paper
D) Treasury bills
Q3) Although the subprime mortgage market problem began in the United States,the first indication of the seriousness of the crisis began in ________.
A) Europe
B) Australia
C) China
D) South America
Q4) How do increases in interest rates play a role in promoting financial crises?
Q5) What triggered the ABCP saga in Canada?
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Chapter 10: Economic Analysis of Financial Regulation
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Q1) Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government ________.
A) regulation
B) ownership
C) recall
D) forbearance
Q2) According to CDIC risk profiles,________.
A) group 1 is the best and group 4 is the worst
B) group 4 is the best and group 1 is the worst
C) all banks are considered to be similar
D) there is no way to distinguish between them
Q3) One of the reasons for the failure of Canadian Commercial and Northland banks was ________.
A) moral hazard
B) adverse selection
C) the lack of deposit insurance
D) rising oil prices
Q4) Banking crises have occurred throughout the world.What similarities do we find when we look at the different countries?
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Chapter 11: Banking Industry: Structure and Competition
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Q1) Eurodollars are ________.
A) dollar-dominated deposits held in banks outside the United States
B) deposits held by U.S. banks in Europe
C) deposits held by U.S. banks in foreign countries
D) dollar-dominated deposits held in U.S. banks by Europeans
Q2) Currency circulated by banks that could be redeemed for gold was called ________.
A) junk bonds
B) banknotes
C) gold bills
D) state money
Q3) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as ________.
A) municipal bonds
B) Yankee bonds
C) "fallen angels"
D) junk bonds
Q4) What bonds are commonly called "junk bonds"? Why innovations in computer technology helped the "junk bonds" market?
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Chapter 12: Nonbank Finance
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Q1) Shares in open-end funds are ________ while shares in closed-end funds are
A) redeemable; not redeemable
B) not redeemable; redeemable
C) front load; no-load
D) no-load; front load
Q2) In a venture capital funds,investors' money is invested in ________.
A) private equity investments
B) public company investments
C) mutual fund investments
D) government bond investments
Q3) How does the economic concept of adverse selection apply to the lending activities of insurers? Provide an example.
Q4) Which of the following are financial intermediaries?
A) Life insurance companies
B) Mutual funds
C) Stock markets
D) State and local government retirement funds
Q5) List insurance management practices for lowering adverse selection and moral hazard.
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Chapter 13: Banking and the Management of Financial Institutions
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Q1) Your bank has the following balance sheet: Assets Liabilities
Rate-sensitive $100 million Rate-sensitive $75 million
Fixed-rate 100 million Fixed-rate 125 million
What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?
Q2) Banks that suffered significant losses in the 1980s made the mistake of ________.
A) holding too many liquid assets
B) minimizing default risk
C) failing to diversify their loan portfolio
D) holding only safe securities
Q3) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.
A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
Q4) What is a loan sale and how does it work?
Page 15
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Chapter 14: Risk Management With Financial Derivatives
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Q1) if you buy an option to buy Canada futures at 110,and at expiration the market price is 115,________.
A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised
Q2) If you sell in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795,you have a ________ of $________.
A) loss; 1250
B) loss; 5
C) profit; 1250
D) profit; 5
Q3) ________ derivatives offer payoffs on previously issued securities,but ones that bear credit risk.
A) Credit
B) Bond
C) Note
D) Stock
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Page 16
Chapter 15: Central Banks and the Bank of Canada
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Q1) The European Central Bank is located in ________.
A) Frankfurt
B) London
C) Paris
D) Rome
Q2) The Bank of Canada quarterly Monetary Policy Report is published every ________,________,________ and ________.
A) January; April; July; October
B) February; May; August; November
C) March; June; September; December
D) January; February; August; December
Q3) The Bank of Canada assumed the monopoly of issuing bank notes in ________.
A) 1945
B) 1939
C) 1940
D) 1949
Q4) Describe the structure of the Bank of Canada.
Q5) Describe the function and structure of the board of governors of the federal reserve system.
Page 17
Q6) What are the main functions of the Bank of Canada? describe them briefly.
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Chapter 16: The Money Supply Process
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Q1) When the Bank of Canada purchases a government bond from a bank,reserves in the banking system ________ and the monetary base ________,everything else held constant.
A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
Q2) The equation that represents M2+ in the model of the money supply process is
A) M2+ = C + D
B) M2+ = C + D + T - MMF
C) M2+ = C + D - T + MMF
D) M2+ = C + D + T + MMF
Q3) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000,and if the reserve requirement is 20 percent,then the bank has total reserves of ________.
A) $11,000
B) $21,000
C) $31,000
D) $41,000
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Chapter 17: Tools of Monetary Policy
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Q1) The Bank of Canada will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Q2) The Automated Clearing Settlement System (ACSS)________.
A) is the core of the Canadian payments system
B) is an electronic net settlement network designed to provide settlement to wholesale transactions
C) is an electronic net settlement network designed to provide settlement to paper-based payment items
D) Only A and B of the above.
Q3) The overnight interest rate ________.
A) is the shortest-term rate available
B) forms the base of any term structure of interest rates relation
C) is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
D) Only A and B of the above.
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Chapter 18: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) Describe the time-inconsistency problem as it pertains to monetary policy outcomes.
Q2) Increases in interest rates ________.
A) cause large capital losses
B) could lead to bank failures
C) affect consumers' willingness to buy houses
D) all of the above
Q3) The first country to adopt inflation targeting was ________.
A) the United Kingdom
B) Canada
C) New Zealand
D) Australia
Q4) In its most recent attempt in lowering the inflation rate,the Bank of Canada announces explicit targets for the rate of change in the CPI,because the CPI ________.
A) is the most commonly used and understood price measure in Canada
B) comes out monthly and without revisions, whereas other price measures are frequently revised
C) Both A and B of the above.
D) None of the above.
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Chapter 19: The Foreign Exchange Market
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Q1) An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.
A) increase; appreciate B) increase; depreciate
C) decrease; appreciate D) decrease; depreciate
Q2) If,in retaliation for "unfair" trade practices,the Canadian government imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,Canadian demand for Japanese goods increases,then,in the long run,________,everything else held constant
A) the Japanese yen should appreciate relative to the Canadian dollar
B) the Japanese yen should depreciate relative to the Canadian dollar
C) there is no effect on the Japanese yen relative to the Canadian dollar
D) the Japanese yen could appreciate, depreciate or remain constant relative to the Canadian dollar
Q3) In the model of the demand and supply of dollar assets use a graph to explain how a change in the domestic interest rate affects the equilibrium exchange rate.
Q4) Why are exchange rates so volatile?
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Page 21
Chapter 20: The International Financial System
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Q1) The World Bank is an international organization that ________.
A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries
B) makes loans to countries to finance projects such as dams and roads
C) makes loans to countries with balance of payment difficulties
D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West
Q2) When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency,then the country is said to have ________.
A) created a currency board
B) undergone dollarization
C) adopted a managed exchange system
D) adopted an exchange rate monetary system
Q3) Which of the following is not a disadvantage of exchange-rate targeting?
A) It relies on a stable money-inflation relationship.
B) The targeting country gives up an independent monetary policy.
C) The targeting country is left open for a speculative attack.
D) It can weaken the accountability of policymakers.
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Page 22
Chapter 21: Quantity Theory, inflation, and the Demand for Money
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Q1) The classical economists believed that if the quantity of money doubled,________.
A) output would double
B) prices would fall
C) prices would double
D) prices would remain constant
Q2) If the demand for money is unstable then ________.
A) velocity is unpredictable
B) quantity of money is not linked to aggregated spending
C) aggregate spending rises
D) both A and B
Q3) In the liquidity trap,the money demand curve ________.
A) is horizontal
B) is vertical
C) is negatively sloped
D) is positively sloped
Q4) Explain the Keynesian theory of money demand.What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?
Q5) Describe the factors that affect the demand for money.
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Chapter 22: The Is Curve
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Q1) Planned investment spending is higher ________.
A) when real interest rate is higher
B) during financial frictions
C) when businesses are optimistic
D) A and C
Q2) A decrease in unplanned inventory investment for the entire economy equals the excess of ________.
A) output over aggregate supply
B) output over aggregate demand
C) aggregate supply over output
D) aggregate demand over output
Q3) An increase in autonomous consumer expenditure causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Q4) Define the IS curve.
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Chapter 23: The Monetary Policy and Aggregate Demand
Curves
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Q1) A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.
A) up; rise B) up; fall
C) down; rise
D) down; fall
Q2) Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.
Q3) If the Bank of Canada conducts open market purchases,the money supply ________,shifting the MP curve to the ________,everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left
Q4) List the six factors that cause both the IS and the aggregate demand curve to shift.
Q5) Explain the difference between autonomous changes in monetary policy and the Taylor principle.
25
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Chapter 24: Aggregate Demand and Supply Analysis
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Q1) The aggregate demand curve is the total quantity of an economy's ________.
A) intermediate goods demanded at different inflation rates
B) intermediate goods demanded at a particular inflation rate
C) final goods and services demanded at a particular inflation rate
D) final goods and services demanded at different inflation rates
Q2) A decrease in the availability of raw materials that increases the price level is called a ________ shock.
A) unfavourable demand
B) favourable demand
C) unfavourable supply
D) favourable supply
Q3) This theory views shocks to tastes (workers' willingness to work,for example)and technology (productivity)as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.
A) The natural rate hypothesis
B) Hysteresis
C) Real business cycle theory
D) The Phillips curve model
Q4) Why is the aggregate demand curve downward sloping?
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Chapter 25: Monetary Policy Theory
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Q1) Demonstrate graphically and explain the short-run and long-run effects of an unanticipated monetary expansion in the new classical model.
Q2) The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called ________.
A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag
Q3) Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a ________.
A) structural model
B) reduced-form model
C) black-box model
D) scientific model
Q4) What is reverse causation and how does it relate to reduced-form evidence on monetary policy transmission?
Q5) What are the advantages of reduced-form evidence?
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Chapter 26: The Role of Expectations in Monetary Policy
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Q1) With a negative aggregate demand shock,monetary policy credibility can ________.
A) stabilize output
B) set inflation equal to zero
C) determine the effective interest rate
D) prevent financial malfeasance
Q2) Milton Friedman and his followers are known as ________.
A) monetarists
B) activists
C) Keynesians
D) neo-Keynesians
Q3) Advocates of nondiscretionary policy emphasize the importance of a constant money growth rate rule more than the balanced-budget amendment or restrictions on union power because ________.
A) they regard excessive money growth as the cause of inflation
B) they believe that excessive government spending, not excessive monetary growth, is the cause of inflation
C) they believe that while unions cause inflation, they are too politically powerful to deal with
D) they regard high tax rates as the cause of inflation
Q4) Describe the two main benefits of a credible nominal anchor.
Page 28
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Chapter 27: Transmission Mechanisms of Monetary Policy
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Q1) A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.
A) lowering real; decreasing B) lowering real; increasing C) raising nominal; increasing D) raising real; increasing
Q2) A contractionary monetary policy raises the real interest rate,causing the domestic currency to ________,thereby ________ net exports.
A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering
Q3) Early Keynesians believed that low ________ during the Great Depression indicated that ________ policy was easy.
A) money growth; fiscal B) money growth; monetary C) interest rates; fiscal D) interest rates; monetary
Q4) What are the advantages of reduced-form evidence?
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Chapter 28: The ISLM Model
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Q1) Everything else held constant,if aggregate output is to the right of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
Q2) Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess supply of money which will cause the interest rate to
A) right; fall
B) right; rise
C) left; fall
D) left; rise
Q3) In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively
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