ECN 211 LATEST 2026 TEST PAPER QUESTIONS AND
SOLUTIONS GRADED A+
✔✔What is money? - ✔✔- Widely accepted means of payment
- Most liquid asset
- Solves double coincidence of wants
- Eliminates the need for barter
✔✔What is part of the money supply? - ✔✔- Currency
- Demand deposits
✔✔What are the functions of the FED? - ✔✔- Supervising and regulating banks
- Acting as a bank for banks
- Issuing paper currency
- Check clearing
- Guiding the macroeconomy
- Dealing with financial crisis
✔✔What are the objectives of the FED? - ✔✔- Price stability
- Full employment
- Exchange rate stability
- Financial stability
✔✔What are the monetary policy tools? - ✔✔- Open market operations
- Changes in the federal reserve ratio, discount rate, and interest rate
✔✔Open market purchase - ✔✔FED buys bonds which increases money supply.
✔✔Open market sale - ✔✔FED sell bonds which decreases money supply.
✔✔Money multiplier - ✔✔The amount of money the banking system generates with
each dollar of reserves.
✔✔What influences the quantity of reserves? - ✔✔- Open market operations
- Lending to banks (changes in the discount rate)
✔✔What influences the reserve ratio? - ✔✔Changes in the required reserve ratio and
interest rate on reserves
✔✔Quantity theory of money - ✔✔The quantity of money determines the overall price
level in the economy (value of money).
✔✔Liquidity preference theory - ✔✔Interest rate adjusts to balance supply and demand
for money. Money demand reflects how much wealth people want to hold in liquid form.
, ✔✔What is the opportunity cost of money? - ✔✔What you could have earned if you
were holding onto a financial asset instead.
✔✔What happens if real income (Y) increases? - ✔✔As Y increases, households will
want to buy more goods and services but in order to obtain that money, they will attempt
to sell some of their bonds. An increase in Y increases money demand.
✔✔What does the money supply not depend on? - ✔✔Interest rate.
✔✔If the interest rate falls, what affect does that have on money demand? If the price
level falls, what affect does that have on money demand? - ✔✔- If the interest rate (r)
falls, money demand increases
- If the price level (p) falls, money demand decreases which also decreases r
✔✔In order to change the interest rate AND shift the aggregate demand curve the Fed
has to do what? - ✔✔The Fed conducts open market operations to change money
supply.
✔✔How can the Fed increase the interest rate? - ✔✔In order to increase the interest
rate, money supply needs to decrease. If interest rate increases then the quantity of
goods and services demanded decreases.
✔✔Fiscal policy - ✔✔The setting of government spending/taxation by government
policymakers.
✔✔Expand fiscal policy - ✔✔An increase in G or decrease in T shifts aggregate
demand curve to the right.
✔✔Contract fiscal policy - ✔✔A decrease in G or increase in T shifts aggregate demand
curve to the left.
✔✔Multiplier effect - ✔✔The additional changes in aggregate demand that results from
the fiscal policy increasing income and thereby also increasing consumer spending.
✔✔Marginal propensity to consume - ✔✔The fraction of extra income that households
choose to consume rather than save.
✔✔What is the formula to calculate real wage? - ✔✔NOMINAL WAGE/CPI
✔✔What is the formula to calculate real interest rate? - ✔✔INTEREST RATE -
INFLATION RATE
SOLUTIONS GRADED A+
✔✔What is money? - ✔✔- Widely accepted means of payment
- Most liquid asset
- Solves double coincidence of wants
- Eliminates the need for barter
✔✔What is part of the money supply? - ✔✔- Currency
- Demand deposits
✔✔What are the functions of the FED? - ✔✔- Supervising and regulating banks
- Acting as a bank for banks
- Issuing paper currency
- Check clearing
- Guiding the macroeconomy
- Dealing with financial crisis
✔✔What are the objectives of the FED? - ✔✔- Price stability
- Full employment
- Exchange rate stability
- Financial stability
✔✔What are the monetary policy tools? - ✔✔- Open market operations
- Changes in the federal reserve ratio, discount rate, and interest rate
✔✔Open market purchase - ✔✔FED buys bonds which increases money supply.
✔✔Open market sale - ✔✔FED sell bonds which decreases money supply.
✔✔Money multiplier - ✔✔The amount of money the banking system generates with
each dollar of reserves.
✔✔What influences the quantity of reserves? - ✔✔- Open market operations
- Lending to banks (changes in the discount rate)
✔✔What influences the reserve ratio? - ✔✔Changes in the required reserve ratio and
interest rate on reserves
✔✔Quantity theory of money - ✔✔The quantity of money determines the overall price
level in the economy (value of money).
✔✔Liquidity preference theory - ✔✔Interest rate adjusts to balance supply and demand
for money. Money demand reflects how much wealth people want to hold in liquid form.
, ✔✔What is the opportunity cost of money? - ✔✔What you could have earned if you
were holding onto a financial asset instead.
✔✔What happens if real income (Y) increases? - ✔✔As Y increases, households will
want to buy more goods and services but in order to obtain that money, they will attempt
to sell some of their bonds. An increase in Y increases money demand.
✔✔What does the money supply not depend on? - ✔✔Interest rate.
✔✔If the interest rate falls, what affect does that have on money demand? If the price
level falls, what affect does that have on money demand? - ✔✔- If the interest rate (r)
falls, money demand increases
- If the price level (p) falls, money demand decreases which also decreases r
✔✔In order to change the interest rate AND shift the aggregate demand curve the Fed
has to do what? - ✔✔The Fed conducts open market operations to change money
supply.
✔✔How can the Fed increase the interest rate? - ✔✔In order to increase the interest
rate, money supply needs to decrease. If interest rate increases then the quantity of
goods and services demanded decreases.
✔✔Fiscal policy - ✔✔The setting of government spending/taxation by government
policymakers.
✔✔Expand fiscal policy - ✔✔An increase in G or decrease in T shifts aggregate
demand curve to the right.
✔✔Contract fiscal policy - ✔✔A decrease in G or increase in T shifts aggregate demand
curve to the left.
✔✔Multiplier effect - ✔✔The additional changes in aggregate demand that results from
the fiscal policy increasing income and thereby also increasing consumer spending.
✔✔Marginal propensity to consume - ✔✔The fraction of extra income that households
choose to consume rather than save.
✔✔What is the formula to calculate real wage? - ✔✔NOMINAL WAGE/CPI
✔✔What is the formula to calculate real interest rate? - ✔✔INTEREST RATE -
INFLATION RATE
