ESCP Torino Macroeconomics BIM 2

Some practice multiple choice questions Set 4 11 November 2022

1. Consider the Taylor rule for monetary policy and refinancing rate
setting by a central bank
Rt =RR + π t + 0.5 ( π t – π ) + 0.5O Gt + residua l t
S ¿ ¿

where
RtS: policy (refinancing) rate; π t : inflation rate;
¿
π : inflation target; O Gt = output gap
¿
R R is the real interest rate target

If the current inflation rate is 8%, target inflation is 2% , real interest

rate target is 1% and if current GDP is 5% below full employment
output (potential output) then the policy (refinancing) rate RtS that
should be chosen by the Central Bank should be

A 8,5%

B 6,5%

C 4%

D 9,5%

2. If in the economy of question 1 there is a change of government where

the new government regards dealing with unemployment as much
more of a priority than dealing with inflation and if the Central Bank
follows this lead by according three times as much priority to the
unemployment goal as to the inflation goal then the the policy
(refinancing) rate RtS that the Central Bank will now follow will be

A 8,25%

B 2,5%

C 6,75%

D The Central bank will still select the same policy (refinancing)
rate as in question 1 above
3. If in a particular economy which issues all of its debt in its own
currency it is expected that over the coming year real GDP will grow by
2% and that inflation will be 8%; and if the aggregate sovereign debt to
GDP ratio for the economy is 100% while the coupon rate on the
current debt is 9% and all of the bonds composing this debt are
coming due for repayment in one year’s time then we can expect

A The country can be in a position to roll over all of its debt

(issue of new bonds to pay off the old bonds) if it so wishes
without any increase in the sum total of debt outstanding
unless it is running a new public sector budget deficit in the
next year

B The country may be able to roll over its debt (issue of new bonds
to pay off the old bonds) but in that case the sum total of its
borrowings and so the size of its sovereign debt will inevitably
increase unless it plans to run a significant public sector budget
surplus next year

C The country will have no realistic option other than to default on

part or all of its debt

D The country may be able to roll over the debt (issue of new bonds
to pay off the old bonds) but there will inevitably be a larger
spread on the coupon rates (effective interest rates) of the new
bonds issued

4. Looking at the current inflation rates of the Eurozone economies which

are in the region of 10% per annum in terms of macroeconomic theory
we can say that

A They are readily explicable in terms of the Keynesian theory of

the inflationary gap and demand-pull inflation

B The inflation is due to strong upward pressure on wages and

salaries as a reaction to a long period of wage and salary stability

C The inflation is being led by cost increases for firms arising

from various effects of the war in Ukraine on energy and
other prices (e.g. transport); and firms passing on these cost
increases in higher prices for their goods and services

D Given the causes of this inflation the European Central Bank is

powerless to mitigate/reduce the inflation
5. The following equations have been estimated for an economy that is
currently far from being at full employment
Consumption function C = 0,8Yd +300 where Yd=disposable income
1
T= Y Im = 0,5Y I = 500 G = 400 X = 600
4
C=consumption, T=total tax yield; Im=Imports; I=Investment;
G=Government spending; X=Exports; Y = real GDP

The level of equilibrium income in this economy will be approximately

A 2000

B 2571

C 3257

D 6000

6. If in the economy described in question 4 above there is an increase of

exports by 450 (to a level of X = 1050) then the multiplier effect
associated with this increase of exports (assuming an economy
significantly below full employment) will be approximately

A 0,9

B 1,11

C 1,66

D 5

7. If the old classical Quantity Theory of Money holds true for an

economy and if over time the money supply is growing at a rate of 5%
per annum and the full employment output of the economy is growing
at a rate of 1% per annum then annual price inflation would be
expected to be roughly

A 5%

B 4%

C 2%

D 1%
8. After an open market operation whereby the Central Bank sells off
€10million of its bond holdings to banks or on financial markets then
if the minimum cash reserve ratio of the banks is 5% we can expect
that
A There will be an increase of money supply of approximately
€200million
B There will be no impact on money supply
C There will be an increase of money supply of approximately
€50million
D There will be a reduction of money supply of approximately
€200million