Principles of Microeconomics Final Exam
Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts and analytical tools used to understand how individual markets function. The course covers topics such as supply and demand, consumer and producer behavior, market equilibrium, elasticity, efficiency, market structures (perfect competition, monopoly, and others), and the role of government in the economy. Students learn to apply economic reasoning to real-world scenarios, enabling them to analyze how resources are allocated and how various factors influence prices and production in the marketplace.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) The measure of the aggregate price level that is most frequently reported in the media is the
A)GDP deflator.
B)producer price index.
C)consumer price index.
D)household price index.
Answer: C
Q2) Stock prices are
A)relatively stable trending upward at a steady pace.
B)relatively stable trending downward at a moderate rate.
C)extremely volatile.
D)unstable trending downward at a moderate rate.
Answer: C
Q3) Why is it important to understand the bond market?
Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined.
Page 3
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Chapter 2: An Overview of the Financial System
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Q1) Equity of U.S. companies can be purchased by
A)U)S. citizens only.
B)foreign citizens only.
C)U)S. citizens and foreign citizens.
D)U)S. mutual funds only.
Answer: C
Q2) How do regulators help to ensure the soundness of financial intermediaries?
Answer: Regulators restrict who can set up a financial intermediary,conduct regular examinations,restrict assets,and provide insurance to help ensure the soundness of financial intermediaries.
Q3) The agency that restricts insider trading is the
A)Federal Reserve System.
B)Securities and Exchange Commission.
C)Office of the Comptroller of the Currency.
D)Federal Deposit Insurance Corporation.
Answer: B
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4
Chapter 3: What Is Money
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Q1) The total collection of pieces of property that serve to store value is a person's A)wealth.
B)income.
C)money.
D)credit.
Answer: A
Q2) Compared to an electronic payments system,a payments system based on checks has the major drawback that
A)checks are less costly to process.
B)checks take longer to process,meaning that it may take several days before the depositor can get her cash.
C)fraud may be more difficult to commit when paper receipts are eliminated.
D)legal liability is more clearly defined.
Answer: B
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Chapter 4: The Meaning of Interest Rates
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Q1) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is A)-3 percent.
B)-2 percent.
C)3 percent.
D)7 percent.
Q2) If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2,200,is the yield to maturity greater or less than 5%? Why?
Q3) Assuming the same coupon rate and maturity length,the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into A)the nominal interest rate.
B)the real interest rate.
C)the nominal exchange rate.
D)the expected inflation rate.
Q4) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.
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Chapter 5: The Behavior of Interest Rates
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Q1) When the economy slips into a recession,normally the demand for bonds ________,the supply of bonds ________,and the interest rate ________,everything else held constant.
A)increases;increases;rises
B)decreases;decreases;falls
C)increases;decreases;falls
D)decreases;increases;rises
Q2) The supply curve for bonds has the usual upward slope,indicating that as the price ________,ceteris paribus,the ________ increases.
A)falls;supply
B)falls;quantity supplied
C)rises;supply
D)rises;quantity supplied
Q3) An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets,everything else held constant.
A)reduce;financial
B)reduce;real
C)raise;financial
D)raise;real
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.
A)increase;increase
B)reduce;reduce
C)reduce;increase D)increase;reduce
Q2) According to the liquidity premium theory,a yield curve that is flat means that
A)bond purchasers expect interest rates to rise in the future.
B)bond purchasers expect interest rates to stay the same.
C)bond purchasers expect interest rates to fall in the future.
D)the yield curve has nothing to do with expectations of bond purchasers.
Q3) During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.
A)U)S. Treasury
B)corporate Aaa
C)municipal
D)corporate Baa
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8
Chapter
Expectations, and the Efficient Market Hypothesis
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Sample Questions
Q1) Using the Gordon growth model,a stock's current price decreases when
A)the dividend growth rate increases.
B)the required return on equity decreases.
C)the expected dividend payment increases.
D)the growth rate of dividends decreases.
Q2) Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis
A)outperforms the overall market.
B)far outperforms the overall market,suggesting that stockbrokers provide valuable services.
C)does not outperform the overall market.
D)does not outperform the overall market,suggesting that stockbrokers do not provide services of any value.
Q3) A change in perceived risk of a stock changes
A)the expected dividend growth rate.
B)the expected sales price.
C)the required rate of return.
D)the current dividend.
Q4) What rights does ownership interest give stockholders?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Q1) That only large,well-established corporations have access to securities markets
A)explains why indirect finance is such an important source of external funds for businesses.
B)can be explained by the problem of moral hazard.
C)can be explained by government regulations that prohibit small firms from acquiring funds in securities markets.
D)explains why newer and smaller corporations rely so heavily on the new issues market for funds.
Q2) Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are
A)limited-liability clauses.
B)risk insurance.
C)restrictive covenants.
D)illegal.
Q3) Why does the free-rider problem occur in the debt market?
Q4) How does a mutual fund lower transactions costs through economies of scale?
Q5) How does collateral help to reduce the adverse selection problem in credit market?
Q6) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Banking and the Management of Financial Institutions
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Q1) Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the A)adverse selection problem.
B)lemon problem.
C)adverse credit risk problem.
D)moral hazard problem.
Q2) Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the A)requirement that firms keep compensating balances at the banks from which they obtain their loans.
B)requirement that firms place on their board of directors an officer from the bank.
C)inclusion of restrictive covenants in loan contracts.
D)requirement that individuals provide detailed credit histories to bank loan officers.
Q3) How can specializing in lending help to reduce the adverse selection problem in lending?
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Chapter 10: Economic Analysis of Financial Regulation
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Q1) The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight.
A)restrict
B)encourage
C)renegotiate
D)enhance
Q2) Because of asymmetric information,the failure of one bank can lead to runs on other banks. This is the
A)too-big-to-fail effect.
B)moral hazard problem.
C)adverse selection problem.
D)contagion effect.
Q3) One of the criticisms of Basel 2 is that it is procyclical. That means that
A)banks may be required to hold more capital during times when capital is short.
B)banks may become professional at a cyclical response to economic conditions.
C)banks may be required to hold less capital during times when capital is short.
D)banks will not be required to hold capital during an expansion.
Q4) The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.
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Chapter 11: Banking Industry: Structure and Competition
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Q1) New computer technology has
A)increased the cost of financial innovation.
B)increased the demand for financial innovation.
C)reduced the cost of financial innovation.
D)reduced the demand for financial innovation.
Q2) Prior to 2008,bank managers looked on reserve requirements
A)as a tax on deposits.
B)as a subsidy on deposits.
C)as a subsidy on loans.
D)as a tax on loans.
Q3) The entry of AT&T and GM into the credit card business is an indication of
A)government's efforts to deregulate the provision of financial services.
B)the rising profitability of credit card operations.
C)the reduction in costs of credit card operations since 1990.
D)the sale of unprofitable operations by Bank of America and Citicorp.
Q4) Mutual savings banks are primarily regulated by
A)the states in which they are located.
B)the Federal Reserve.
C)the FDIC.
D)the National Credit Union Administration.
Page 13
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Chapter 12: Financial Crises
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Sample Questions
Q1) A serious consequence of a financial crisis is
A)a contraction in economic activity.
B)an increase in asset prices.
C)financial engineering.
D)financial globalization.
Q2) When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
A)credit boom.
B)credit bust.
C)deleveraging.
D)market race.
Q3) Microprudential supervision does all of the following EXCEPT
A)checking capital ratios of a bank.
B)checking a bank's compliance with disclosure requirements.
C)assessing the riskiness of an individual bank's activities.
D)focusing on financial system liquidity.
Q4) Typically,the economy recovers fairly quickly from a recession. Why did this NOT happen in the United States during the Great Depression?
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Chapter 13: Central Banks and the Federal Reserve System
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Q1) The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking,otherwise known as
A)the First Bank of the United States and the Second Bank of the United States.
B)the First Bank of the United States and the Central Bank of the United States.
C)the First Central Bank of the United States and the Second Central Bank of the United States.
D)the First Bank of North America and the Second Bank of North America.
Q2) Which of the following is NOT an entity of the Federal Reserve System?
A)Federal Reserve Banks
B)the Comptroller of the Currency
C)the Board of Governors
D)the Federal Open Market Committee
Q3) There are ________ members of the Board of Governors of the Federal Reserve System. A)5 B)7
C)12
D)19
Q4) Make the case for and against an independent Federal Reserve.
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) If the required reserve ratio is one-third,currency in circulation is $300 billion,checkable deposits are $900 billion,and there is no excess reserve,then the M1 money multiplier is
A)2.5.
B)2.8.
C)2.0.
D)0.67.
Q2) Assuming initially that the required reserve ratio = 10%,the currency-deposit ratio = 40%,and the excess reserve ratio = 0,an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to ________,everything else held constant.
A)increase from 2.5 to 2.8
B)decrease from 2.8 to 2.5
C)increase from 2.33 to 2.8
D)decrease from 2.8 to 2.33
Q3) High-powered money minus reserves equals
A)reserves.
B)currency in circulation.
C)the monetary base.
D)the nonborrowed base.
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Page 16
Chapter 15: Tools of Monetary Policy
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Q1) State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."
A)True
B)False
Q2) In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement increases the demand for reserves,________ the federal funds interest rate,everything else held constant.
A)rise;lowering
B)decline;raising
C)decline;lowering
D)rise;raising
Q3) In the market for reserves,a lower interest rate paid on excess reserves
A)decreases the supply of reserves.
B)increases the supply of reserves.
C)decreases the effective floor for the federal funds rate.
D)increases the effective floor for the federal funds rate.
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) The European Central Bank (ECB)pursues a hybrid monetary policy strategy that has elements in common with the ________-targeting strategy previously used by the Bundesbank but also includes some elements of ________ targeting.
A)monetary;inflation
B)inflation;monetary
C)monetary;exchange rate
D)monetary;nominal GDP
Q2) Which of the following is not a disadvantage of of the Fed's "just do it" approach to monetary policy?
A)There is low transparency of policy.
B)There is low accountability for central bankers.
C)This type of policy make the Fed more susceptible to the time-inconsistency problem.
D)It relies on a stable money-inflation relationship.
Q3) The first country to adopt inflation targeting was
A)the United Kingdom.
B)Canada.
C)New Zealand.
D)Australia.
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Chapter 17: The Foreign Exchange Market
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Q1) If one U.S. dollar is traded on the foreign exchange market for about 49.0 Indian rupees,then one Indian rupee can purchase about ________ U.S. dollars.
A)0.02
B)1.20
C)7.00
D)49.0
Q2) Everything else held constant,when a country's currency appreciates,the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive.
A)more;less
B)more;more
C)less;less
D)less;more
Q3) The exchange rate is
A)the price of one currency relative to gold.
B)the value of a currency relative to inflation.
C)the change in the value of money over time.
D)the price of one currency relative to another.
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19
Chapter 18: The International Financial System
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Q1) Under a fixed exchange rate regime,if a country has an ________ exchange rate,then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves.
A)undervalued;gain
B)undervalued;loss
C)overvalued;gain
D)overvalued;loss
Q2) When a country forgoes its own currency and starts using another country's currency as its own,we say that this country has
A)created a currency board.
B)undergone dollarization.
C)adopted a managed exchange system.
D)adopted an exchange rate monetary system.
Q3) Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?
Q4) Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes.
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Page 20
Chapter 19: Quantity Theory, inflation and the Demand for Money
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Q1) The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed
A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.
Q2) The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates,and there is ________ evidence that a liquidity trap exists.
A)sensitive;substantial
B)sensitive;little
C)insensitive;substantial
D)insensitive;little
Q3) Keynes hypothesized that the transactions component of money demand was primarily determined by the level of A)interest rates.
B)velocity.
C)income.
D)stock market prices.
21
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Chapter 20: The Is Curve
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Q1) A tax cut initially
A)increases consumption expenditure by an amount greater than the tax cut.
B)increases consumption expenditure by an amount equal to the tax cut.
C)increases consumption expenditure by an amount that is less than the value of the tax cut.
D)has no effect on consumption expenditure.
E)reduces consumption expenditure by an amount that is less than the value of the tax cut.
Q2) Economists define investment as the purchase of
A)a new physical asset such as a new machine or a new house.
B)any physical asset,whether new or not,used by business to increase production.
C)any physical asset used by business to increase production and the repurchase of common stock.
D)business spending on capital and household spending on durable goods.
Q3) A difference between inventory investment and fixed investment is that
A)fixed investment is never unplanned.
B)fixed investment is never planned.
C)inventory investment is never unplanned.
D)unplanned inventory investment is always zero.
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Page 22
Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Q1) Everything else held constant,an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________.
A)right;increase
B)right;decrease
C)left;increase
D)left;decrease
Q2) The upward slope of the MP curve indicates that
A)the central bank lowers real interest rates when inflation rises.
B)the central bank raises real interest rates when inflation falls.
C)the central bank raises nominal interest rates when inflation rises.
D)the central bank raises real interest rates when inflation rises.
Q3) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates,thereby ________ the level of equilibrium aggregate output. ,everything else held constant.
A)real;lowering
B)real;raising
C)nominal;lowering
D)nominal;raising
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) A decrease in the availability of raw materials that increases the price level is called a ________ shock
A)negative demand
B)positive demand
C)negative supply
D)positive supply
Q2) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant,the development of a new,more productive technology will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.
A)an increase;an increase
B)a decrease;a decrease
C)a decrease;an increase
D)no change;no change
Q3) A temporary supply shock that raises prices
A)will cause the real interest rate to rise in the long run.
B)has no long-run impact on inflation and output.
C)causes output to fall in the long run.
D)causes inflation to rise in the long run.
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Chapter 23: Monetary Policy Theory
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Q1) The combination of a successful wage push by workers and the government's commitment to high employment leads to
A)demand-pull inflation.
B)supply-side inflation.
C)supply-shock inflation.
D)cost-push inflation.
Q2) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then
A)inflation will be lower.
B)output will be at its potential.
C)output will be lower.
D)inflation will not change.
E)both A and B.
Q3) When the policy rate hits its lower bound and inflation keeps falling,this portion of the Monetary Policy curve is
A)downward sloping.
B)upward sloping.
C)flat.
D)undetermined.
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Chapter 24: The Role of Expectations in Monetary Policy
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Q1) The Lucas critique indicates that
A)advocates of discretionary policies' criticisms of rational expectations models are well-founded.
B)advocates of discretionary policies' criticisms of rational expectations models are not well-founded.
C)expectations are important in determining the outcome of a discretionary policy.
D)expectations are not important in determining the outcome of a discretionary policy.
Q2) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as
A)the monetarist revolution.
B)the Lucas critique.
C)public choice theory.
D)new Keynesian theory.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) If the aggregate price level adjusts slowly over time,then an expansionary monetary policy lowers
A)only the short-term nominal interest rate.
B)only the short-term real interest rate.
C)both the short-term nominal and real interest rates.
D)the short-term nominal,the short-term real,and the long-term real interest rates.
Q2) Because of the presence of asymmetric information problems in credit markets,an expansionary monetary policy causes a ________ in net worth,which ________ the adverse selection problem,thereby ________ increased lending to finance investment spending.
A)decline;increases;encouraging
B)rise;increases;discouraging
C)rise;reduces;encouraging
D)decline;reduces;discouraging
Q3) Monetarists' preference for reduced-form models is based on their belief that
A)reverse causation is a problem.
B)structural models may understate money's effect on economic activity.
C)money supply changes are always endogenous.
D)monetary policy affects only investment spending.
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Page 27
Chapter 26: Financial Crises in Emerging Market Economies
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Sample Questions
Q1) The economic hardship resulting from a financial crises is severe,however,there are also social consequences such as A)increased crime.
B)difficulty getting a loan.
C)currency devaluations.
D)loss of output.
Q2) At the time of the South Korean financial crisis,the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________.
A)were not;could borrow abroad
B)were not;could not borrow abroad
C)were;could borrow abroad
D)were;could not borrow abroad
Q3) A sharp depreciation of the domestic currency after a currency crisis leads to A)higher inflation.
B)lower import prices.
C)lower interest rates.
D)decrease in the value of foreign currency-denominated liabilities.
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Chapter 27: The ISLM Model
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Q1) A decline in the money ________ shifts the LM curve to the ________,causing the interest rate to rise and output to fall,everything else held constant.
A)demand;right
B)demand;left
C)supply;right
D)supply;left
Q2) As interest rates rise,the opportunity cost of holding money ________ and the demand for money ________.
A)rises;rises
B)rises;falls
C)falls;rises
D)falls;falls
Q3) The money market is in equilibrium
A)at any point on the IS curve.
B)at any point on the LM curve.
C)at only one point on the LM curve.
D)only at the intersection of the IS and LM curves.
Q4) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.
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