ANSWER OUTLINE
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 00
EXERCISE SET 6: 10 POINTS TOTAL DUE: Tuesday, March 21, 2:10 P.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 2-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 REQUIRED ONLINE AND TEXT MATERIALS RELATED TO MISHKIN
CHAPTERS 5, 6, AND 8.
1-2. If you already own stock in Hardees Hamburgers, then the additional
purchase of stock in ________ helps to reduce your ________ risk.
A. Wendy's Hamburgers; nonsystematic
B. Compaq Computer Corporation; systematic risk
C C. Dell Computer Company; nonsystematic risk
D. Kentucky Fried Chicken; systematic risk
2-2. A key distinction between the Arbitrage Pricing Theory (APT)
and the Capital Asset Pricing Model (CAPM) is
A A. The CAPM postulates the existence of only one source of
systematic risk.
B. The CAPM predicts that an increase in the systematic risk of a
portfolio will result in a higher risk premium, all else equal.
C. For the APT, the market price of a particular source of
systematic risk is the same for all investors.
D. The CAPM assumes that investors' preferences for portfolios
depend only on systematic risk.
3-2. The supply curve for bonds slopes upward because, at a higher
bond price, the yield to maturity is _______ which is an incentive
to ______ to supply more bonds.
A A. lower; borrowers
B. higher; borrowers
C. lower; lenders
D. higher; lenders
4-2. 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 B. below; excess demand for; rise
C. above; excess supply of; rise
D. below; excess demand for; fall
5-2. If the expected inflation rate for next year is expected to
rise, then (all else equal) this will tend to ______ borrowing
today, in the sense that the ______ curve for bonds will shift
_____.
A A. encourage; supply; to the right (more quantity supplied for
each price)
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)
6-2. 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 lower 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 B. demand; to the right; rise
C. demand; to the left; fall
D. demand; to the right; fall
E. none of the above.
7-2. If the exchange rate for the Thai baht changes from 25 bahts to
the dollar to 30 bahts to the dollar, then
A. the baht has appreciated and the dollar has appreciated.
B B. the baht has depreciated and the dollar has appreciated.
C. the baht has appreciated and the dollar has depreciated.
D. the baht has depreciated and the dollar has depreciated.
8-2. According to the law of one price, if the price of Spanish wine
is 2,000 pesetas per bottle (750ml) and the price of Italian wine is
16,000 lira per bottle (750ml), then the exchange rate between the
Spanish peseta and the Italian lira should be
A. 100 pesetas per lira
B. 16 pesetas per lira
C. 1 peseta per lira
D D. 0.125 pesetas per lira
E. none of the above
9-2. If the 1999 inflation rate in Colombia is 10 percent, and the
1999 inflation rate in Norway is 4 percent, then the theory of
purchasing power parity predicts that, during 1999, the value of the
Columbian currency (pesos) measured in terms of the Norwegian
currency (krones) -- i.e., the number of krones per peso -- will
A. rise by 14 percent
B. rise by 6 percent
C C. fall by 6 percent
D. fall by 14 percent
E. none of the above
10-2. If the average nominal interest rate on bank deposit accounts
in the ROW is 8 percent, and if the HC nominal exchange rate E with
respect to ROW is expected to appreciate by 2 percent, then interest
parity predicts that the average nominal interest rate on HC bank
deposit accounts should be about
A. 10 percent.
B B. 6 percent.
C. -6 percent
D. 5 percent
E. none of the above
