tesfatsi@iastate.edu
FINAL EXAM: 70 QUESTIONS TOTAL L. Tesfatsion
Econ 353/Section 1
May 3, 2001
1-1 The total dollar value of goods and services newly produced within the
borders of the U.S., measured using current prices, is referred to as
A. real gross domestic product.
B. real gross national product.
C C. nominal gross domestic product.
D. nominal gross national product.
2-1 Which of the following are true statements:
A. The average price of goods and services in an economy is called the
aggregate price level.
B. The inflation rate is measured as the rate of change in the aggregate
price level.
C. Countries with the highest inflation rates tend also to be those with
the highest money growth rates.
D D. All of the above.
E. Only A and B.
3-1 A primary way in which a broker DIFFERS from a dealer is as follows:
A. Brokers facilitate financial asset trades but not trades in real assets.
B. Brokers take positions in the financial assets they trade.
C C. Brokers charge commissions to the users of their services.
D. all of the above.
E. only B and C.
4-1 The primary way in which a dealer DIFFERS from a financial intermediary
is as follows:
A. Dealers hold asset inventories for resale.
B. The most important source of profits for dealers is 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 markets is organized as an OVER-THE-COUNTER market:
A. The Nasdaq stock market.
B. The secondary market for government bonds.
C. The foreign exchange market.
D D. All of the above.
E. Only A and B.
6-1 Corporations do NOT acquire new funds when their securities are sold
A. in a primary market by investment banks.
B B. in a secondary market by securities dealers.
C. in a primary market overseas.
D. both A and C.
7-1 Which of the following describes an instance of DIRECT finance:
A A. A corporation buys commercial paper newly issued by another corporation.
B. A pension fund manager buys stock on the New York Stock Exchange.
C. A firm obtains a loan from a commercial bank.
D. You obtain a mortgage from a Savings and Loan.
E. Both C and D.
8-1 Which of the following describes an instance of INDIRECT finance:
A. A corporation buys commercial paper newly issued by another corporation.
B. A pension fund manager buys stock on the New York Stock Exchange.
C. A firm obtains a loan from a commercial bank.
D. You obtain a mortgage from a Savings and Loan.
E E. Both C and D.
9-1 Which of the following are true statements:
A A. Money is defined as anything that is generally accepted in payment for
goods and services and in repayment of debts.
B. Money is defined as any legally enforced medium of exchange.
C. The real purchasing power of money increases as the aggregate price
level increases, all else equal.
D. Only A and C.
E. Only B and C.
10-1 Which of the following statements best explains why the use of money in
an economy increases economic efficiency relative to barter exchange:
A. Money is costless to produce.
B B. Money encourages specialization and the division of labor.
C. Money reduces the need for specialization and the division of labor.
D. Money increases the number of prices needed to carry out exchanges.
11-1 Financial innovations such as money market mutual funds make it _____
for the Fed to use monetary policy to control the economy because _____
A. easier; it is clearer how the money supply should be measured.
B. harder; these newer forms of money involve lower transaction costs.
C. easier; people are using fewer forms of money in larger volume.
D D. harder; it is less clear how the money supply should be measured.
12-1 The COUPON RATE on a coupon bond with a purchase price of $160, a $200
face value, an annual $10 coupon payment, and a 3-year maturity is
A. one coupon payment per year.
B B. the coupon payment $10 divided by the face value $200.
C. the coupon payment $10 divided by the purchase price $160.
D. total coupon payments ($30) divided by the maturity 3.
13-1 Letting "*" denote multiplication, if the annual interest rate is 8
percent, then the PRESENT VALUE of a payment stream ($40,$0,$10) with $40 to
be received at the end of the FIRST year and $10 to be received at the end of
the THIRD year is given by
3
A A. $40/(1 + .08) + $10/(1 + .08)
B. $40*(1 + .24) + $10*(1 + .24)
C. [$40 + $10] divided by 3
3
D. $40*(1 + .08) + $10*(1 + .08)
14-1 Suppose a two-year security selling for $200 pays $110 at the end of the
first year and $121 at maturity (the end of the second year). Then, letting *
denote multiplication, its YIELD TO MATURITY i is the solution to
A. $200*i = $110 + $121
B B. $200*(1+i)*(1+i) = $110*(1+i) + $121
C. $200*(1+i) = $110 + $121
D. $200*i = $110 + $121 - $200
15-1 Letting i denote the current market interest rate (yield to maturity),
in which of the following situations would you prefer to be BORROWING:
A. i = 2 percent and the expected inflation rate = -1 percent
B. i = 7 percent and the expected inflation rate = 3 percent
C C. i = 13 percent and the expected inflation rate = 11 percent
D. i = 25 percent and the expected inflation rate = 20 percent
16-1 If there currently is an EXCESS SUPPLY of Treasury bonds, then the
theory in Mishkin Chapter 5 predicts that (all else equal) the current price
of Treasury bonds is ______ than the equilibrium price and hence will_______.
A. higher; be bid upwards until demand equals supply
B B. higher; be bid downwards until demand equals supply
C. lower; be bid upwards until demand equals supply
D. lower; be bid downwards until demand equals supply
17-1 If people revise DOWNWARD their expectations of the future yield to maturity
on bonds, the theory in Mishkin Chapter 5 predicts that (all else equal) the
current demand curve for bonds will shift to the ________ because _________.
A. left; borrowers will foresee higher real interest payments
B. right; borrowers will foresee lower real interest payments
C. left; lenders will foresee a decrease in their capital gains
D D. right; lenders will foresee an increase in their capital gains
18-1 If people revise UPWARD their expectations of the future inflation
rate, the theory in Mishkin Chapter 5 predicts that (all else equal) the
current supply curve for bonds will shift to the ________ because ________.
A. left; borrowers will foresee higher real interest payments
B B. right; borrowers will foresee lower real interest payments
C. left; lenders will foresee lower real interest receipts
D. right; lenders will foresee higher real interest receipts
19-1. Suppose the market for corporate bonds is currently in equilibrium.
However, new data on corporate profits convinces people to revise DOWNWARD
their expectations regarding the future inflation rate. Then the theory in
Mishkin Chapter 5 predicts that (all else equal) the effect on the bond
market today will be ________ in the equilibrium price of corporate bonds and
_________ in the equilibrium quantity of corporate bonds sold.
A A. a definite increase; either an increase or decrease
B. a definite increase; a definite decrease
C. a definite decrease; either an increase or decrease
D. either an increase or decrease; a definite increase
20-1 If a factor INCREASES the demand for ________ goods relative to _______
goods, the domestic currency (measured in foreign currency units) will tend
to appreciate.
A. foreign; domestic
B B. domestic; foreign
C. foreign; foreign
D. domestic; domestic
21-1 Which of the following is most likely to result from a WEAKER dollar
against the Japanese yen (that is, a drop in the yen per dollar exchange rate)?
A. U.S. citizens will buy more Japanese goods.
B. U.S. goods exported to Japan will cost more in Japan, so the Japanese
will buy fewer of them.
C C. U.S. goods exported to Japan will cost less in Japan, so the Japanese
will buy more of them.
D. the U.S. will definitely be worse off.
22-1 In a world divided between HC and ROW, the HC REAL EXCHANGE RATE is
defined to be
A. the HC nominal exchange rate plus the ROW inflation rate minus the
HC inflation rate.
B. the HC nominal exchange rate minus the HC inflation rate
C C. the HC nominal exchange rate times the HC aggregate price level
divided by the ROW aggregate price level
D. the HC nominal exchange rate times the ROW aggregate price level
divided by the HC aggregate price level
23-1 In a world divided between HC and ROW, the PURCHASING POWER PARITY (PPP)
condition asserts that
A. the HC real interest rate equals the ROW real interest rate.
B. the HC nominal exchange rate will stay constant over time.
C C. the HC real exchange rate will stay constant over time.
D. the HC aggregate price level equals the ROW aggregate price level.
24-1 A key reason why the PURCHASING POWER PARITY (PPP) theory, based on
the Law of One Price, cannot fully explain exchange rate movements in the
real world is that in actuality
A A. different countries do not produce the same bundle of goods and services.
B. different countries have different aggregate price levels.
C. different countries have different inflation rates.
D. different countries have different monetary policies.
25-1 If the 2001 inflation rate in Canada is 4 percent, and the 2001
inflation rate in Mexico is 2 percent, then the PURCHASING POWER PARITY
(PPP) theory predicts that, during 2001, the nominal exchange rate E giving
the value of the Canadian dollar in terms of Mexican pesos (i.e., the number
of pesos per Canadian dollar) will
A. rise by 6 percent
B. rise by 2 percent
C. fall by 6 percent
D D. fall by 2 percent
26-1 If the average nominal interest rate on bank deposit accounts in the
ROW is 5 percent, and if the HC nominal exchange rate E with respect to ROW
is expected to depreciate by 3 percent, then INTEREST PARITY predicts that
the average nominal interest rate on HC bank deposit accounts should be about
A. -8 percent
B B. 8 percent.
C. -2 percent
D. 2 percent.
27-1 Which of the following items would be directly entered as an item in
the U.S. CAPITAL account:
A A. A loan of $1 million from the U.S. First National Bank to Brazil
B. Foreign aid to the Ukraine
C. An Air France ticket bought by a U.S. citizen
D. Income earned by the Coca Cola Corporation from its plants abroad.
28-1 Which of the items below would be directly entered as items in the U.S.
CURRENT account:
A. Purchases by Cubans of cigars newly produced within the U.S.
B. A Malaysian citizen's purchase of U.S. Treasury bonds
C. Interest payments received by U.S. holders of a German bond issue
D. Foreign aid to Zambia
E E. All but B
29-1 In U.S. national income accounting, the U.S. CURRENT ACCOUNT must, by
accounting definition, equal
A. the total value of newly produced goods and services within the U.S.
B. total U.S. investment minus U.S. national saving
C. U.S. net imports
D D. U.S. national saving minus total U.S. investment
30-1 A U.S. CURRENT ACCOUNT ______ indicates that the U.S. is DECREASING its
net claims on foreign assets because the U.S. is _______ the rest of the world.
A. surplus; a net lender to
B B. deficit; a net borrower from
C. surplus; a net borrower from
D. deficit; a net lender to
31-1 Suppose the world is divided between HC and ROW. Using the definitions
for the HC current account CA, the HC "nonofficial" capital account NKA, the
balance of payments BP, and the HC capital account KA = NKA - BP introduced
in the online notes for Mishkin Chapter 19, the HC balance of payments
ACCOUNTING IDENTITY states that
A. the sum of CA and NKA is zero.
B. the sum of CA and NKA equals BP.
C. BP is zero.
D. the sum of CA and KA is 0.
E E. both B and D.
32-2 Suppose the world is divided between HC and ROW. If the HC is in a
balance of payments EQUILIBRIUM, this means
A. the HC central bank is undertaking official reserve transactions to
ensure demand equals supply in the foreign exchange market
B B. ROW currency demand equals ROW currency supply without the need for
HC central bank official reserve transactions.
C. HC government expenditures are equal to HC tax revenues
D. in net terms the HC is neither borrowing from nor lending to ROW.
33-1 Suppose the world is divided between HC and ROW. Using the definitions
for the HC current account CA, the HC "nonofficial" capital account NKA, the
balance of payments BP, and the HC capital account KA = NKA - BP introduced
in the online notes for Mishkin Chapter 19, the HC is in a balance of
payments EQUILIBRIUM if
A. CA is zero.
B. the sum of CA and KA is zero.
C. BP is zero.
D. the sum of CA and NKA is zero.
E E. both C and D.
34-1 Suppose the world is divided between HC and ROW. If the HC is running
a balance of payments DEFICIT, this is not a tenable situation for the HC in
the long run because
A. the HC is increasing its borrowing from ROW.
B. the HC is importing more from ROW more than it is exporting to ROW.
C C. the HC central bank is running down its limited ROW currency reserves.
D. the HC central bank is running down its limited HC currency reserves.
35-1 As established by the 1945 Bretton Woods agreement, membership in the
International Monetary Fund (IMF) is _________ for all countries, and membership
fees are to be used primarily to provide members with _____________.
A. voluntary; grants for long-term development projects.
B. mandatory; loans to address purchasing power parity problems
C C. voluntary; loans to meet liquidity needs in times of financial distress.
D. mandatory; fund transfers to offset reserve shortages due to bank panics.
36-1 Which of the following is NOT one of the eight basic puzzles about
U.S. financial structure discussed in Mishkin Chapter 8:
A A. Stocks are the most important source of finance for U.S. businesses.
B. Issuing marketable securities is not the primary way U.S. businesses
finance their operations.
C. Indirect finance is many times more important than direct finance.
D. Banks are currently the single most important source of external funds
for U.S. businesses.
37-1 The presence of TRANSACTION COSTS in U.S. financial markets explains,
in part, why
A. U.S. corporations rely on stocks more than bonds for external financing.
B B. indirect finance plays such an important role in U.S. financial markets.
C. direct finance plays such an important role in U.S. financial markets.
D. principal-agent problems arise for bond holders.
38-1 ADVERSE SELECTION is a problem that can arise with newly issued
securities because of
A. the inability of security purchasers to monitor fully the future
behavior of security issuers.
B. the possibility that other investors will be able to gain information
costlessly by observing the actions of security purchasers.
C C. the security purchasers' lack of detailed information about the
financial situation (e.g., default risk) of the security issuer
D. the inability of security issuers to impose and enforce covenants
restricting the behavior of security issuers.
39-1 MORAL HAZARD is a problem that can arise with newly issued securities
because of
A. the inability of security purchasers to monitor fully the future
behavior of security issuers.
B. the possibility that other investors will be able to gain information
costlessly by observing the actions of security purchasers.
C. the security purchasers' lack of detailed information about the
financial situation (e.g., default risk) of the security issuer
D. the inability of security purchasers to impose and enforce covenants
restricting the behavior of security issuers.
E E. Only A and D.
40-1 Moral hazard tends to be a greater problem for corporate SHAREholders
than for corporate BONDholders because
A. corporate bonds include restrictive covenants that condition interest
payment obligations on corporate profit performance.
B. corporate bondholders have priority over corporate stockholders in case
of bankruptcy.
C. corporate bondholders are less affected than stockholders by corporate
management activities, hence less vulnerable to free-rider problems.
D. Only A and B.
E E. Only B and C.
41-1 Policies adopted by governments in emerging and transition countries
that HELP the efficient operation of their financial systems include:
A. the encouragement of regulatory forbearance.
B B. the development of an impartial and effective legal system.
C. the nationalization of banks to ensure central political control.
D. all of the above.
E. Only A and B.
42-1 Financial crises _______ occur in countries with fundamentally sound
financial structures because ___________.
A. cannot; financial crises only occur in financially repressed
(underdeveloped) countries.
B. can; financial crises are always a response to prior problems in
the real production sector of the economy.
C C. can; self-fulfilling pessimism on the part of consumers, firms, or
financial institutions can lead to circular-flow breakdowns.
D. cannot; international financial institutions such as the IMF always
intervene promptly and effectively to prevent such financial crises.
43-1 According to Mishkin, most financial crises in the U.S. have begun with
A. a deterioration in banks' balance sheets.
B. a sharp rise in interest rates.
C. a steep stock market decline.
D. an increase in uncertainty resulting from a failure of a major
financial or non-financial firm.
E E. all of the above
44-1 According to Mishkin, a key way in which U.S. financial crises have
differed from financial crises in emerging and transition economies such as
Mexico is that
A. U.S. financial crises have not resulted in substantial bank failures.
B. U.S. regulators have not permitted insolvent financial institutions to
stay in operation.
C C. foreign exchange crises (e.g., speculative currency attacks) have not
played a dominant role in U.S. financial crises.
D. U.S. financial crises tend to be of far shorter duration.
45-1 Bank panics can trigger or worsen financial crises because
A. they encourage governments to impose stronger financial restrictions.
B. they encourage borrowers to shift to indirect financing.
C C. they can cause bank failures (bankruptcies).
D. they increase moral hazard problems.
E. all of the above
46-1 Adverse selection and moral hazard problems increased in magnitude
during the early years (1929-1933) of the Great Depression in the U.S. as
A. stock prices substantially declined.
B. numerous banks failed.
C. the aggregate price level sharply increased.
D. All of the above.
E E. Only A and B.
47-1 An important factor that triggered the 1994-1995 Mexican financial
crisis was
A. the failure of the Mexican oil monopoly.
B B. increasing loan losses at Mexican banks.
C. the ratification of the North American Free Trade Agreement.
D. the failure to ratify the North American Free Trade Agreement.
48-1 The international rescue package provided to Mexico following its
financial crisis in 1994--1995 has both advocates and critics. Advocates say
it proved the importance of helping countries whose financial institutions
are _____________, but critics argue that this rescue package _____________.
A. insolvent but still functioning; led to increased adverse selection
problems in Mexico.
B. experiencing temporary reserve shortages; reduced Mexico's chances of
regaining interest parity.
C C. in need of temporary liquidity assistance; led to further financial
crises (e.g., in East Asia) by encouraging risky lending activities and
lax bank monitoring in other countries.
D. experiencing temporary debt deflation; led to further problems down
the road for Mexico by encouraging inappropriate monetary policies.
49-1 The increasing reliance that U.S. commercial banks are placing on
_______ activities to generate earnings is a concern to financial regulators
because these activities __________.
A. traditional banking; generate relatively low profits.
B. risk management; tend to reduce bank innovation.
C C. off-balance sheet; increase moral hazard problems for bank depositors.
D. asset management; lead to lower lending volumes.
50-1 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.
51-1 The DUAL BANKING SYSTEM in the United States was established by the
__________ in an attempt to ___________________.
A. Federal Reserve Act of 1913; ensure a safer banking system.
B. Glass-Steagall Act of 1933; prevent further bank panics.
C. Revolutionary Banking Act of 1782; protect states rights.
D D. National Banking Act of 1863; curb the power of state banks.
52-2 A CENTRAL BANKING SYSTEM in the U.S. was not firmly established until
the _________ due to persistent concerns about _____________.
A. the National Banking Act of 1863; domination by northern states.
B B. 1913 Federal Reserve Act; the protection of states' rights.
C. 1982 Depository Institutions Act; the efficiency of free banking.
D. 1933 Glass-Steagall Act; too much centralized control.
53-1 Banking in the U.S. DIFFERS from most other industrialized countries
because
A. foreign branch banking is not permitted.
B B. the U.S. currently has a greater separation of commercial banking
from securities activities due to restrictions imposed from 1933-1999.
C. the U.S. central bank is not as politically independent as central
banks in most other industrialized countries.
D. All of the above.
E. Only B and C.
54-1 According to Mishkin, the key reason why the U.S. has a large number of
commercial banks in comparison with other industrialized countries is
A. vigorous competition within the U.S. commercial banking industry.
B B. past U.S. regulations that restricted branching across state lines.
C. strong U.S. consumer preference for small community banks.
D. consumer protection laws.
55-1 Which of the following is NOT a provision of the 1933 Glass-Steagall Act:
A. the creation of the Federal Deposit Insurance Corporation.
B. investment banks prohibited from commercial banking activities.
C. commercial banks prohibited from securities activities.
D D. the establishment of a new system of federally-chartered national banks.
56-1 The primary focus of the 1999 Gramm-Leach-Bliley Act is the
A. relaxation of the 1994 Reigle-Neal Act branching restrictions.
B B. relaxation of the 1933 Glass-Steagall Act separation provisions.
C. strengthening of the Federal Deposit Insurance Corporation.
D. establishment of risk-based capital requirements.
57-1 According to Mishkin, key factors that triggered the financial crisis
in the U.S. in the early 1980s included
A. increased regulation that restricted banks' efforts to engage in
financial innovation.
B. increased competition for deposits from money market mutual funds.
C. increases in federal deposit insurance coverage that encouraged banks
to engage in riskier activities.
D. all of the above.
E E. only B and C above.
58-1 According to Mishkin, bank regulators did not perform well during the
U.S. financial crisis in the 1980s in the following respects:
A. they strengthened prohibitions against charging interest on checkable
deposits, thus preventing banks from exploiting profit opportunities.
B. they did not practice regulatory forbearance -- i.e., they were too
impatient to close down insolvent firms.
C C. they adhered to a "too big to fail" policy, which resulted in
assistance being unfairly distributed across large and small banks.
D. all of the above.
E. only B and C above.
59-1 According to Mishkin, the development of new financial products and
services, referred to as __________, typically takes place in response to
___________ .
A. financial free-riding; increased information costs.
B B. financial engineering; changes in demand/supply conditions or regulations.
C. financial expansion; inappropriate government monetary policy.
D. financial data mining; recessions.
60-1 The development of nonbank banks in the U.S. is an interesting example
of "loophole mining," which refers to
A. attempts to profit from the careless behavior of competitors.
B. attempts to profit from changes in economic circumstances.
C C. attempts to get around regulations perceived to restrict profits.
D. attempts to profit from government-provided information.
61-1 The increased volatility of __________ in the U.S. in the 1970s was a
primary reason for the development of __________ .
A. money demand; bank credit cards.
B B. interest rates; adjustable-rate mortgages.
C. the inflation rate; junk bonds.
D. the eurodollar market; commercial paper.
62-1 According the Mishkin, the following types of financial innovations
were created in a direct attempt to get around various branching restrictions
imposed on U.S. banks in past banking legislation:
A. junk bonds and money market mutual funds
B. virtual banks and electronic money
C C. nonbank banks and automated teller machines
D. adjustable-rate mortgages and NOW accounts
63-1 A money market mutual fund is an example of a __________ whose
development in the U.S. was stimulated by a desire to get around ______ .
A. NOW account; provisions of the 1933 Glass-Steagall Act.
B B. financial innovation; provisions against interest on checkable deposits
C. financial intermediary; U.S. reserve requirements.
D. short-term financial asset; Fed control of the money supply.
64-1 Since the U.S. financial crisis in the 1980s, efforts to restructure
the U.S. financial system have significantly STRENGTHENED
A. consumer protection provisions
B. the separation of commercial banking from securities activities
C. capital requirements and disincentives for risk taking
D D. Only A and C
E. Only B and C
65-1 _________, the process of transforming otherwise illiquid financial
assets (e.g., mortgages) into more marketable securities, has contributed to
_________ since its initiation in 1970.
A. asset transformation; the rise of indirect financing
B B. securitization; the decline of traditional banking practices
C. risk pooling; the decline in the volatility of financial asset returns
D. risk spreading; the increase in stock holding by individual investors
66-1 Chartering restrictions imposed on bank applicants in the U.S. have
both advantages and disadvantages. Advantages include ________ while
disadvantages include ____________.
A. guarantees of foreign branching rights; increased foreign competition.
B. easier entry into banking; costly periodic bank examinations.
C C. reduced adverse selection problems for depositors; reduced competition
D. increased financial innovation efforts; costly state verification.
67-1 Reforms in bank capital requirements introduced in the U.S. since the
1980s financial crisis now require larger banks to maintain __________ that
take into account ________.
A. free reserves; the anticipated overflow of their withdrawal requests.
B. reserve ratios; the volume of their deposits.
C. foreign currency reserves; balance of payments problems.
D D. leverage (net worth to asset) ratios; the riskiness of their activities.
68-1 Key government safety net protections extended to financial institutions
in the U.S. to prevent bank panics include
A. truth in lending, anti-discrimination, and community involvement laws
B B. lender of last resort protection and deposit insurance
C. minimum capital balance requirements
D. separation of commercial banking from securities activities
69-1 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 A. easier identification of assets that have lost value (e.g., bad loans)
B. lower transaction costs
C. increased incentives for regulators to practice regulatory forbearance.
D. reduced incentives for free-riding
70-1 The 1977 Community Reinvestment Act requiring banks to _______ the
members of the community from which they aquire their deposits has recently
been strengthened by _________.
A A. lend to; the 1999 Gramm-Leach-Bliley Act
B. disclose their financial condition to; the 1995 Financial Disclosure Act.
C. support the charitable concerns of; the 1998 Basel Accord.
D. provide toasters to; the 1999 Toasters Convention Act.