tesfatsi@iastate.edu
ANSWER KEY
FINAL EXAM: 120 POINTS TOTAL L. Tesfatsion
Econ 353/Section 1
Spring 1999
1-1 The "aggregate price level" for an economy is the ____________ and the
"inflation rate" is the _________________.
A. sum of all prices in the economy in some time period; difference in
this sum from one period to the next.
B. value of all goods and services in the economy in some time period;
percent change in this value from one period to the next.
C C. average price of goods and services in the economy in some time period;
percent change in this average price from one period to the next.
D. none of the above.
2-1 According to time series data presented in Mishkin (Chapter 1):
A. U.S. interest rates have fluctuated substantially over 1950-1997.
B. The U.S. inflation rate has been persistently positive over 1950-1997.
C. U.S. stock prices have increased dramatically over 1950-1997.
D D. All of the above.
3-1 The primary ways in which a "broker" DIFFERS from a "dealer" are as
follows:
A. Brokers facilitate the trade of financial assets.
B. Brokers do not take positions in the financial assets they trade.
C. Brokers charge commissions to the users of their services.
D. all of the above.
E E. only B and C above.
4-1 The primary ways in which a "dealer" differs from a "financial
intermediary" are as follows:
A. Dealers hold asset inventories for resale.
B. Dealers make profits by buying assets at low prices
and then reselling these same assets at higher prices.
C. Dealers do not engage in asset transformation.
D D. All of the above.
E. Only A and B above.
5-1 Which of the following are primary markets.
A. The New York Stock Exchange
B B. The auction market for U.S. Treasury bills, notes, and bonds
C. The foreign exchange market.
D. The U.S. over-the-counter stock market
E. Only A, C, and D above
6-1 Corporations acquire new funds when their securities are sold
A. in a secondary market by securities dealers.
B B. in a primary market by investment banks.
C. in a secondary market by stock exchange brokers.
D. in a secondary market by commercial banks.
7-1 Which of the following statements are TRUE:
A. U.S. commercial banks are heavily involved in the underwriting of
corporate securities.
B. In the U.S., investment banks are key players in primary markets.
C. In the U.S., dealers are key players in secondary markets
D. Only A and B are true.
E E Only B and C are true.
8-1 Which of the following properties characterize debt securities:
A. Debt securities require the issuer (borrower) to periodically make
debt payments to the holder (lender).
B. Except in bankruptcy, debt payments are fixed in advance rather than
being conditional on the profits earned by the issuer (borrower).
C. Debt holders do not usually participate in the management of the
affairs of the debt issuer except under conditions of duress.
D D. all of the above.
9-1 Suppose a person has a chance to use $100 to buy either a debt security
issued by a corporation DEDBEET or common stock shares issued by corporation
DEDBEET. Specify which of the following statements is true:
A. Purchasing the debt instrument is necessarily more risky than
purchasing the common stock shares because DEDBEET may go bankrupt.
B. Purchasing the debt instrument is necessarily more risky than
purchasing the common stock shares because a common stock share holder
is ensured a steady stream of dividend payments from DEDBEET.
C C. Neither A nor B is true.
D. Both A and B are true.
10-1 Whatever a society uses as money, the defining characteristic is that
A. it must be completely inflation proof.
B B. it must be generally acceptable as payment for goods and services
and repayment of debts.
C. it must contain at least some amount of a precious metal.
D. it must be produced by government.
11-1 The conversion of a barter economy to one that uses money increases
efficiency by reducing
A. the need to exchange goods.
B. the need to specialize.
C. the need to employ team production methods.
D D. transactions costs.
12-1 During hyperinflations
A. the purchase value of money falls rapidly.
B. money no longer functions well as a store of value .
C. debtors benefit as the real value of their debt falls.
D D. all of the above occur.
13-1 The evolution of the means of payment from commodity money to
paper money to checkable deposits and beyond can best be understood as a
consequence of
A. government mandates regarding means of payment that were designed to
ensure the overall efficiency of the payments system.
B. government mandates regarding means of payment that were designed to
ensure the overall safety of the payments system.
C C. financial innovations introduced to reduce transactions costs and
hence to increase profits.
D. financial innovations introduced to promote the overall safety
of the payments system.
14-1 Which of the following statements about "fiat money" are accurate:
A. fiat money is unbacked, i.e., it is not collateralized by any
commodity.
B. fiat money is paper money.
C. fiat money is legal tender -- i.e., by law, citizens must accept
it as repayment for debts.
D D. all of the above are true by definition of fiat money.
15-1 Which of the following statements accurately describe the three
different aggregate money measures used in the U.S. -- M1, M2, and M3:
A. M1 is the narrowest measure of money and corresponds most closely to the
theoretical definition of money as a generally accepted means of payment.
B. Although M1, M2 and M3 tend to move together, there have been time
periods during which large discrepancies have arisen (especially
between M1 and the remaining two measures M2 and M3).
C. Initial estimates of M1, M2, and M3 are frequently subject to
substantial revisions after more data become available.
D D. all of the above are true **by definition of fiat money.**
PLEASE NOTE: The phrase between asterisks in 15-1:part D reading "by
definition of fiat money" was included by mistake (an inadvertent
repetition of part D in question 14). Because of this problem, ALL
answers given for question 15 have been counted as CORRECT and
awarded 2 points. The intended correct answer to 15-1 was "D. all
of the above are true"
16-1. Which of the following statements are true for fixed payment loans?
A. The borrower is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date of the loan.
B. The borrower makes the same fixed payment in every payment period
until the maturity date of the loan is reached.
C. Installment loans are frequently of the fixed payment type.
D. Only A and C of the above are true.
E E. Only B and C of the above are true.
17-1 If the annual interest rate is 5 percent, the present value of a
payment of $500 to be received three years from now is
A. $500 multiplied by (1 + .05)@3
B. $500 divided by (1 + .15)
C C. $500 divided by (1 + .05)@3
D. $500 divided by 3
18-1 The (annual) yield to maturity i on a coupon bond with a purchase
price $250, a face value $300, a 2-year coupon payment stream ($50,$50),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($50, $50)
B. i equals the total coupon payments $100 divided by the maturity 2.
C. i equals the coupon payment $50 divided by the purchase price $250.
D D. i equals the annual interest rate that, when used to calculate the
present value of the stream ($50,$350) of all payments generated by
the bond, results in a present value equal to the bond purchase price
of $250.
19-1 Which of the following are true in general for coupon bonds?
A. When a coupon bond is priced at its face value, its yield to maturity
equals its coupon rate.
B. The purchase price and yield to maturity for a coupon bond are
inversely related (one is high when the other is low), all else
remaining constant.
C. For a coupon bond, its coupon rate is less than its yield to maturity
when its purchase price is less than its face value.
D D. All of the above are true.
E. Only A and B of the above are true.
20-1 Holding everything else constant,
A. if an asset's risk rises relative to that of alternative assets,
its demand will fall.
B. the more liquid an asset, relative to alternative assets, the
greater will be its demand.
C. the higher the expected return of an asset relative to alternative
assets, the greater will be its demand.
D D. all of the above.
E. only A and B of the above.
21-1 By suitably diversifying the assets in a portfolio, its _______
risk can be eliminated, leaving only ___________ risk.
A. interest rate; default
B. systematic; nonsystematic
C. default; interest rate
D D. nonsystematic; systematic
22-1 The beta of an asset measures the extent to which its ________
varies directly with the expected return rate on the market portfolio,
hence it constitutes a measure of its _______________.
A. market price; nonsystematic risk
B B. expected return rate; systematic risk
C. market price; liquidity
D. nonsystematic risk; desirability
23-1 The capital asset pricing model (CAPM) postulates that the ________
of an asset can be explained by a single source of systematic risk as
reflected by movements in ______________.
A. interest rate risk; its yield to maturity
B B. expected return rate; the expected return rate of the market portfolio
C. total risk; the return rate of the risk-free asset
D. purchase price; the inflation rate
24-1 When the interest rate on loans is _________ the equilibrium interest
rate, there is an excess _________ for (of) loanable funds and the interest
rate will tend to _______.
A. above; demand; rise
B. below; demand; fall
C C. above; supply; fall
D. above; supply; rise
25-1 Given a world divided between HC and ROW, the purchasing power parity
condition in rates-of-change form predicts the following: If the 1996
inflation rate in the HC is 3 percent, and the 1996 inflation rate in ROW is
6 percent, then the HC nominal exchange rate E will ________ in 1996.
A. rise by 9 percent
B B. rise by 3 percent
C. remain unchanged
D. fall by 3 percent
26-1 Given a world divided between HC and ROW, according to the interest
parity condition, a ROW saver attempting to decide between holding a
bank deposit account in ROW and a bank deposit in the HC with the same
_______ will choose the bank deposit account with the highest ________
taking into account both _________ and _________.
A. default risk; insurance; insurance premiums; contingency fees
B. risk; liquidity; inflation rates; price levels
C C. risk; expected return; interest rates; expected HC exchange rate changes
D. expected return; market value; the HC exchange rate; the HC price level
27-1 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A. current account; net trades in existing financial and real assets
B. capital account; net trades in newly produced goods and services
C C. current account; net exports, net factor payments, and net transfers
D. capital account; net foreign investment income.
28-1 Assuming the world is divided between HC and ROW, if the HC is
running a current account surplus, then HC national saving _______
HC total investment and the HC is ___________ ROW.
A. is greater than; borrowing from
B B. is greater than; lending to
C. is less than; lending to
D. is less than; borrowing from
29-1 Assuming the world is divided between HC and ROW, that only the HC
central bank holds offical reserve assets (HC and ROW currency reserves), and
that the changes in ROW currency reserves ("official reserve asset
transactions") undertaken by the HC central bank are included in the
definition of the HC capital account, the balance of payments accounting
identity for the HC requires that the sum of the _________ and the
___________ equals _____________
A. HC current account; changes in ROW currency reserves; 0
B. HC capital account; changes in ROW currency reserves;
HC current account
C C. HC current account; HC capital account; 0
D. HC current account; HC capital account;
changes in ROW currency reserves
30-1 As of 1997, American businesses primarily obtained their external
funds from
A. stock issues
B B. bank loans
C. bonds and commercial paper issue
D. government loans
31-1 Property that is pledged to the lender in the event that a borrower
defaults on his or her debt payments to the lender is called
A. net worth
B. principal
C C. collateral
D. reserves
32-1 The presence of ___________ in financial markets leads to
adverse selection and moral hazard problems that interfere with the
functioning of financial markets.
A. noncollateralized risk
B. free-riding
C. costly state verification
D D. asymmetric information
33-1 Because of adverse selection problems in financial markets,
A. good credit risks are more likely to seek loans.
B. lenders may refuse loans to individuals with high net worth,
because of their greater ability to avoid payments by leaving town.
C C. lenders are reluctant to make loans not secured by collateral.
D. all of the above
34-1 Because of moral hazard problems in financial markets,
A. lenders frequently write debt contracts that restrict borrowers
from engaging in certain types of behavior.
B. debt issue is used more frequently than equity issue to obtain
external funds.
C. lenders frequently write contracts that require insurance coverage.
D D. all of the above.
35-1 In the United States, the government agency that requires firms
participating in securities markets to adhere to standard accounting
principles and to disclose information about their sales, assets, and
earnings is the
A. Federal Trade Commission
B B. Securities and Exchange Commission
C. Federal Reserve System
D. Oversight Directorship for Securities Markets
36-1 A "free-rider problem" is said to occur when
A. the average cost of loans declines as the amount of loans increases.
B B. people who do not pay for information take advantage of the information
that other people have paid for by observing their behavior.
C. high-risk borrowers are successfully able to pass themselves off
as low-risk borrowers when applying for loans.
D. ownership of assets is separated from the control of these assets.
37-1 In the U.S., it is generally more difficult for dealers in corporate
securities than for banks to reduce moral hazard problems because
A. corporations are subject to principal-agent problems.
B. banks can put special covenant restrictions in their loan contracts.
C. securities dealers are not subject to very much regulation.
D. all of the above.
E E. only A and B above.
38-1 The "economic growth" of a country refers to _______ and is often
measured by _________
A. increases in the size of its economy; its population growth rate.
B. increases in its capital stock; its investment level.
C C. increases in the size of its economy; its GDP growth rate.
D. increases in its labor force; its population growth rate.
39-1 A country's financial markets tend to perform poorly when
A. its legal system is weak.
B. standard accounting practices are absent.
C. government regulation is inadequate or inappropriate.
D D. all of the above.
40-1 According to Mishkin, key factors that can trigger or worsen
financial crises include
A. sharp increases in interest rates.
B. sharp declines in goods and services prices.
C. bank panics.
D D. all of the above.
E. only A and C of the above.
41-1 Increases in interest rates potentially worsen _________ problems
because they can result in ______________
A. moral hazard; a credit crunch.
B B. adverse selection; a lower average quality of loan applicant.
C. free-rider; lower information costs.
D. monitoring; higher costs for eyeglasses.
42-1 According to Mishkin, one of the key factors that led to
the Mexican financial crisis during 1994--1995 was ___________,
caused in part by _______ .
A. inflation; an unanticipated devaluation of the peso.
B B. bank capital deterioration; inadequate screening out of bad loans.
C. price deflation; decreased lending to households and firms
D. contractions in GDP; low real wages.
43-1 According to Mishkin, a key factor leading to the serious decline in
economic activity in the U.S. during the first three years of the Great
Depression was _____________, which resulted in large part from _____________.
A. severe debt deflation; sharp increases in the aggregate price level
B. high unemployment; sharp contractions in the real money supply.
C C. severe debt deflation; sharp decreases in the aggregate price level.
D. declining real wages; substantial cut-backs in government spending.
44-1 The _______ of a bank appear on its balance sheet as part of its
__________ and are an important aspect of its _______________ .
A. checkable deposits; assets; asset management
B. reserves; liabilities; liquidity management
C C. loans; assets; asset management
D. securities; liabilities; capital adequacy management
45-1 A __________ is a government institution that has responsibility
for the amount of money and credit supplied in an economy as a whole.
A. commercial bank
B. national bank
C. treasury department
D D. central bank.
46-1 An automated teller machine is an example of a __________ whose
development in the U.S. was stimulated by a desire to get around ______ .
A. monetary payment system; Fed control of the money supply.
B. nonbank bank; provisions of the 1933 Glass-Steagall Act.
C C. financial innovation; U.S. branching restrictions.
D. depository institution; U.S. reserve requirements.
47-1 U.S. banking differs from banking in most other countries because
A. past branching restrictions have resulted in low relatively concentration.
B. commercial banking and securities activities are required to be separate.
C. U.S. banks are not key players in international financial markets.
D. all of the above.
E E. only A and B of the above.
48-1 The central banking system of the U.S. was established by the
____________ in order to ________________.
A. 1989 Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA); prevent future crises like the 1980s U.S. financial crisis.
B. 1982 Depository Institutions Act; promote more orderly lending.
C. 1933 Glass-Steagall Act; help prevent another Great Depression
D D. 1913 Federal Reserve Act; promote a safer banking system.
49-1 Which of the following is NOT a provision of the 1933 Glass-Steagall Act:
A A. the establishment of a new system of federally-chartered banks
B. requirement that Fed members buy federally-provided deposit insurance.
C. investment banks prohibited from commercial banking activities.
D. commercial banks prohibited from dealing in corporate securities.
50-1 Arguments AGAINST the entry of U.S. commercial banks into the
securities business include
A. this would cause increased competition from banks abroad.
B. this would give banks an unfair advantage against securities
firms because banks receive deposit insurance subsidies.
C. this would increase brokerage commissions.
D. this would encourage banks to engage in higher-risk activities.
E E. only B and D of the above.
51-1 Financial engineering of new products typically takes place in
response to ___________ .
A. recessions.
B. regulations that are perceived to restrict profitable activities.
C. inappropriate monetary policy.
D. changed economic circumstances.
E E. both B and D.
52-1 The increased volatility in interest rates in the U.S. in the 1980s
was a primary reason for the development of
A. bank credit cards.
B B. adjustable-rate mortgages.
C. junk bonds.
D. commercial paper.
53-1 Bank regulation is difficult because
A. complete and accurate information regarding the activities and
financial conditions of individual banks is difficult to acquire.
B. small differences in regulatory details can have large unintended
consequences as banks enage in loophole mining.
C. as regulations become more careful and precise, taking into account
individual situations, they become more costly to impose and enforce.
D D. all of the above.
54-1 A key form form of government safety net provision in the U.S. is
A. the Comptroller of the Currency ensures an adequate money supply.
B B. the Fed provides lender-of-last-resort help to commercial banks.
C. the Fed insures commercial banks against loan defaults.
D. the Securities and Exchange Commission enforces debt obligations.
55-1 Some of the more important types of banking regulations that have
been imposed on U.S. banks include _________ , which _____________.
A. portfolio restrictions; restrict the holding of investment portfolios
B B. chartering restrictions; restrict free entry into banking.
C. lending restrictions; restrict the amount loaned to any one borrower.
D. all of the above.
E. only A and B above.
56-1 According to Mishkin, key factors that triggered the financial
crisis in the U.S. in the early 1980s included
A. financial innovations such as money market mutual funds that
reduced profits from traditional bank lending.
B. an increasingly liberalized financial regulatory environment.
C. decreases in mandated federal deposit insurance coverage.
D. all of the above.
E E. only A and B above.
57-1 According to Mishkin, bank regulators did not perform well during the
U.S. financial crisis in the 1980s in the following respects:
A. the FDIC substantially weakened government safety net provisions.
B. bank regulators practiced regulatory forbearance -- i.e., they
let insolvent firms stay in operation.
C. the FDIC engaged in a "too big to fail" policy, which resulted in
assistance being unfairly distributed across large and small banks.
D. all of the above.
E E. only B and C above.
58-1 Some of the reforms introduced in U.S. government safety net provisions
in 1991 as a result of the 1980s U.S. financial crisis include:
A. only Fed member banks could obtain deposit insurance.
B B. deposit insurance premiums were required to be risk based.
C. securities firms were prohibited from obtaining any discount loans.
D. all of the above.
59-1 Chartering restrictions imposed on bank applicants have both
advantages and disadvantages. Advantages include ________ while
disadvantages include ____________.
A. guarantees that community needs are satisfied; increased competition.
B. eased entry into banking; costly periodic bank examinations.
C C. protection against unqualified applicants; reduced competition
D. regulatory forbearance; costly state verification.
60-1 Reforms in bank capital requirements introduced subsequent to the
1980s financial crisis in the U.S. have both advantages and disadvantages.
Advantages include ________ while disadvantages include ____________.
A. simpler reporting requirements; less discouragement to risky lending.
B. banks engaging in significant off-bank-sheet activities (hence more
risky activity) are now required to hold more bank capital;
enforcement is more difficult and costly.
C. new risk-based capital requirements discourage high-risk lending;
these risk-based capital requirements are harder to set and enforce.
D. all of the above.
E E. only B and C above.