MEcon Master of Economics Study Guide 2026

The Hausman test checks whether the random effects estimator is consistent by testing for systematic differences between RE and FE coefficients; rejection favors fixed effects.

The claim that an increase in the demand for money will shift the LM curve right is untrue. The LM curve represents equilibrium in the money market. An increase in the demand for money, for a given money supply, means that a higher interest rate is required to clear the money market at any given level of output. This causes the LM curve to shift *left (up)*, reflecting that for any output level, a higher interest rate is needed to reduce money demand back to the fixed supply.

Grants address vertical fiscal imbalances (the mismatch between revenue-raising capacity and spending responsibilities) and horizontal spillovers (when one jurisdiction's services benefit residents elsewhere).

When a depositor writes a cheque to someone who banks at a different institution, the funds must be transferred from the first bank's reserves to the second bank's reserves. This interbank transfer directly reduces the reserves held by the paying bank, as its liability (the deposit) decreases and its asset (reserves) also decreases.

Adverse selection arises from asymmetric information — those who know they are higher risk seek insurance more eagerly, skewing the insured pool toward bad risks.

The International Monetary Fund was created at Bretton Woods specifically to oversee the international monetary system and assist countries with balance-of-payments problems.