ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 00
EXERCISE SET 6: 10 POINTS TOTAL DUE: Tuesday, March 21, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO
EXCEPTIONS*
*NOTE:* Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No.
on Side 1 of the accompanying answer sheet and write "353 SECTION
1-EXERCISE SET 6" in the top margin of Side 1. Use a #2 pencil to
MARK YOUR ANSWERS on Side 1 of the answer sheet to the following
five multiple choice questions:
PLEASE NOTE THIS IS A DOUBLE EXERCISE. THE FOLLOWING 10 QUESTIONS
COVER REQUIRED ONLINE AND TEXT MATERIALS RELATED TO MISHKIN CHAPTERS
5, 6, AND 8.
1-1. If you already own stock in USAirlines, then the additional
purchase of stock in _______ provides you with the LEAST amount of
risk reduction.
A. Greyhound Buslines
B B. Delta Airlines
C. Microsoft
D. McDonalds Corporation
2-1. A key distinction between the Arbitrage Pricing Theory (APT)
and the Capital Asset Pricing Model (CAPM) is
A. The APT predicts that an increase in the systematic risk of a
portfolio will result in a higher risk premium, all else equal.
B. For the APT, the market price of a particular source of
systematic risk can differ from one investor to another.
C C. The APT postulates the existence of more than one source of
systematic risk.
D. The APT assumes that investors' preferences for portfolios
depend only on risk and expected return.
3-1. The demand curve for bonds slopes downward because, at a lower
bond price, the yield to maturity is _______ , which is an incentive
to ______ to demand more bonds.
A. lower; borrowers
B. higher; borrowers
C. lower; lenders
D D. higher; lenders
4-1. When the price of bonds is _____ the equilibrium price level,
then there is an ________ bonds and the price of bonds can be
expected to ____.
A. above; excess demand for; fall
B. below; excess supply of; fall
C. above; excess supply of; rise
D D. above; excess supply of; fall
5-1. If the expected inflation rate for next year is expected to
fall, then (all else equal) this will tend to ______ borrowing
today, in the sense that the ______ curve for bonds will shift _____.
A. encourage; supply; to the right (more quantity
supplied for each price)
B B. discourage; supply; to the left (less quantity
supplied for each price)
C. encourage; demand; to the right (more quantity
demanded for each price)
D. discourage; demand; to the left (less quantity
demanded for each price)
6-1. If the bond market is currently in a demand=supply
equilibrium, and suddenly Alan Greenspan at the Fed announces that
he has good reason to believe that the yield to maturity on bonds
will be higher next year than currently anticipated, then the
analysis in Mishkin Chapter 6 predicts that (all else equal) the
effect on the bond market today will be that the _____ curve for
bonds will shift ______ and the current price of bonds will ______.
A. supply; to the right; rise
B. demand; to the right; rise
C C. demand; to the left; fall
D. demand; to the right; fall
E. none of the above.
7-1. If the exchange rate for the French franc changes from 10
francs to the dollar to 9 francs to the dollar, then
A. the franc has appreciated and the dollar has appreciated.
B. the franc has depreciated and the dollar has appreciated.
C C. the franc has appreciated and the dollar has depreciated.
D. the franc has depreciated and the dollar has depreciated.
8-1. According to the law of one price, if the price of Columbian
coffee is 100 Colombian pesos per pound of coffee and the price of
Brazilian coffee is 4000 Brazilian cruzados per pound of coffee,
then the exchange rate between the Columbian peso and the Brazilian
cruzado should be
A. 40 pesos per cruzado
B. 100 pesos per cruzado
C C. 0.025 pesos per cruzado
D. l peso per cruzado
E. none of the above
9-1. If the 1999 inflation rate in Spain is 5 percent, and the 1999
inflation rate in Italy is 7 percent, then the theory of purchasing
power parity predicts that, during 1999, the value of the Spanish
currency (pesetas) measured in terms of the Italian currency (lira)
-- i.e., the number of lira per peseta -- will
A. rise by 12 percent
B B. rise by 2 percent
C. fall by 2 percent
D. fall by 12 percent
E. none of the above
10-1. If the average nominal interest rate on bank deposit accounts
in the ROW is 4 percent, and if the HC nominal exchange rate E with
respect to ROW is expected to depreciate by 1 percent, then interest
parity predicts that the average nominal interest rate on HC bank
deposit accounts should be about
A. 3 percent.
B B. 5 percent.
C. -3 percent
D. 2.5 percent
E. none of the above
