tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 1 L. Tesfatsion
FIRST MIDTERM EXAM: 70 POINTS TOTAL February 29, 2000
1-1. Letting P(T) denote the aggregate price level in period T, the inflation
rate from period T to period T+1 is defined to be
A. P(T+1) - P(T)
B. [P(T) + P(T+1)]/2
C C. [P(T+1) - P(T)]/P(T)
D. [P(T) - P(T+1)]/P(T+1)
2-1. Recurrent fluctuations that occur in time series data for real GDP
and other key macro variables are referred to as
A. variable trends.
B B. the business cycle.
C. measurement errors.
D. standard deviations.
E. none of the above
3-1. Nominal GDP (gross domestic product) for the U.S. in 1999 is
A. the total dollar value of all U.S.-owned assets at the end of 1999.
B. the total dollar value of all final goods and services produced in 1999
using U.S.-owned factors of production, measured in 1999 prices.
C. the total dollar value of all final goods and services produced
within the borders of the U.S. in 1999, measured in base year 1992 prices.
D D. the total dollar value of all final goods and services produced in 1999
within the borders of the U.S., measured in 1999 prices.
4-1. In gross domestic product accounting, home country (HC) exports consist of
all purchases by the ______ of final goods and services newly produced ______.
A. HC; within the borders of the ROW (NOTE: ROW = Rest-of-the-World)
B. HC; using ROW-owned assets of production.
C C. ROW; within the borders of the HC.
D. ROW; using HC-owned assets of production.
5-1. Evidence from the United States indicates that
A. interest rates are unrelated to the business cycle.
B. there is a strong positive relationship between real interest rates and
the expected inflation rate (i.e., they tend to move in the same direction).
C. short-term and long-term interest rates show no relationship.
D D. there is a strong positive relationship between the money growth rate
and the inflation rate (i.e., they tend to move in the same direction)
E. none of the above.
6-1. The "Twin Deficit Problem" which arose in the 1980s refers to the
A. simultaneous occurrence of rising unemployment and rising inflation.
B B. simultaneous opening up of a government budget deficit and a current
account deficit.
C. simultaneous opening up of a capital account deficit and a current
account deficit.
D. simultaneous occurrence of increasing imports and decreasing exports.
7-1. The U.S. government budget SURPLUS in 2000 measures the extent to which
A. the U.S. is lending to the rest of the world in 2000.
B. U.S. government expenditures exceed U.S. government tax revenues in 2000.
C C. U.S. government tax revenues exceed U.S. government expenditures in 2000.
D. U.S. exports exceed U.S. imports in 2000.
8-1 If the value of the U.S. dollar increases relative to the British pound,
A A. British wool blankets will become cheaper in the U.S.
B. American wheat will become cheaper in Great Britain
C. British wool blankets will become more expensive in the U.S.
D. None of the above
9-1. Which of the following are secondary markets.
A. The New York Stock Exchange
B. The U.S. government bond market conducted through dealers
C. The over-the-counter stock market
D. U.S. Treasury bill auctions conducted by the Treasury.
E E. All except D.
10-1. Key distinctions between a dealer and a financial intermediary (FI) are:
A. a dealer does not keep an inventory of the assets he or she trades in.
B. the dealer is paid by commission.
C. the dealer does not transform the financial assets he or she trades in.
D. dealers are key players in over-the-counter markets.
E E. only C and D above.
11-1. Which of the following can be described as direct finance:
A A. A corporation buys newly issued shares of stock from another corporation.
B. You buy a share in a mutual fund maintained by a brokerage firm.
C. A pension fund manager buys commercial paper in the secondary market.
D. A household takes out a loan from a bank.
E. None of the above.
12-1. Which of the following can be described as indirect finance.
A. A corporation buys newly issued shares of stock from another corporation.
B. You buy a share in a mutual fund maintained by a brokerage firm.
C. A pension fund manager buys commercial paper in the secondary market.
D D. A household takes out a loan from a bank.
E. None of the above.
13-1. Which of the following statements about debt and equity are true.
A. Debt and equity claims have equal priority in case of insolvency.
B. Debt and equity claims are both based on profit performance.
C. Corporations are legally obligated to pay dividends to equity holders.
D D. None of the above.
E. Only A and B of the above.
14-1. Asymmetric information refers to
A. information that consists partly of good news and partly of bad news.
B. differences in information between government and the private sector.
C C. differences in information between buyers and sellers in markets.
D. differences in the quality of information that an investor possesses.
E. differences in information between corporations and shareholders.
15-1. For financial markets, the concept of moral hazard refers to
A A. the incentive of borrowers to shift to more risky loan projects
after their loan contracts are signed if monitoring is imperfect.
B. the high rejection rates faced by loan applicants.
C. the tendency of borrowers to undertake risky loans.
D. the negative effects on the quality of the pool of loan applicants when
banks try to use a single interest rate to cover expected default costs.
16-1. Economists define money as
A. The flow of value accrued over some specified period of time.
B. The stock of dollar-denominated assets at a point in time.
C C. Anything that is generally accepted in payment for goods and
services and for the repayment of debt.
D. Anything that can be used to store value over time.
E. None of the above.
17-1. Which are TRUE statements for an economy with many goods and services:
A. The change from a barter to a monetary economy increases efficiency
by discouraging specialization in the production of goods and services.
B B. The change from a barter to a monetary economy increases efficiency
by reducing the number of prices needed to implement exchange.
C. The change from a barter to a monetary economy increases efficiency
by increasing the amount of time and effort spent on each transaction.
D. All of the above are true.
E. Only A and B are true.
18-1. For an economy with exactly 11 goods, _______ prices are needed to
support exchange under a barter payment system while ______ prices are
needed to support exchange under a monetary payment system.
A. 121; 22
B. 55; 22
C. 22; 11
D. 110; 22
E E. 55; 11
19-1. If one observes a decline over time in the use of money to carry out
transactions and an increase in barter exchanges, then most probably
A. inflation has accelerated into hyperinflation.
B. money no longer serves as a good store of value.
C. money has gained in value relative to goods and is being hoarded.
D. all of the above.
E E. only A and B of the above.
20-1 If an individual moves money from a small-denomination time deposit
account to a checkable bank deposit account,
A. There is no change in either M1 or M2
B. M1 increases and M2 decreases.
C. M1 decreases and M2 increases.
D D. M1 increases and there is no change in M2
E. none of the above.
21-1 If a borrower receives a simple loan on January 1, 1999 in amount
$1000 and agrees to pay the lender $1100 on June 1, 2001, then the
interest payment on this simple loan is __________ and the (annualized)
simple interest rate on this loan is _________.
A. $50, 1 percent
B. $100, 10 percent
C. $50, 5 percent
D D. $100,5 percent
22-1 Which of the following are true in general for coupon bonds?
A. The owner of the coupon bond receives a fixed payment every period
until the maturity date plus the face value of the bond at the
maturity date.
B. U.S. Treasury bonds and notes are examples of coupon bonds.
C. Corporate bonds are examples of coupon bonds.
D D. All of the above
E. Only A and B of the above
23-1 The current yield on a coupon bond with a purchase price of $80, a $100
face value, annual coupon payments of $10, and a 2-year maturity is
A A. the coupon payment $10 divided by the purchase price $80.
B. the present value of all payments (coupon payments plus face value).
C. the coupon payment $10 divided by the face value $100.
D. the present value of all coupon payments.
24-1 If the annual interest rate is 10 percent, the present value of a
payment of $400 to be received two years from now is
A. $400 multiplied by (1 + .10)@2
B B. $400 divided by (1 + .10)@2
C. $400 divided by (1 + .20)
D. $400 divided by 2
25-1 Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the present value of a payment stream ($10, $50) with $10
to be received at the end of the first year and $50 to be received at the
end of the second year is given by
A. $10*(1 + .05) + $50*(1 + .05)@2
B. $10/(1 + .05) + $50/(1 + .10)
C C. $10/(1 + .05) + $50/(1 + .05)@2
D. [$10 + $50] divided by 2
26-1 The yield to maturity i on a coupon bond with a purchase price $180,
a face value $300, a coupon payment stream ($20,$20), and a 2-year
maturity is calculated as follows:
A. Total coupon payments $40 divided by the maturity 2.
B B. The annual interest rate i that, when used to calculate the present
value PV(i) of all bond payments ($20,$320), gives PV(i) = $180.
C. The coupon payment $20 divided by the purchase price $180.
D. The annual interest rate i that, when used to calculate the present
value PV(i) of the coupon payments ($20,$20), gives PV(i) = $180.
27-1 For a coupon bond, its purchase price is _________ than its face value
if and only if its coupon rate is __________ than its yield to maturity.
A. higher; lower
B. lower; higher
C C. lower; lower
D. none of the above.
28-1 Which of the following are true for the current yield of a coupon bond?
A. The current yield is a closer approximation for the yield to maturity for
the bond the closer the bond price is to its face value, all else equal.
B. The formula for the current yield is identical to the formula
describing the yield to maturity for a consol.
C. The current yield is a closer approximation for the yield to maturity
for the bond the longer the time to maturity for the bond, all else equal.
D D. All of the above are true
E. Only A and B of the above are true.
29-1 Which of the following $1000 face-value coupon bonds has the LOWEST
yield to maturity?
A. A coupon bond with a 15 percent coupon rate selling for $1,000
B. A coupon bond with a 10 percent coupon rate selling for $1,000
C C. A coupon bond with a 8 percent coupon rate selling for $1,000
D. A coupon bond with a 8 percent coupon rate selling for $900
30-1 In which of the following situations would you prefer to be BORROWING?
A. The nominal interest rate is 9 percent and the expected inflation rate
is 7 percent.
B. The nominal interest rate is 4 percent and the expected inflation rate
is 1 percent.
C. The nominal interest rate is 13 percent and the expected inflation rate
is 15 percent.
D D. The nominal interest rate is 25 percent and the expected inflation rate
is 50 percent.
31-1 Which of the the following are true concerning the distinction between
interest rates and return rates.
A. The return rate on a bond will not necessarily equal the interest
rate on that bond.
B. The return rate on a coupon bond can be expressed as the sum of the
current yield and the rate of capital gain or loss.
C. Measured from time T to time T+1, the return rate on a coupon bond will
be greater than the current yield when the price of the bond rises
between T and T+1.
D D. All of the above are true.
E. Only A and B of the above are true.
32-1 Empirically, most savers find risk ___________ and return ___________.
Consequently, if you offer a saver a choice of another portfolio of assets
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
33-1 If a portfolio is sufficiently diversified, the __________ risk of each
asset contributes nothing to the total risk of the portfolio; consequently,
only _________ risk remains.
A. interest rate; default
B B. nonsystematic; systematic
C. default; interest rate
D. systematic; nonsystematic
34-1 The basic capital asset pricing model (CAPM) postulates that the expected
return rate of a portfolio of assets 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.
35-1 The __________ of a portfolio of assets measures the extent to which its
expected return rate varies directly with the expected return rate of ______,
hence it constitutes a measure of the portfolio's ____________.
A. market price; the risk-free asset; expected return.
B. beta; the market portfolio; nonsystematic risk.
C. liquidity; the risk-free asset.
D D. beta; the market portfolio; systematic risk.