tesfatsi@iastate.edu
ANSWER KEY
FINAL EXAM: 120 POINTS TOTAL L. Tesfatsion
Econ 353/SECTION 2
May 4, 1999
1-2 A "recession" is defined to be a period of time during which________
and an "expansion" is defined to be a period of time during which __________.
A. real wages are low; real wages are high.
B B. real GDP is declining; real GDP is increasing.
C. the current account is in deficit; the current account is in surplus.
D. the real money supply is low; the real money supply is high.
2-2 According to time series data presented in Mishkin (Chapter 1):
A. Over 1950-1997, U.S. stock prices have dramatically increased.
B. Over 1950-1997, U.S. interest rates have fluctuated substantially.
C. Over 1950-1997, the U.S. aggregate price level has persistently
increased.
D D. All of the above.
3-2 The primary ways in which a "dealer" DIFFERS from a "broker" are as
follows:
A. Dealers facilitate the trade of financial assets.
B. Dealers take positions in the financial assets they trade.
C. Dealers make profits by buying assets low and selling assets high.
D. all of the above.
E E. only B and C above.
4-2 The primary ways in which a "financial intermediary" DIFFERS from a
"dealer" are as follows:
A. Financial intermediaries facilitate the flow of funds from savers to
investors.
B. Financial intermediaries engage in asset transformation.
C. The main source of profits for financial intermediaries comes from
charging relatively high interest rates to investors (those who
borrow from them) and paying relatively low interest rates to
savers (the ones they borrow from).
D. All of the above.
E E. Only B and C above.
5-2 Which of the following are secondary markets.
A. The New York Stock Exchange
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 E. Only A, C, and D above
6-2 A financial institution that plays a major role in the sale of
securities in the primary market is
A. a stock exchange.
B B. an investment bank.
C. a savings and loan.
D. a commercial bank.
7-2 Which of the following statements are FALSE:
A 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. In the U.S., brokers are heavily involved in the capital market.
E. In the U.S., investment banks are generally prohibited from engaging
in commercial banking activities.
8-2 Which of the following properties characterize common stock shares:
A. A buyer of a common stock share acquires an ownership interest in the
assets and earnings of the seller of the common stock share.
B. Buyers can earn profits on the common stock shares they purchase
either through dividend payments or through stock price appreciation.
C. Dividend payments cannot be negative but stock prices can depreciate.
D D. All of the above.
9-2 Which of the following properties characterize debt securities:
A. In case of bankruptcy, debt claims are paid before the claims of
common stock holders.
B. Debt payments are conditional on the profits earned by the
debt issuer (borrower), except when the issuer declares bankrupcty.
C. Debt holders do not usually participate in the management of the
affairs of debt issuers except under conditions of duress.
D D. Only A and C above.
10-2 Checkable deposits in the U.S. satisfy the definition of money because
A. federal regulations mandate that they be so considered.
B. checkable deposits are federally insured.
C C. checkable deposits serve as a generally acceptable means of payment
for goods and services and for repayment of debts.
D. all of the above.
11-2 The conversion of a barter economy to one that uses money
A. increases efficiency by reducing the need to exchange goods and
services
B. increases efficiency by reducing the need to specialize.
C C. increases efficiency by reducing transactions costs.
D. does not increase economic efficiency.
12-2 During hyperinflations
A. the purchasing power of money rises rapidly.
B B. people increasingly switch away from money transactions
and towards barter transactions.
C. creditors benefit as the real value of their financial assets rises.
D. all of the above.
13-2 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.
14-2 The observed tendency for the form of money to evolve from commodity
money to fiat money increases the fragility of money because
A. fiat money can lose much of its value in hyperinflations.
B. fiat money is unbacked, i.e., it is not collateralized by any
commodity.
C. fiat money can lose much of its value if people lose confidence in its
general acceptability as a means of payment for goods and services.
D D. all of the above.
15-2 Which of the following statements accurately describe the three
different aggregate money measures used in the U.S. -- M1, M2, and M3:
A. M3 is the narrowest measure of money and corresponds most closely to the
theoretical definition of money as a generally accepted means of payment.
B. M1, M2 and M3 always move closely together.
C. Initial estimates of M1, M2, and M3 are rarely revised, so they are
reliable guides to short-run movements in the money supply.
D D. none of the above.
16-2 Which of the following are true in general for coupon bonds?
A. The borrower makes a fixed coupon payment in every payment period until
the maturity date, at which time the borrower also pays the face value.
B. The borrower is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date of the coupon bond.
C. Corporate bonds are examples of coupon bonds.
D. All of the above
E E. Only A and C of the above
17-2 If the annual interest rate is 10 percent, the present value of a
payment of $700 to be received two years from now is
A. $700 multiplied by (1 + .10)@2
B B. $700 divided by (1 + .10)@2
C. $700 divided by (1 + .20)
D. $700 divided by 2
18-2 The (annual) yield to maturity i on a coupon bond with a purchase
price $170, a face value $200, a 2-year coupon payment stream ($20,$20),
and a 2-year maturity is calculated as follows:
A. i equals the total coupon payments $40 divided by the maturity 2.
B B. i equals the annual interest rate that, when used to calculate the
present value of the stream ($20,$220) of all payments generated by
the bond, results in a present value equal to the bond purchase price
of $170.
C. i equals the coupon payment $20 divided by the purchase price $170.
D. i equals the present value of the coupon payment stream ($20, $20).
19-2 Which of the following are true for the current yield of a coupon bond?
A. The current yield is defined as the coupon payment divided by the
purchase price of the bond.
B. The formula for the current yield is the same as the formula
that defines the yield to maturity for a consol.
C. The current yield will be a close approximation for the yield to
maturity the longer the time to maturity, and also the closer the bond
price is to its face value.
D D. All of the above are true
E. Only A and B of the above are true.
20-2 Empirically, most savers find risk ___________ and return ___________.
Thus, given such a saver, if you offer him a choice of another asset
portfolio than the one he currently owns, where both portfolios have the same
total market value but the alternative portfolio has higher risk, the only
way the saver would be willing to accept the alternative portfolio in place
of his current portfolio is if the alternative portfolio has a_________
expected return rate.
A. desirable; undesirable; lower
B B. undesirable; desirable; higher
C. undesirable; desirable; lower
D. desirable; undesirable; higher
21-2 If a portfolio is sufficiently diversified, the __________ risk of
each asset contributes nothing to the total risk of the portfolio. Thus,
only _________ risk remains.
A. interest rate; default
B B. nonsystematic; systematic
C. default; interest rate
D. systematic; nonsystematic
22-2 The __________ of an asset measures the extent to which the asset's
expected return rate varies directly with the expected return rate of
__________, hence it constitutes a measure of the asset's __________ risk.
A. market price; the risk-free asset; systematic
B. beta; the market portfolio; nonsystematic
C. liquidity; the risk-free asset; nonsystematic
D D. beta; the market portfolio; systematic
23-2 The capital asset pricing model (CAPM) postulates that the expected
return rate of an asset can be explained by __________ of systematic risk as
reflected by movements in ______________.
A. two sources; its current yield and its capital gain or loss
B B. a single source; the expected return rate of the market portfolio
C. multiple sources; inflation rate, yield spread, and other factors
D. its total amount; the purchase price of the asset
24-2 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. below; demand; fall
B B. below; demand; rise
C. below; supply; fall
D. above; supply; rise
25-2 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 8 percent, and the 1996 inflation rate in ROW is
6 percent, then the HC nominal exchange rate E will _______ in 1996.
A. rise by 7 percent
B. rise by 2 percent
C. remain unchanged
D D. fall by 2 percent
26-2 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. expected return; risk; default risk; interest rate risk
B B. risk; expected return; interest rates; expected HC exchange rate changes
C. risk; liquidity; inflation rates; price levels
D. expected return; market value; the HC exchange rate; the HC price level
27-2 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A. capital account; net exports, net factor payments, and net transfers
B. current account; net trades in existing financial and real assets
C C. capital account; net trades in existing financial and real assets
D. current account; net official reserve transactions
28-2 Assuming the world is divided between HC and ROW, if the HC is running
a current account deficit, then HC national saving _______ HC total
investment and the HC is ___________ ROW.
A. is greater than; lending to
B. is greater than; borrowing from
C. is less than; lending to
D D. is less than; borrowing from
29-2 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; HC capital account
B B. HC current account; HC capital account; 0
C. HC current account; HC capital account; changes in ROW currency reserves
D HC capital account; changes in ROW currency reserves; 0
30-2 Of the four sources of external funds listed below, the most important
source of external funds for American businesses as of 1997 was
A A. bank loans
B. foreign investment
C. corporate bond issue
D. equity issue
31-2 The predominant form of household debt is
A. consumer installment debt
B B collateralized debt
C. unsecured debt
D. none of the above
32-2 An investor who takes out a loan usually has better information about
the potential risks and returns of the investment projects he plans to
undertake than does the lender. This inequality of information is called
A. moral hazard
B B. asymmetric information
C. noncollateralized risk
D. adverse selection
33-2 Because of adverse selection problems in financial markets,
A. lenders may prefer to lend only to those who "do not need the money."
B. lenders typically require collateral before making a loan.
C. lenders may refuse loans to individuals with low net worth.
D D. all of the above.
34-2 Because of moral hazard problems in financial markets,
A. lenders sometimes demand to participate in the management of
the corporations who borrow from them.
B. lenders frequently write complicated contracts with many covenant
restrictions.
C. lenders more readily lend to borrowers with high net worth.
D D. all of the above.
35-2 Participants in securities markets in the United States are required
to adhere to standard accounting principles and to disclose information about
their sales, assets, and earnings. The government agency that enforces these
regulations is called the
A. Securities Supervision and Accountancy Board
B B. Securities and Exchange Commission
C. Federal Deposit Insurance Corporation
D. National Accountancy Commission
36-2 "Economies of scale" are said to occur in financial markets when
A A. the average cost of loans declines as the amount of loans increases.
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.
37-2 In the U.S., banks are generally better able than corporate securities
dealers to reduce information problems because
A. dealers have a harder time eliminating free-rider problems.
B. banks can include collateral requirements in loan contracts, which
can act as a signal regarding the type of borrower (high or low risk)
C. bank loans are generally not traded on an open market, which gives
banks a greater incentive to engage in information gathering.
D D. all of the above.
E. only A and B above.
38-2 The "economic development" of a country refers to improvements in
__________ that permit higher standards of living for its people.
A. its balance of payments
B B. the infrastructure, organization, and governance of its economy
C. its unemployment rate
D. the size of its GDP
39-2 The economic growth and development of a country are impeded when the
flow of funds from savers to lenders is disrupted, which can result from
A. a weak legal system.
B. absence of standard accounting practices.
C. inadequate or inappropriate government regulation.
D D. all of the above.
40-2 According to Mishkin, key factors that can trigger or worsen financial
crises include
A. increases in lender uncertainty.
B. sharp declines in corporate real net worth.
C. exchange rate depreciations or devaluations.
D D. all of the above.
E. only A and B of the above.
41-2 Bank panics can trigger or worsen financial crises because
A A. they can result in bank failures (bankruptcies).
B. they encourage governments to impose stronger financial regulations.
C. they encourage borrowers to shift to indirect financing.
D. they increase moral hazard problems.
42-2 According to Mishkin, one of the key factors that resulted in the
prolonged and serious nature of the financial crisis during the Great
Depression was ___________, triggered in part by _____________ .
A. inflation; increases in the nominal money supply.
B. contractions in the real money supply; negative exchange rate shocks.
C C. price deflation; decreased lending to households and firms
D. contractions in real GDP; decreasing real wages.
43-2 The international rescue package provided to Mexico following its
financial crisis in 1994--1995 has both advocates and critics. Advocates say
it proves the importance of helping countries whose financial institutions
are _____________, but critics argue that it can worsen _____________.
A. experiencing temporary reserve shortages; purchasing power parity problems.
B B. in need of liquidity assistance but not insolvent; moral hazard problems.
C. insolvent but still functioning; balance of payment problems.
D. experiencing debt deflation; inflation.
44-2 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 B. reserves; assets; liquidity management
C. loans; liabilities; liability management
D. securities; liabilities; capital adequacy management
45-2 The Federal Reserve System is the ___________ for the United
States, defined to be a government agency responsible for __________.
A. national bank; ensuring money demand equals money supply.
B B. central bank; money and credit supplied in the economy as a whole.
C. Treasury; carrying out open market exchanges of government securities.
D. financial comptroller; regulatory oversight of government reserves.
46-2 A bank holding company is an example of a ______ whose development in
the U.S. was stimulated in part by a desire to get around __________ .
A. thrift; U.S. chartering restrictions.
B B. financial innovation; pre-1994 U.S. branching restrictions.
C. savings and loan institution; provisions of the 1933 Glass-Steagall Act.
D. nonbank bank; U.S. reserve requirements.
47-2 U.S. banking differs from banking in most European countries in that
A. U.S. banking is a not a very concentrated industry.
B. commercial banking and securities activities are required to be separate.
C. primary regulatory oversight is provided by a central banking system.
D. all of the above.
E E. only A and B of the above.
48-2 The Federal Deposit Insurance Corporation was established by the
____________ in response to ________________.
A. 1989 Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA); the 1980s financial crisis in the U.S.
B. 1982 Depository Institutions Act; pressures for deregulation.
C C. 1933 Glass-Steagall Act; financial troubles during the Great Depression.
D. 1913 Federal Reserve Act; earlier U.S. financial crises (e.g., in 1907).
49-2 Which of the following types of provision(s) are included in the 1994
Riegle-Neal Banking and Branching Efficiency Act:
A. U.S. commercial banks are prohibited from dealing in corporate securities.
B. U.S. banks are prohibited from branching abroad.
C C. repeal of earlier legislation prohibiting U.S. banks from engaging in
domestic interstate branching.
D. all of the above.
E. only A and C of the above.
50-2 Arguments IN FAVOR of the entry of U.S. commercial banks into the
securities business include
A A. U.S. banks could then compete better against securities firms.
B. this would increase the spread between the price guaranteed to the
security issuer and the price paid for the security by the purchaser.
C. this would decrease the risk exposure of banks by diversifying
their activities.
D. all of the above.
E. only A and C of the above.
51-2 __________ is an example of a financial innovation that has contributed
to the recent decline in traditional banking activities in the U.S.
A. securitization
B. money market mutual funds
C. junk bonds
D D. all of the above
E. only B and C of the above
52-2 The development of NOW (negotiable order of withdrawal) accounts in
the U.S. is an important example of "loophole mining," which refers to
A. attempts to profit from the careless behavior of competitors.
B B. attempts to get around regulations perceived to restrict profits.
C. attempts to profit from changes in economic circumstances.
D. attempts to profit from government-provided information.
53-2 Bank supervision is difficult because
A. bank regulators and politicians with fixed terms of office have
strong incentives to engage in regulatory forbearance.
B. deposit insurance and other safety net provisions give depositors less
incentive to push for careful monitoring and enforcement of regulations.
C. it is difficult to ensure complete and accurate information disclosure.
D D. all of the above
54-2 Government safety net provisions in the U.S. include the following:
A. the Comptroller of the Currency prevents free-riding problems.
B. the Fed insures commercial banks against loan defaults.
C C. the FDIC sells low-cost deposit insurance to commercial banks.
D. the Securities and Exchange Commission prevents loophole mining.
E. all of the above.
55-2 Some of the more important types of banking regulations that have
been imposed on U.S. banks include _________, which _____________.
A. chartering restrictions; restrict branching across state lines.
B. disclosure requirements; require public disclosure of the financial
condition of each applicant seeking a loan from a commercial bank.
C C. capital requirements; place minimum requirements on bank capital.
D. all of the above.
E. only B and C of the above.
56-2 According to Mishkin, key factors that triggered the financial crisis
in the U.S. in the early 1980s included
A. financial innovations that widened the scope for risk taking and
reduced the profitability of traditional bank lending activities.
B. government safety net provisions leading to moral hazard problems.
C. a sharp decline in interest rates.
D. all of the above.
E E. only A and B above.
57-2 According to Mishkin, bank regulators did not perform well during the
U.S. financial crisis in the 1980s in the following respects:
A. bank regulators lacked the expertise and funds to oversee newly
permitted higher-risk forms of lending.
B. bank regulators practiced regulatory forbearance -- letting insolvent
banks stay in operation.
C. the FDIC adopted a "too big to fail" policy, which resulted in
assistance being unfairly distributed across large and small banks.
D D. all of the above.
E. only A and B above.
58-2 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. the FDIC was required to take earlier corrective actions when
banks showed signs of distress.
B. the FDIC's use of the "too big to fail" policy was restricted.
C. deposit insurance premiums were required to be risk based.
D D. all of the above.
59-2 Bank chartering requirements help to reduce _________ problems for
bank depositors, and restrictions on bank asset holdings help to reduce
_________ problems for bank depositors.
A. risk diversification; risk pooling
B. regulatory forbearance; adverse selection
C C. adverse selection; moral hazard
D. free riding; economies of scale
60-2 Market-value accounting (i.e., valuing assets and liabilities on
bank balance statements by their current market value) has a number of
advantages over historical-cost accounting (i.e., valuing assets and
liabilities on bank balance statements by their purchase cost), including:
A. making it more difficult for bank officials to hide insolvencies
when loans go bad.
B. helping to ensure that off-balance-sheet activities (which can
adversely affect future expected earnings net of costs) are more
appropriately accounted for on bank balance statements.
C. making it more difficult for regulators and politicians to practice
regulatory forbearance when bank loans go bad.
D D. all of the above.