ECON 1951 ACTUAL EXAM 2026 FULL
QUESTIONS AND SOLUTIONS VIEW AHEAD
◉ What does the modern interpretation of the quantity of money
equation essentially say?
Answer: The demand for money is higher when the level of nominal
income is higher. As income/output increases, producers require
more money to support financially the higher level of production,
and consumers require more money to facilitate their higher level of
consumption.
◉ How is the strength of monetary policy usually measured?
Answer: Income multiplier with respect to the money supply: the
increase in equilibrium income due to a unit increase in the money
supply.
◉ In the long run, what is the relationship between money demand
and the money supply?
Answer: In the long run, the monetary sector of the economy moves
to an equilibrium in which the rate of growth of money demand
equals the rate of growth of money supply.
◉ What is the formula for the long-run annual rate of inflation?
,Answer: Long-run rate of price inflation = rate of growth of the
money supply - rate of real income growth
◉ What are two important implications of the long-run inflation
equation?
Answer: 1. An economy does not experience inflation if its money
supply increases at a rate equal to the real rate of growth of the
economy (money-demand increase due to annual real income
growth = annual money-supply increase).
2. An economy will experience a low, steady inflation in the long run
if its money supply grows at a low, steady rate
◉ What is the monetarist rule?
Answer: Belief that the monetary authorities should be replaced by a
robot programmed to increase the money supply at a low, constant
rate.
◉ What is seignorage? What limits the amount of financing made
available to the government through seignorage?
Answer: The amount of financing made available to the government
through printing money.
Too much financing creates inflation.
◉ For what reasons do monetarists advocate their rule? (4)
, Answer: 1. Guarantees a low long-run rate of inflation. (Economic
stability)
2. Creates automatic stabilizing forces
3. Insulates monetary policy from politics
4. Prevents the Fed from making mistake
◉ What are criticisms of the monetarist rule? (4)
Answer: 1. Unstable velocity - As a result of banking innovations and
measure of M1 and M2. Way to overcome this is to target on a
nominal GDP growth rate equal approximately to the historical real
rate of growth of GDP.
2. Lack of Fed control over money supply - Arises from fluctuation of
public holding of money, financial innovations, excess reserves in
banks.
3. Short-run monetary shocks - Fed needs to increase money supply
to alleviate these shocks when necessary
4. Inflexibilty
◉ What does discretionary policy refer to? Opposite to what kind of
policy?
Answer: Policy based on the judgement of policymakers, as opposed
to the monetarist rule.
◉ What is the formula for a one year coupon bond?
QUESTIONS AND SOLUTIONS VIEW AHEAD
◉ What does the modern interpretation of the quantity of money
equation essentially say?
Answer: The demand for money is higher when the level of nominal
income is higher. As income/output increases, producers require
more money to support financially the higher level of production,
and consumers require more money to facilitate their higher level of
consumption.
◉ How is the strength of monetary policy usually measured?
Answer: Income multiplier with respect to the money supply: the
increase in equilibrium income due to a unit increase in the money
supply.
◉ In the long run, what is the relationship between money demand
and the money supply?
Answer: In the long run, the monetary sector of the economy moves
to an equilibrium in which the rate of growth of money demand
equals the rate of growth of money supply.
◉ What is the formula for the long-run annual rate of inflation?
,Answer: Long-run rate of price inflation = rate of growth of the
money supply - rate of real income growth
◉ What are two important implications of the long-run inflation
equation?
Answer: 1. An economy does not experience inflation if its money
supply increases at a rate equal to the real rate of growth of the
economy (money-demand increase due to annual real income
growth = annual money-supply increase).
2. An economy will experience a low, steady inflation in the long run
if its money supply grows at a low, steady rate
◉ What is the monetarist rule?
Answer: Belief that the monetary authorities should be replaced by a
robot programmed to increase the money supply at a low, constant
rate.
◉ What is seignorage? What limits the amount of financing made
available to the government through seignorage?
Answer: The amount of financing made available to the government
through printing money.
Too much financing creates inflation.
◉ For what reasons do monetarists advocate their rule? (4)
, Answer: 1. Guarantees a low long-run rate of inflation. (Economic
stability)
2. Creates automatic stabilizing forces
3. Insulates monetary policy from politics
4. Prevents the Fed from making mistake
◉ What are criticisms of the monetarist rule? (4)
Answer: 1. Unstable velocity - As a result of banking innovations and
measure of M1 and M2. Way to overcome this is to target on a
nominal GDP growth rate equal approximately to the historical real
rate of growth of GDP.
2. Lack of Fed control over money supply - Arises from fluctuation of
public holding of money, financial innovations, excess reserves in
banks.
3. Short-run monetary shocks - Fed needs to increase money supply
to alleviate these shocks when necessary
4. Inflexibilty
◉ What does discretionary policy refer to? Opposite to what kind of
policy?
Answer: Policy based on the judgement of policymakers, as opposed
to the monetarist rule.
◉ What is the formula for a one year coupon bond?
