tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 2 L. Tesfatsion
FIRST MIDTERM EXAM: 70 POINTS TOTAL February 29, 2000
1-2. The aggregate price level for the U.S. in 2000
A. is the total value of all goods and services sold in the U.S. in 2000.
B. is the total sum of prices for goods and services in the U.S. during 2000.
C C. is the average price of goods and services in the U.S. during 2000.
D. is the average value of U.S.-owned assets at the end of 2000.
2-2. Sustained upward movements in real GDP are referred to as
A. inflation.
B. recessions.
C. slides.
D D. expansions.
E. none of the above
3-2. The key difference between nominal GDP (gross domestic product) and real
GDP for the United States is that
A. Nominal GDP includes production outside the borders of the U.S.
whereas real GDP does not.
B B. Real GDP is corrected for price movements whereas nominal GDP is not.
C. Nominal GDP includes financial assets whereas real GDP includes only
real assets.
D. Nominal GDP is the initial measure of output and real GDP is the
final revised measure of output.
4-2 In gross domestic product accounting, home country (HC) imports consist of
all purchases by the ________ of final goods and services newly produced ________.
A. ROW; within the borders of the ROW (NOTE: ROW = Rest-of-the-World)
B. HC; with ROW-owned assets of production
C. ROW; within the borders of the HC
D D. HC; within the borders of the ROW
5-2 Since 1952
A. the year-to-year fluctuations in the U.S. inflation rate have become larger.
B B. the U.S. inflation rate has been consistently positive.
C. the U.S. inflation rate has fluctuated around zero.
D. the U.S inflation rate is no longer considered by the Fed for policy purposes.
6-2. Evidence from the United States and other foreign countries indicates that
A. there is a strong negative association between the inflation rate and the
growth rate of money (i.e., when one is high, the over tends to be low).
B B. there is strong positive association between the inflation rate and
the growth rate of money (i.e., they tend to move in the same direction).
C. the money growth rate is unrelated to the business cycle.
D. the money growth rate is unrelated to inflation.
E. only B and C are true
7-2. The U.S. government budget DEFICIT for 1985 measured the extent to which
A. the U.S. had to rely on foreign borrowing in 1985.
B B. U.S. government expenditures exceeded U.S. government tax revenues in 1985.
C. U.S. government tax revenues exceeded U.S.government expenditures in 1985.
D. U.S. imports exceeded U.S. exports in 1985.
8-2 If the U.S. dollar falls in value relative to the British pound,
A. British wool blankets will become more expensive in the U.S.
B. American computers will become less expensive in Great Britain
C. British wool blankets will become less expensive in the U.S.
D D. only A and B will occur
9-2. Which of the following are primary 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 D. U.S. Treasury bill auctions conducted by the Treasury
E. All except D.
10-2. Key distinctions between a broker and a dealer are:
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
11-2. Which of the following can be described as direct finance:
A. A corporation takes out a loan from a bank.
B. You obtain a loan from a savings and loan institution.
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.
12-2. 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 newly issued by the U.S. Treasury.
D D. A household takes out a loan from a bank.
E. None of the above.
13-2. Which of the following statements about debt and equity claims issued
by a corporation are true.
A. They can both be long-term financial instruments.
B. They both involve a claim on the issuer's income.
C. Debt claims are paid prior to equity claims in case of issuer insolvency.
D D. All of the above.
E. Only A and B of the above.
14-2. For financial markets, the concept of adverse selection refers to
A A. 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.
B. the high rejection rates faced by loan applicants.
C. the tendency of borrowers to undertake risky loans.
D. the incentive of borrowers to shift to more risky loan projects
after their loan contracts are signed if monitoring is imperfect.
15-2. Economists define income as
A. The market value of all assets owned at a point in time.
B. Anything that is generally accepted in payment for goods and
services and for the repayment of debt.
C. Anything that can be used to store value over time.
D D. The flow of value accrued over some specified period of time.
E. None of the above.
16-2. Which of the following are true statements:
A. The change from a barter to a monetary economy increases efficiency
by ensuring a "double coincidence of wants" in goods to be exchanged.
B. The change from a barter to a monetary economy increases efficiency
by reducing costs for those who wish to specialize in production.
C. The change from a barter to a monetary economy increases efficiency
by reducing transactions costs.
D. All of the above are true.
E E. Only B and C are true.
17-2. For an economy with exactly 10 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 A. 45; 10
B. 90; 10
C. 90; 20
D. 10; 45
E. 20; 10
18-2. During periods of rapidly rising prices
A. money fails to serve as a unit of account.
B B. money fails to serve as a good store of value.
C. money fails to serve as a repayment of debt.
D. money fails to serve as a means of payment.
E. money fails to serve as a legal tender.
19-2 If a borrower receives a simple loan on January 1, 1999 in amount
$1000 and agrees to pay the lender $1,200 on January 1, 2001, then the
interest payment on this simple loan is _________ and the (annualized)
simple interest rate on this loan is _________.
A. $1200, $200
B B. $200, 10 percent
C. $200, 20 percent
D. $100, 20 percent
20-2. Which of the following are true in general for fixed payment loans?
A. The borrower repays the entire principal plus interest at the
maturity date.
B. Installment loans and mortgages are frequently of the fixed payment
type.
C. The borrower repays the loan by making the same payment every month
D. Only A and B of the above
E E. Only B and C of the above
21-2 Under the terms of a discount bond, the borrower agrees to pay to the
lender
A. a periodic fixed payment until a specified maturity date, where
the fixed payment includes both principal and interest.
B. the face value of the bond plus principal, both at the maturity date.
C. a periodic fixed coupon payment until a specified maturity date, plus
the face value of the bond at the maturity date.
D D. only one payment, the face value of the bond at the maturity date.
22-2 The coupon rate 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. the coupon payment $10 divided by the purchase price $80.
B. one coupon payment per year.
C C. the coupon payment $10 divided by the face value $100.
D. total coupon payments $20 divided by the maturity 2.
23-2 If the annual interest rate is 5 percent, the present value of a
payment of $200 to be received three years from now is
A. $200 multiplied by (1 + .05)@3
B. $200 divided by (1 + .15)
C C. $200 divided by (1 + .05)@3
D. $200 divided by (1 + .50)@3
24-2 Letting "*" denote multiplication, if the annual interest rate is 8
percent, then the present value of a payment stream ($40, $10) with
$40 to be received at the end of the first year and $10 to be received
at the end of the second year is given by
A. $40*(1 + .08) + $10*(1 + .08)@2
B B. $40/(1 + .08) + $10/(1 + .08)@2
C. $40/(1 + .08) + $10*(1 + .08)
D. [$40 + $10] divided by 2
25-2 The yield to maturity i on a coupon bond with a purchase price $290,
a face value $300, a coupon payment stream ($50,$50), and a 2-year
maturity is calculated as follows:
A. The present value of the coupon payment stream ($50, $50)
B. Total interest payments $100 divided by the maturity 2.
C. The coupon payment $50 divided by the purchase price $290.
D D. The annual interest rate i that, when used to calculate the present
value PV(i) of ($50,$350), gives a value for PV(i) equal to $290.
26-2 For a coupon bond, its current yield is a LESS accurate measure of its
yield to maturity the _______ the maturity of the bond and the __________
the deviation of its purchase price from its face value.
A. shorter; smaller
B B. shorter; greater
C. longer; smaller
D. longer; greater
27-2 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 current yield.
B. The purchase price and yield to maturity for a coupon bond are
negatively related, all else remaining constant.
C. For a coupon bond, its yield to maturity is greater than its coupon rate
when its purchase price is below its face value.
D D. All of the above are true.
E. Only A and B of the above are true.
28-2 Which of the following $1000 face-value securities has the HIGHEST
yield to maturity?
A. A coupon bond with a 5 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 12 percent coupon rate selling for $1,000
D. A coupon bond with a 12 percent coupon rate selling for $1,200
29-2 When an increase occurs in the expected inflation rate at time T,
then by definition, all else remaining constant, there must be
A A. a decrease in the real interest rate at time T
B. an increase in the real interest rate at time T
C. a decrease in the real interest rate at time T+1
D. an increase in the real interest rate at time T+1
30-2 In which of the following situations would you prefer to be LENDING?
A. The nominal interest rate is 9 percent and the expected inflation rate
is 7 percent.
B 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. The nominal interest rate is 25 percent and the expected inflation rate
is 50 percent.
31-2 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 falls
between T and T+1.
D. All of the above are true.
E E. Only A and B of the above are true.
32-2 Empirically, most savers find return ___________ and risk ___________.
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 a lower expected return
rate, 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 _________ risk.
A. undesirable; desirable; higher
B B. desirable; undesirable; lower
C. undesirable; desirable; lower
D. desirable; undesirable; higher
33-2 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
34-2 CAPM theory assumes that each saver's preferences over asset portfolios
depend only on ___________ and __________.
A. current yield; capital gain or loss
B B. risk; expected return rates
C. interest; liquidity
D. purchase price; default risk
35-2 The beta of a portfolio of assets measures the extent to which its _____________
varies directly with the expected return rate on the market portfolio,
hence this beta constitutes a measure of the portfolio's _______________.
A. market price; nonsystematic risk
B B. expected return rate; systematic risk
C. market price; liquidity
D. nonsystematic risk; desirability