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ECON 353 L. Tesfatsion
FIRST MIDTERM EXAM: 50 POINTS TOTAL September 29, 2005
QUESTION 1. The NOMINAL GROSS DOMESTIC PRODUCT for the U.S. in 2005 is
defined to be
A. the total market value in base-year (1990) dollars of all final goods
and services produced within the borders of the U.S. in 2005.
B B. the total market value (in 2005 dollars) of all final goods and services
produced within the borders of the U.S. during 2005.
C. the total market value (in 2005 dollars) of all final goods and services
produced using U.S. owned assets anywhere in the world in 2005.
D. the total market value (in 2005 dollars) of all final goods and services
consumed within the borders of the U.S. during 2005.
QUESTION 2. MONETARY POLICY refers to
A. decisions by government regarding whether to use external or internal
financing of government expenditures.
B. the management of the government budget deficit.
C C. the management of money and interest rates.
D. management of government expenditures and taxes in nominal (money) terms.
QUESTION 3. A RECESSION is defined to be a period of time during which________.
A. real wages are decreasing.
B. the current account is in deficit.
C. the real money supply is contracting.
D. inflation is increasing.
E E. aggregate output (GDP) is declining.
QUESTION 4. All else equal, when the U.S. dollar becomes STRONGER,
A. the U.S. is unquestionably made better off.
B. U.S. goods exported abroad become cheaper for foreigners to buy.
C C. U.S. goods exported abroad become more expensive for foreigners to buy.
D. inflation increases.
E. real GDP declines.
QUESTION 5. According to data presented in Mishkin (Chapter 1):
A. During 1980-2000, U.S. stock prices dramatically increased.
B. Since 1950, the U.S. aggregate price level has dramatically declined.
C. average inflation rates and average money growth rates tend to move
together over time (when one goes up, the other tends to go up).
D. All of the above.
E E. Only A and C.
QUESTION 6. The INFLATION RATE is defined to be
A. the rate of expansion in the size of the money supply.
B. the rate at which nominal GDP increases in value over time.
C C. the growth rate of some measure of average prices in an economy.
D. the rate at which the U.S. government debt is expanding.
QUESTION 7. If the U.S. aggregate price level were to decline by one half,
then (all else equal) the real value of a U.S. dollar would
A A. double.
B. fall by 50 percent.
C. more than double.
D. rise but not double due to diminishing returns.
E. none of the above.
QUESTION 8. If current government expenditures are GREATER than current tax
revenues, then the government is said to be running
A. a government budget surplus.
B. a current account deficit.
C. a capital account surplus.
D D. a government budget deficit.
E. a trade deficit.
QUESTION 9. By definition, a FINANCIAL ASSET is
A. any asset sold in a secondary market for financial gain.
B. an instrument issued as an IPO by an investment bank.
C C. a claim against real assets.
D. any asset sold in a primary market for financial gain.
E. any asset sold by a financial intermediary.
QUESTION 10. Bonds sold in a foreign country and that are denominated in a
currency other than that of the country in which they are sold are
A. typically more expensive than domestic bonds.
B B. called Eurobonds.
C. prohibited by most countries.
D. considered low-grade speculative investments by most rating agencies.
E. called foreign bonds.
QUESTION 11. Equity instruments (e.g., stock shares) are ________ for the
purchaser and _________ for the seller.
A. puts; calls
B. primary; secondary
C C. assets; liabilities
D. liquid; illiquid
E. liabilities; assets
QUESTION 12. As seen in Exercise 2 (Q6), the percentage of financial assets
held by households and non-profit organizations (1995-2004) in the form of
__________ exhibited a sharp INCREASE towards the end of the 1990s, a period
of time now commonly referred to among financial investors as __________.
A. bonds; a junk bond period.
B B. equity shares; the dot.com bubble
C. deposit accounts; a savings and loan crisis.
D. foreign currencies; a foreign exchange crisis.
QUESTION 13. Brokers DIFFER from dealers in the following key way(s):
A. Brokers engage in financial asset transformation.
B. Brokers do not take positions in the financial assets they trade.
C. Brokers charge commissions to the users of their services.
D. all of the above.
E E. only B and C above.
QUESTION 14. A key DISTINCTION between a financial intermediary (FI) and a
dealer is:
A. A dealer never takes ownership of the assets it trades in.
B. An FI buys low and sells high whereas a dealer is paid by commission
C C. The financial assets sold by an FI to buyers (lenders) differ from the
financial assets bought by the FI from sellers (borrowers).
D. FIs are key players in auction markets.
E. FIs are key players in over-the-counter markets.
Q15. A dealer's "bid-ask spread" for a financial asset
A. is the bid (buy) price minus the asked (sell) price posted by the
dealer for the financial asset.
B. measures the gross profit margin of the dealer on trades in the asset.
C. is the asked (sell) price minus the bid (buy) price posted by the
dealer for the financial asset.
D D. Only B and C are true.
E. Only A and B are true.
QUESTION 16. A type of financial player that has a major role in ensuring
the sale of stock shares in SECONDARY markets is
A. an investment banker.
B B. a specialized trader on the floor of a stock exchange.
C. a commercial banker.
D. a savings and loan officer.
E. a Securities and Exchange Commissioner.
QUESTION 17. As seen in Exercise 3 (Q6), the Chicago Board of Trade was
originally established in ________ for the primary purpose of _________ .
A. 1994; electronic trading of financial futures contracts.
B. 1975; trade in indexed bonds as a hedge against inflation.
C. 1933; recovery from the Great Depression.
D D. 1848; trade in futures contracts on agricultural commodities
QUESTION 18. Which of the following are PRIMARY markets.
A. Auction markets conducted by the U.S. Treasury for U.S. Treasury bills.
B. Initial public offerings of corporate bonds.
C. The NASDAQ.
D. All of the above.
E E. Only A and B above.
QUESTION 19. The U.S. government does NOT acquire NEW funds when its
securities are sold
A. in a domestic primary market.
B. in auctions as initial public offerings.
C C. on the New York Stock Exchange.
D. directly in an overseas primary market.
QUESTION 20. In financial markets, lenders typically have less information
about the potential risks and returns associated with the debt instruments
they buy than the borrowers they buy from. This difference in information
is called
A. comparative information advantage.
B B. asymmetric information.
C. caveat venditor
D. default risk.
QUESTION 21. A lender who posts a fixed interest rate for loans faces the
potential _______ problem that many of the borrowers that subsequently come
to her asking for loans could have a relatively high default risk.
A. credit crunch
B. free rider
C. moral hazard
D D. adverse selection
QUESTION 22. The concept of _______ in markets for loans refers to __________.
A. default risk; the high rejection rates faced by loan applicants.
B. free riding; the tendency of borrowers to undertake multiple loans.
C. interest rate risk; the risk borrowers face that their interest rates
might be increased over time.
D D. moral hazard; the incentive borrowers have to shift to more risky
loan projects after their loan contracts are signed unless they
are suitably monitored.
QUESTION 23. Which of the following statements is TRUE:
A. The maturity of a debt instrument is the length of time it takes a
holder of the instrument to recover his or her purchase cost.
B B. The maturity of a debt instrument is the time to the expiration
date of the instrument.
C. The maturity of a debt instrument is the length of time the debt
instrument has been in existence.
D. The maturity of a debt instrument is the issue date of the instrument.
QUESTION 24. Which of the following statements is/are TRUE:
A. In case of bankruptcy, debt claims are paid before the claims of
preferred stock holders.
B. The size of the debt payments in debt contracts are conditioned on
the profits earned by the debt issuer (borrower).
C. Debt claim holders do not usually participate in the management of the
affairs of the issuers of these claims except under conditions of duress.
D. All of the above.
E E. Only A and C above.
QUESTION 25. Which of the following can be described as INDIRECT finance:
A. Google sells newly issued stock shares to Bill Gates.
B B. You buy shares in a money market fund offered by Last National Bank.
C. The U.S. Treasury sells U.S. Treasury bills in an auction.
D. You sell 1 million shares of Microsoft in the New York Stock Exchange.
E. None of the above.
QUESTION 26. Which of the following can be described as DIRECT finance.
A. The U.S. government purchases a fire insurance policy from All State
Insurance Company.
B. You obtain a loan from your uncle.
C. Vice-President Cheney buys newly issued bonds from Halliburton Inc.
D. Only A and C.
E E. Only B and C.
Q27. Which of the following statements is/are TRUE?
A A. An issuer of a debt instrument promises to make one or more payments to
the purchaser in accordance with a definite time schedule.
B. An issuer of a common stock share promises to make one or more payments
to the purchaser in accordance with a definite time schedule.
C. All debt instruments are traded in the money market and all equity
instruments are traded in the capital market.
D. All of the above statements are true.
E. Only A and B are true.
QUESTION 28. 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.
QUESTION 29. Money is DEFINED to be
A. a unit of account.
B. coins and paper bills.
C. an amount of wealth.
D. anything that must be accepted in repayment of debt, by law.
E E. anything that is a generally accepted means of payment for goods
and services and for repayment of debts, as a matter of social custom.
QUESTION 30. Which of the following statements about FIAT MONEY are true
by definition:
A. fiat money is unbacked.
B. fiat money is paper money.
C. fiat money is legal tender.
D D all of the above.
QUESTION 31. The conversion of a barter economy to one that uses money
A. increases the efficiency of trade by decreasing the need for "double
coincidence of wants."
B. increases efficiency of trade by encouraging specialization in
production.
C. increases efficiency of trade by decreasing the number of prices
required to support trade.
D D. All of the above.
E. Only A and C.
QUESTION 32. 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. 11; 55
B B. 55; 11
C. 110; 22
D. 110; 11
QUESTION 33. During the years immediately BEFORE the American Revolution,
the colonies relied heavily on ________ as their principal form(s) of money.
A. collateralized notes issued by the Bank of North America
B. greenbacks issued by the Continental Congress
C. British coins and gold reserves
D D. commodity monies and backed paper monies
E. Federal Reserve Notes
QUESTION 34. The particular U.S. agency charged with responsibility for
protecting the security of the U.S. currency against counterfeiters is
A A. the U.S. Secret Service.
B. the Securities and Exchange Commission.
C. the Federal Open Market Committee.
D. the Federal Deposit Insurance Corporation.
E. the Comptroller of the Currency.
QUESTION 35. As seen in Exercise 4 (Q6), an important security feature now
incorporated in higher denominations of U.S. dollar bills is
A. an Egyptian protective icon in the form of an eye over a pyramid.
B. an official declaration that the bill is legal tender and hence
redemable in gold upon demand.
C. the signature of George Washington in hidden ink.
D D. a security thread running the width of the currency that glows red
when held over an ultraviolet light.
E. a watermark (embossed portrait) of President George W. Bush.
QUESTION 36. Economists have not found a completely satisfactory way to
measure the money supply because
A. the Federal Reserve Board does not publicly release its estimates
regarding the size of the money supply.
B B. the degree to which different financial assets function as "money"
is not clearcut and hence is subject to disagreement.
C. economists are ideologically divided concerning what constitutes
an appropriate definition of "money."
D. economists receive insufficient financial training.
QUESTION 37. The particular U.S. agency currently responsible for carrying
out monetary policy in the U.S. is
A. the U.S. Secret Service.
B. the Securities and Exchange Commission.
C C. the Federal Open Market Committee (part of the Federal Reserve Board).
D. the Federal Deposit Insurance Corporation
E. the Comptroller of the Currency.
QUESTION 38. Which of the following statements is/are true for DISCOUNT BONDS:
A. The borrower makes only one fixed payment, at maturity, and this
payment is equal to the loan value.
B. The borrower makes the same fixed payment in every payment period
until maturity, and the present value of these payments must equal
the face value.
C. The borrower makes the same fixed payment in every payment period until
maturity.
D D. At maturity the borrower makes one fixed payment equal to the face value.
QUESTION 39. Which of the following statements is/are true for COUPON BONDS:
A. The coupon bond owner receives a fixed coupon payment in every payment
period through to maturity, at which time the face value is also received.
B. U.S. Treasury bills are examples of coupon bonds.
C. Corporate bonds typically take the form of coupon bonds.
D. All of the above
E E. Only A and C above
QUESTION 40. Which of the following statements is/are true for FIXED
PAYMENT LOAN CONTRACTS:
A. The borrower makes only one fixed payment, at maturity, and this
payment is equal to the loan value.
B. The borrower makes the same fixed payment in every payment period
until maturity, and the present value of these payments must equal
the face value.
C C. The borrower makes the same fixed payment in every payment period until
maturity.
D. At maturity the borrower makes one fixed payment equal to the face value.
QUESTION 41. If the annual interest rate is 10 percent, and a payment of $300
is to be received TWO years from now, the present value of this $300 payment is
A. $300/(1.20)
B B. $300/(1.10)^2
C. $300*(1.10)/2
D. $300*(1.10)^2
where "*" denotes multiplication and "^" denotes "raised to the power of".
Q42. Letting "*" denote multiplication, if the annual interest rate is 5 percent,
then the PRESENT VALUE of a payment stream ($50,$0,$0,$70) with $50 to be
received at the end of the FIRST year, $0 to be received at the end of the
SECOND and THIRD years, and $70 to be received at the end of the FOURTH year
is given by
A. $50/(1.05) + $70/(1.20)
B. $50*(1.05) + $70*(1.05)^4
C. [$50 + $70]/(1.20)
D D. $50/(1.05) + $70/(1.05)^4
QUESTION 43. If a two-year security with a purchase price of $500 pays $300
at the end of the first year and $700 at the end of the second year, then
(letting * denote multiplication) its yield to maturity i can be found using
the following formula:
A. $700 = $300/(1+i)
B. i = [$300 + $700]/$500
C C. $500 = $300/(1+i) + $700/(1+i)^2
D. i = [$300 + $700 - $500]/$500
QUESTION 44. 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 A. lower; lower
B. higher; lower
C. lower; higher
D. none of the above.
QUESTION 45. The current yield on a coupon bond with a $1,000 face value,
a 10 percent coupon rate, a 5 year maturity, and a current purchase price
of $1,000 is
A. 5 percent
B. 8 percent
C C. 10 percent
D. 20 percent
E. none of the above.
QUESTION 46 Which of the following statements is/are TRUE:
A. The REAL interest rate is the nominal (market) interest rate minus the
expected inflation rate.
B. REAL interest rates provide a more accurate assessment than nominal
interest rates regarding the true cost of borrowing.
C. Treasury Inlation Protection Securities (TIPS), an indexed bond
introduced in 1997 by the U.S. Treasury, permit improved estimates
of real interest rates.
D D. All of the above.
E. Only A and B above.
QUESTION 47. Letting i denote the current yield to maturity on coupon bonds,
which of the following situations is most favorable to LENDERS planning to
lend through coupon bond transactions:
A. i = 4 percent and the expected inflation rate = 1 percent
B B. i = 8 percent and the expected inflation rate = 4 percent
C. i = 9 percent and the expected inflation rate = 7 percent
D. i = 13 percent and the expected inflation rate = 10 percent
QUESTION 48. Which of the the following statements is/are TRUE:
A. By definition, over any given holding period, the RETURN on a financial
asset is equal to the sum of all payments generated by the financial
asset over the holding period plus the capital gain or loss incurred
on the financial asset over the holding period.
B. If the (annual) coupon payment on a coupon bond is $200, the market
price on January 1, 2005 is $400, and the market price on December 31,
2005 is $250, then the RETURN RATE on this coupon bond during the year
2005 equals the current yield $200/$400 plus [$250 - $400]/$400.
C. Measured from time T to time T+1, the return rate on a coupon bond will
be LESS than the current yield when the purchase price of the bond
DECREASES between time T and time T+1.
D D. All of the above.
E. Only A and B above.
QUESTION 49. Suppose the inflation rate over the coming year is expected to
be 3 percent. Suppose you intend to store $4000 under your mattress for this
entire year. Then the NOMINAL return rate you should expect to earn on this
$4000 over the coming year is ______ and the REAL return rate that you should
expect to earn on this $4000 over the coming year is _______.
A. 3 percent; -1 percent
B. 3 percent; 0 percent
C C. 0 percent; -3 percent
D. 0 percent; 3 percent
QUESTION 50. __________ is the possible reduction in returns faced by a
bond ______ from changes in the bond's yield to maturity.
A. Default risk; holder (buyer).
B B. Interest rate risk; holder (buyer).
C. Default risk; issuer (seller).
D. Interest rate risk; issuer (seller).