Monetary Economics 1 Final Exam June 15th, 2022 Open book and notes Prepared by: Muhammad Fawdy Renardi Wahyu Please read the instructions carefully! 1. You should do the exam at 09.40 WIB - 11.40 WIB (120 minutes). WIB means Western Indonesian Time. 2. You must upload your answers in Excel and PDF form by typing your answers. In case you want to write equation using your handwriting, please scan your handwriting and attach them in the number you want to answer. Excel file is for multiple choices answer and PDF file is for essay answer. 3. Answer sheet format: FINAL_ME1_StudentNumber. For example, if your student number is 14/EK/312178/18340, then you should name your file as: FINAL_ME1_312178. 4. You can only upload your answers at 09.40-11.40 + extra time 10 minutes. You cannot upload your answers after 10 minutes extra time. 5. You should upload your answers in the Simaster. You cannot communicate with your fellow students during the exam. Cheating in any form will be subject to consequences according to the regulations of the Faculty of Economics and Business UGM. Multiple Choices (Maximum 60 points) 1. The main characteristic of monetary policy strategies in all countries is the use of nominal anchors, which is nominal variables used by monetary policy makers as an… A) operating targets, such as the fed funds rate B) intermediate targets, such as the fed funds rate C) intermediate targets to achieve ultimate goals such as price stability D) operating targets to achieve ultimate goals such as exchange rate stability 2. The goal to achieve a high level of employment occurs when the unemployment rate is at a level where the demand for labor equals the supply of labor. Economists refer to this unemployment rate as… A) the frictional unemployment rate. B) the structural unemployment rate. C) the natural rate of unemployment. D) Keynesian unemployment rate. 3. The trend in recent years is that more and more governments A) have been granting greater independence to their central banks. B) have been reducing the independence of their central banks to make them more accountable for poor economic performance. C) have mandated that their central banks focus on controlling inflation. D) have required their central banks to cooperate more with their Ministers of Finance. 4. Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A) the most independent central banks. B) political control of monetary policy. C) money financing of budget deficits. D) a policy of always keeping interest rates low. 5. In the reserves market, when the policy rate (eg fed funds rate) is above the interest rate paid on excess reserves, the demand curve for reserves is ________. A) vertical B) horizontal C) has a positive slope D) has a negative slope 6. In the reserves market, when the policy rate is above the interest rate paid on excess reserves, the open market sale of ________ supply of reserves causes the fed funds rate to ________, assuming no endogeneity problem (ceteris paribus). A) decreases; decrease B) increases; decrease C) increases; increase D) decreases; increase 7. ________ is the most important monetary policy tool because it is a major factor in changes in ________, a major source of fluctuations in the money supply. A) Open market operations; monetary base B) Open market operations; money multiplier C) Changes in reserve requirements; monetary base D) Changes in reserve requirements; money multiplier 8. The discount rate is A) the interest rate of the Fed charges on loans to banks. B) the price the Fed pays for government securities. C) the interest rate that banks charge their most preferred customers. D) the price banks pay the Fed for government securities. 9. If the central bank uses monetary targeting, the central bank announces a target annual growth rate for ________. A) monetary aggregate B) reserve aggregate C) monetary base D) GDP 10. Which of the following statements is an advantage when the central bank uses monetary targeting? A) The central bank gives an immediate signal regarding the achievement of the target. B) The central bank does not rely on a stable money-inflation relationship. C) Central bank implies a lack of transparency. D) Central bank implies smaller output fluctuations. 11. The monetary policy strategies that lack transparency are: A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. 12. If the intermediate target desired by the central bank is interest rates, the policy instrument preferred by the central bank is A) the federal funds rate. B) the monetary base. C) nonborrowed reserves. D) borrowed reserves. E) the discount rate. 13. Keynes had more concerned to… A) recession of 1920-21. B) low levels of output and employment during the Great Depression. C) strong economic growth of the 1920s. D) high unemployment in Great Britain during the 1920s. 14. Assuming there is no endogeneity problem (ceteris paribus), if total consumption increases from IDR 600,000 to IDR 800,000 due to an increase in disposable income of IDR 400,000, then mpc is equal to A) 0.2. B) 0.4. C) 0.5. D) 0.6. 15. If aggregate demand is below the actual level of output, unplanned inventory ________ will cause output to be ________. A) accumulation; rise B) depletion; fall C) depletion; rise D) accumulation; fall 16. If you know the value of the multiplier and the amount of change in autonomous investment, you can calculate A) changes in interest rates. B) changes in the money supply. C) changes in the demand for money D) changes in the equilibrium output. 17. In the Keynesian cross diagram, a decrease in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output decreases, and the IS curve shifts ________, assuming there is no endogeneity problem (ceteris paribus). A) up; left B) up; Well C) down; left D) down; Well 18. Expansive monetary policy shifts the LM curve to ________, reducing ________, assuming no endogeneity problems (ceteris paribus). A) left; output and increase interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increase real output 19. Despite expansionary monetary policy, the economy continued to experience a recession. Assuming there is no endogeneity problem (ceteris paribus), a recession can occur regardless of a shift in the LM curve to the right if ________. A) consumer confidence decreased sharply B) there is an investment boom C) the money supply increases D) taxes are cut 20. The long-run neutrality of money refers to the fact that in the long run, monetary policy ________. A) changes only real output B) changes only the real interest rate C) changes both real output and the real interest rate D) has no effect on either real output or the real interest rate 21. The quantity theory of money is derived from A) the concept of velocity. B) the Keynesian monetary transmission mechanism. C) the equation of exchange. D) the money supply. 22. By analyzing aggregate demand through its constituent components, we can conclude that the aggregate demand curve has a downward sloping slope because A) a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money in real terms, causes the interest rate to fall, and stimulates planned investment spending. B) a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money in nominal terms, causes the interest rate to rise, and stimulates planned investment spending. C) a higher price level, holding the nominal quantity of money constant, leads to a larger quantity of money in real terms, causes the interest rate to fall, and stimulates planned investment spending. D) a higher price level, holding the nominal quantity of money constant, leads to a smaller quantity of money in real terms, causes the interest rate to fall, and stimulates planned investment spending. 23. This theory views shocks to tastes (workersʹ 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 24. A reduction of aggregate demand may raise the natural rate of unemployment above the full employment level, meaning that the self-correcting mechanism will only be able to return the economy to the natural rate level of output and unemployment not to the full employment levels. Such a view is consistent with A) monetarism. B) hysteresis. C) Keynesianism. D) real business cycle theory. 25. The condition of a continually rising price level is defined as A) stagflation. B) stagnation. C) disinflation. D) inflation. 26. A one-time increase in the price level A) is rarely reported by the news media as inflation, but is nevertheless considered to be inflation by economists. B) is regularly reported by the news media as inflation, but is not considered to be inflation by economists. C) is rarely reported by the news media as inflation because it is not considered to be inflation by economists. D) is regularly reported by the news media as inflation because it is considered to be inflation by economists. 27. Methods of financing government spending are described by an expression called the government budget constraint, which states the following: A) the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public. B) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public. C) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed. D) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury. 28. The ________ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy, while the ________ lag is the time it takes for the policy to actually have an impact on the economy. A) recognition; implementation B) legislative; effectiveness C) implementation; recognition D) implementation; effectiveness 29. Evidence strongly supports the view that countries with high inflation also have A) the lowest nominal interest rates. B) the highest rates of money growth. C) the smallest budget deficits. D) the lowest interest rates. 30. According to aggregate demand and supply analysis, inflation is caused by A) supply shocks. B) expansionary fiscal policies. C) expansionary monetary policies. D) rising prices. ESSAY (Maximum 40 Points) 1. Describe two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important? 2. There are two types of open market operations carried out by the central bank, dynamic and defensive open market operations. What is the purpose of each type of open market operation? Describe two situations when defensive open market operations are used. How are defensive open market operations usually carried out? 3. The central bank decided to raise interest rates when it wanted to reduce aggregate demand to fight inflation. How does an increase in interest rates reduce aggregate demand? 4. Suppose that government spending is increased at the same time when an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve? 5. Suppose that a new Central Bank’ chair is appointed and his/her approach to monetary policy is that he/she only cares about increasing employment since the inflation rate is remain low and stable. He/she wants to prioritize more on using accommodative monetary policy to promote employment. How would you expect the monetary policy curve to be affected, if at all?
