tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 1 L. Tesfatsion
FIRST MIDTERM EXAM: 40 POINTS TOTAL February 27, 2001
1-1. The aggregate price level for an economy over some time period is the
____________ and the inflation rate is the _________________.
A. sum of all prices in the economy during this time period; difference
in this sum from one time period to the next.
B. value of all goods and services produced in the economy during this
time period; percent change in this value from one period to the next.
C C. average price of goods and services in the economy over this time period;
percent change in this average price from one period to the next.
D. average cost of assets in the economy over this time period; the
capital gain or loss on these assets from one period to the next.
2-1. Nominal GDP (gross domestic product) for the U.S. in 2001 is
A. the total dollar value of all U.S.-owned assets at the end of 2001.
B. the total dollar value of all final goods and services produced in 2001
using U.S.-owned factors of production, measured in 2001 prices.
C C. the total dollar value of all final goods and services produced in 2001
within the borders of the U.S., measured in 2001 prices.
D. the total dollar value of all final goods and services produced
within the borders of the U.S. in 2001, measured in base year 1992 prices.
3-1. Recurrent fluctuations that occur in time series data for real GDP
and other key macro variables are referred to as
A. variable trends.
B. measurement errors.
C C. the business cycle.
D. standard deviations.
E. recessions
4-1. The U.S. government budget SURPLUS for 2000 measures the extent to which
A. the rest of the world had to rely on borrowing from the U.S. in 2000.
B B. U.S. government tax revenues exceeded U.S. government expenditures in 2000.
C. U.S. government expenditures exceeded U.S. government tax revenues in 2000.
D. U.S. exports exceeded U.S. imports in 2001.
5-1. According to U.S. time series data presented in Mishkin (Chapter 1):
A. Over 1980-2000, the exchange rate of the U.S. dollar has fluctuated widely.
B. Over 1980-2000, U.S. stock prices have dramatically increased.
C. Over 1980-2000, there has been a strong positive association between the
aggregate price level (GDP deflator) and the M2 money supply.
D D. All of the above.
6-1. Which of the following is most likely to result from a stronger dollar
against the Mexican peso (that is, a rise in the peso per dollar exchange rate)?
A. U.S. goods exported to Mexico will cost less in Mexico, so Mexicans
will buy more of them.
B. The U.S. will definitely be better off.
C C. U.S. goods exported to Mexico will cost more in Mexico, so Mexicans
will buy fewer of them.
D. U.S. citizens will buy fewer Mexican goods.
7-1. Securities are ________ for the person who buys them and _________
for the individual or firm that issues them.
A. liabilities; assets
B B. assets; liabilities
C. calls; puts
D. illiquid; liquid
8-1. A key DISTINCTION between a broker and a dealer is:
A. The broker buys low and sells high whereas the dealer sells
low and buys high.
B. The broker posts bid and asked prices.
C. The dealer keeps an inventory of the assets he or she trades in.
D. The dealer posts bid and asked prices.
E E. Both C and D
9-1. A primary way in which a dealer DIFFERS from a financial intermediary
is 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.
10-1. Which of the following statements is 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.
11-1. 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.
12-1. Corporations DO 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.
13-1. Which of the following statements is TRUE?
A. A bond is a debt instrument that promises to make payments for
a specified period of time (i.e., over its maturity)
B. The maturity of a debt instrument is the length of time to the
debt instrument's expiration date
C. Debt instruments are "short term" if their maturity is less than a year.
D D. All of the above are true
14-1. Suppose a person has a chance to use $100 to buy either a debt instrument
issued by a corporation Cheetum and How (CAH) or common stock shares issued
by CAH. Specify which of the following statements is TRUE:
A A. Purchasing the debt instrument is less risky than purchasing the
common stock shares if CAH faces a high probability of bankruptcy.
B. Purchasing the debt instrument is more risky than purchasing the common
stock shares if CAH is solvent, because a common stock share holder
is then ensured a steady stream of dividend payments from CAH.
C. Neither A nor B is true.
D. Both A and B are true.
15-1. Which of the following can be described as DIRECT finance:
A. A corporation takes out a loan from a bank.
B. You buy a life insurance policy.
C C. A corporation buys commercial paper newly issued by
another corporation.
D. An insurance company buys shares of common stock on the Nasdaq
E. None of the above.
16-1. Which of the following can be described as INDIRECT finance:
A. You make a loan to your neighbor.
B. A corporation buys a share of common stock newly issued by
another corporation.
C. You buy a U.S. Treasury bill from the U.S. Treasury.
D D. You take out a loan from a bank.
E. None of the above.
17-1. ___________ in financial markets leads to adverse selection and moral
hazard problems that interfere with the functioning of these markets.
A. Noncollateralized risk
B. Free-riding
C. Costly state verification
D D. Asymmetric information
18-1. Which of the following is true?
A. Money is defined as anything that is generally accepted in payment
for goods and services or in the repayment of debts.
B. Money is another name for "income".
C. Money holdings count as part of a person's wealth.
D. All of the above are true statements.
E E. Only A and C of the above are true statements.
19-1. During hyperinflations,
A. the value of money falls rapidly.
B. money no longer functions as a good store of value, so the volume of
barter transactions tends to increase.
C. debtors benefit as the real value of their debt falls
D D. all of the above occur.
20-1. 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.
21-1. For an economy with exactly 8 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. 16; 8
B. 28; 16
C C. 28; 8
D. 56; 16
E. 56; 8
22-1. 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.
23-1. The evolution of the means of payment from commodity money to backed
paper money to checkable deposits and to electronic money and beyond can best
be understood as a consequence of
A. government mandates regarding means of payment that were designed to
ensure the overall safety of the payments system.
B B. financial innovations introduced by private agents in order to
increase their profits.
C. government mandates regarding means of payment that were designed to
promote the overall efficiency of the payments system.
D. financial innovations introduced by government to ensure the overall
safety of the payments system.
24-1. The organization responsible for the conduct of monetary policy in the
United States is the
A. Comptroller of the Currency.
B. U.S. Treasury.
C C. Federal Reserve System.
D. Bureau of Monetary Affairs.
25-1. Economists have not found a completely satisfactory way to measure the
money supply because
A. some needed financial asset statistics are not publicly released.
B B. the "moneyness" of a financial asset is a matter of degree.
C. economists are ideologically divided concerning the appropriate
definition of money.
D. economists receive insufficient statistical training.
26-1. When a person withdraws funds from a U.S. checkable deposit account and
deposits them in a (noninstitutional) U.S. money market mutual fund, then
A. M1 and M2 both increase for the U.S.
B. M1 and M2 both decrease for the U.S.
C. M1 decreases and M2 increases for the U.S.
D. M1 increases and M2 decreases for the U.S.
E E. None of the above.
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NOTE: My apologies to Section 1. Part E (the correct answer)
for 26-1 was missing on the original exam copy. Question 26-1 has
therefore been scored as "correct" for everyone.
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27-1. Which of the following is true for FIXED PAYMENT loans?
A. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist entirely of principal repayments.
B B. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist of both interest and principal.
C. At maturity the borrower makes one fixed payment, equal to face value.
D. The borrower makes only one fixed payment, at maturity, and this payment
combines interest and principal repayment.
28-1. Which of the following is true in general for COUPON BONDS?
A. The issuer is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date of the coupon bond.
B. The issuer makes a fixed coupon payment in every payment period
through to maturity, at which time the issuer also pays the face value.
C. Corporate bonds are examples of coupon bonds.
D. Mortgages are examples of coupon bonds.
E E. Only B and C of the above
29-1. Under the terms of a DISCOUNT BOND, the borrower agrees to pay
to the lender
A. a periodic fixed coupon payment until a specified maturity date, where
the fixed coupon payment includes both principal and interest.
B. the face value of the bond plus principal, both at the maturity date.
C C. only one payment, the face value of the bond at the maturity date.
D. a periodic fixed coupon payment until a specified maturity date, plus
the face value of the bond at the maturity date.
30-1. If the annual interest rate is 5 percent, the present value of a payment
of $500 to be received three years from now is
3
A. $500 multiplied by (1 + .05)
B. $500 divided by (1 + .15)
3
C C. $500 divided by (1 + .05)
D. $500 divided by 3
31-1. 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. $40*(1 + .08) + $10*(1 + .08) C. $40*(1 + .24) + $10*(1 + .24)
3
B B. $40/(1 + .08) + $10/(1 + .08) D. [$40 + $10] divided by 3
32-1. The (annual) yield to maturity i on a coupon bond with a purchase
price $250, a face value $300, a 2-year maturity, and a 2-year coupon payment
stream ($50,$50) is calculated as follows:
A. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($50,$50), results in a present
value equal to $250.
B. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($50,$50), results in a present
value equal to $300.
C C. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($50,$350), results in a present
value equal to $250.
D. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($50,$350), results in a present
value equal to $300.
33-1. The current yield on a coupon bond with a $7000 face value, a 5 percent
coupon rate, an 8 year maturity, and a current purchase price of $3500 is
A. 5 percent C C. 10 percent
B. 8 percent D. 20 percent
34-1. 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 is a better approximation to the yield to maturity
the longer the time to maturity, all else equal.
D. The current yield is a better approximation to the yield to maturity
the closer the purchase price is to the face value, all else equal.
E E. All of the above are true
35-1. 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.
36-1. Which of the following $1000 face-value securities has the HIGHEST
yield to maturity?
A. A 4 percent coupon bond selling for $1,000
B. A 8 percent coupon bond selling for $1,000
C C. A 10 percent coupon bond selling for $1,000
D. A 10 percent coupon bond selling for $1,100
37-1. Which of the the following is true:
A. Over any given holding period, the return rate on a coupon bond is not
necessarily equal to the current yield on the 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 purchase price of the bond
DECREASES between T and T+1.
D. All of the above are true.
E E. Only A and B of the above are true.
38-1. Which of the following is true regarding the financial bond pages
appearing in newspapers such as the New York Times and Wall Street Journal:
A. For T-bonds/notes and corporate bonds, the listed security prices
are reported per $100 of face value, so numbers less than 100
correspond to prices less than face value and vice versa.
B. For T-bonds/notes, if two maturity dates are reported, the first is
the earliest call date and the second is the maturity date.
C. For T-bill quotes, discount yields (calculated for both bid and asked
prices) are reported rather than the bid and ask prices themselves.
D. Dealers quote positive bid-ask spreads to ensure positive profits.
E E. All of the above
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TABLE 1: T-BONDS/NOTES QUOTES
DATE RATE BID ASK CHG YLD
Feb 03 p 6 1/4 104.03 104.05 -0.01 5.08
Aug 08-13 12 148.10 148.12 +0.07 5.41
Feb 20 k 8 1/2 134.03 134.05 +0.29 5.69
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39-1. Referring to the T-BONDS/NOTES QUOTES in the above Table 1, which of the
following statements is FALSE:
A. These quotes show that the bond dealers are only willing to trade at
prices ensuring a positive profit margin.
B B. The data in Table 1 are INCONSISTENT with the claim for coupon bonds that
the yield to maturity moves inversely to the purchase price, all else equal.
C. These quotes show that the bonds that can be called early are commanding
a higher coupon rate.
D. The approximate current yield of these bonds can be determined from the
data provided in this table.
E. None of these statements is false.
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TABLE 2: T-BILL QUOTES
DATE BID ASK CHG YIELD
June 02 02 4.42 4.40 ... 4.52
Oct 14 01 4.44 4.42 +.02 4.60
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40-1. Referring to the T-Bill quotes in the above Table 2, which of the
following statements is TRUE:
A. The BID column gives the price offered by SELLERS.
B. The BID column gives the price offered by BUYERS.
C C. The BID column gives the discount yield using the price offered
by BUYERS.
D. The bid-ask spread for Oct 14 01 T-bills is NEGATIVE.
E. Only B and D are true.
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