tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 2 L. Tesfatsion
FIRST MIDTERM EXAM: 40 POINTS TOTAL February 26, 2004
QUESTION 1. The aggregate price level for the U.S. in 2004
A. is the total value of all goods and services sold in the U.S. in 2004
B B. is the average price of goods and services in the U.S. during 2004.
C. is the total sum of prices for goods and services in the U.S. during 2004.
D. is the average cost of U.S.-owned assets at the end of 2004.
E. is the aggregate value of the U.S. money supply in 2004.
QUESTION 2. The key difference between nominal GDP (gross domestic product)
and real GDP for the United States is that
A. Nominal GDP includes sales of financial assets whereas real GDP includes
only sales of real assets.
B. Nominal GDP is the initial measure of output and real GDP is the
final revised measure of output.
C C. Real GDP is corrected for price movements whereas nominal GDP is not.
D. Nominal GDP includes production outside the borders of the U.S.
whereas real GDP does not.
E. Nominal GDP includes earnings from financial assets whereas real GDP
does not.
QUESTION 3. A "recession" is DEFINED to be a period of time during which________.
A. the current account is in deficit.
B. real wages are low.
C. the real money supply is low.
D D. real GDP is declining.
E. inflation is high.
QUESTION 4. A U.S. government budget DEFICIT measures the extent to which
A A. U.S. government expenditures exceed U.S. government tax revenues.
B. the U.S. government is relying on foreign borrowing.
C. U.S. government tax revenues exceed U.S. government expenditures.
D. U.S. imports exceed U.S. exports.
E. the U.S. capital account is in deficit.
QUESTION 5. According to U.S. time series data presented in Mishkin (Chapter 1):
A. From 1980-2000, U.S. stock prices dramatically increased.
B. Since 1950, the U.S. aggregate price level has dramatically increased.
C. Average inflation rates and average money growth rates tend to move together.
D D. All of the above.
E. None of the above.
QUESTION 6. 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. citizens will buy fewer Mexican goods.
B B. U.S. goods exported to Mexico will cost more in Mexico, so Mexicans
will buy fewer of them.
C. the U.S. will definitely be better off.
D. U.S. goods exported to Mexico will cost less in Mexico, so Mexicans
will buy more of them.
E. the current positive trade balance that the U.S. enjoys with Mexico
will increase further.
QUESTION 7. Debt instruments (e.g., bonds) are ________ for the issuer
and _________ for the purchaser.
A. puts; calls
B. primary; secondary
C. assets; liabilities
D. liquid; illiquid
E E. liabilities; assets
QUESTION 8. Key ways in which a broker DIFFERS from a dealer include:
A. Brokers facilitate financial asset trades.
B. Brokers take positions in the financial assets they trade.
C C. Brokers make profits by charging commissions to users of their services.
D. all of the above.
E. only B and C above.
QUESTION 9. A key DISTINCTION between financial intermediaries (FIs) and dealers is:
A. FIs are key players in direct finance.
B. An FI earns most of its profits through commissions charged for its services.
C C. FIs engage in asset transformation, in the sense that FIs transform
relatively risky financial assets purchased from borrowers (e.g., mortgage
contracts) into safer financial assets they can sell to lenders (e.g.,
deposit accounts).
D. FIs "make the market" for bonds in the sense that they post bid and ask
prices for bonds indicating their willingness to accommodate both sellers
and buyers of bonds at these respective prices.
E. FIs are key players in auction markets.
QUESTION 10. A type of financial player that has a major role in ensuring
the sale of corporate bonds in PRIMARY markets is
A A. an investment banker.
B. a specialized trader on a stock exchange.
C. a commercial banker.
D. a savings and loan officer.
E. a Securities and Exchange Commissioner.
QUESTION 11. Which of the following are PRIMARY markets.
A A. Auction markets conducted by the U.S. Treasury for U.S. Treasury bills.
B. The New York Stock Exchange.
C. The foreign exchange market.
D. The over-the-counter market for U.S. government bonds
E. Only B, C, and D above
QUESTION 12. Corporations do NOT acquire new funds when their securities
are sold
A. in a domestic primary market.
B. as initial public offerings.
C C. in a secondary market.
D. directly in an overseas primary market.
E. through investment banks.
QUESTION 13. Which of the following statements is/are TRUE:
A. The maturity of a financial asset is the length of time to the
financial asset's expiration date.
B. A consol has no maturity date.
C. A common stock share has no maturity date.
D D. All of the above statements are true.
E. Only A and B above.
QUESTION 14 Which of the following statements is/are TRUE:
A. In case of bankruptcy, debt claims are paid after the claims of
common stock holders.
B. Debt payments are not conditional on the profits earned by the
debt issuer (borrower), except when the issuer declares bankrupcty.
C. Debt holders do not usually participate in the management of the
affairs of debt issuers except under conditions of duress.
D. All of the above.
E E. Only B and C above.
QUESTION 15. Which of the following can be described as DIRECT finance:
A A. Enron sells newly issued corporate bonds to the King of Saudi Arabia.
B. You buy shares in a money market fund offered by First National Bank.
C. A pension fund manager buys U.S. Treasury bills in a secondary market.
D. You make a deposit to a deposit account at a commercial bank.
E. None of the above.
QUESTION 16. Which of the following can be described as INDIRECT finance.
A. The U.S. government buys commercial paper on a secondary market.
B B. You obtain a mortgage loan from Second Ames Bank.
C. You buy stock shares on the New York Stock Exchange.
D. Vice-President Cheney buys newly issued commercial paper from Halliburton Inc.
E. None of the above.
QUESTION 17. If bad credit risks are the ones that most actively seek out and
receive loans from a financial intermediary due to its loan contract
provisions, then the financial intermediary has _______________
A. a free-riding problem.
B. a moral hazard problem.
C. a risk diversification problem.
D D. an adverse selection problem.
E. an interest rate risk problem.
QUESTION 18. Money is DEFINED to be
A. a riskless repository of spending power.
B. financial claims in the form of coins or paper bills.
C C. a generally accepted means of payment for goods and services
and for repayment of debts, as a matter of social custom.
D. income.
E. anything that must be accepted in repayment of debt, by law.
QUESTION 19. If the U.S. aggregate price level were to double, then (all else
equal) the real value of a dollar would
A. double.
B B. fall by 50 percent.
C. more than double.
D. rise but not double due to diminishing returns.
E. none of the above.
QUESTION 20. The conversion of a barter economy to one that uses money
A. increases efficiency by reducing consumption of goods and services.
B. decreases efficiency by increasing the need to specialize.
C C. increases efficiency by reducing transactions costs.
D. decreases economic efficiency by reducing double coincidence of wants.
E. none of the above.
QUESTION 21. For an economy with exactly 9 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. 72; 18
B. 72; 9
C. 9; 36
D. 36; 18
E E. 36; 9
QUESTION 22. Which of the following statements about "fiat money" is/are TRUE:
A. fiat money is backed, i.e., it is collateralized by some precious commodity.
B. fiat money is legal tender -- i.e., by law, citizens must accept it
as repayment for debts.
C. fiat money is paper money.
D. all of the above are true by definition of fiat money.
E E. only B and C above.
QUESTION 23. The particular U.S. agency charged with the responsibility for
protecting 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 24. The particular U.S. agency charged with the responsibility 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.
D. the Federal Deposit Insurance Corporation
E. the Comptroller of the Currency.
QUESTION 25. U.S. monetary policy makers worry about being able to accurately
measure and control the money supply because
A. their primary responsibility is to use changes in the money supply to
control the current account deficit.
B. by law they need to keep track of the flow of money through the economy.
C C. they use changes in the money supply to affect the Federal funds rate
(hence other key interest rates) with the ultimate objective of ensuring
low inflation and satisfactory economic growth.
D. their prime responsibility is to use money supply changes to keep the
national debt in check.
E. their prime responsibility is to use money supply changes to ensure
the re-election of the President who appointed them to office.
QUESTION 26. Which of the following assets is NOT included in M2, currently
our most frequently used measure of money in the U.S.:
A. traveler's checks
B. currency
C C. large-denomination time deposits
D. checkable deposit accounts held at banks
E. checkable money-market deposit accounts held at Merrill Lynch
QUESTION 27. Which of the following statements is/are true for FIXED PAYMENT loans:
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, where these payments include both principal and interest.
D. At maturity the borrower makes one fixed payment equal to the face value.
QUESTION 28. 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 bonds and notes are examples of coupon bonds.
C. Corporate bonds typically take the form of coupon bonds.
D D. All of the above
E. Only A and B above
QUESTION 29. A _________ is generally bought at a price below its face value,
and the only payment received by the purchaser is _______ at the maturity date.
A. coupon bond; the face value of the bond
B. simple loan contract; an interest payment
C. consol; an interest payment plus principal
D D. discount bond; the face value of the bond
QUESTION 30. 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 divided by (1 + .20)
2
B B. $300 divided by (1 + .10)
C. $300 divided by 2
2
D. $300 multiplied by (1 + .10)
QUESTION 31. Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the present value of a payment stream ($10,$0,$0,$50) with $10
to be received at the end of the FIRST year and $50 to be received at the
end of the FOURTH year is given by
4 4
A. $10*(1 + .05) + $50*(1 + .05) C C. $10/(1 + .05) + $50/(1 + .05)
B. $10/(1 + .05) + $50/(1 + .20) D. [$10 + $50] divided by 4
QUESTION 32. The (annual) yield to maturity i on a coupon bond with a
purchase price $210, a face value $190, a 2-year maturity, and a coupon
payment of $30 is calculated as follows:
A. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($30,$30), results in a present
value equal to $210.
B. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($30,$30), results in a present
value equal to $190.
C C. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($30,$220), results in a present
value equal to $210.
D. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($30,$220), results in a present
value equal to $190.
QUESTION 33. Which of the following statements is/are TRUE for the current
yield of a coupon bond:
A. By definition, the current yield is the coupon payment divided by the
purchase price of the bond.
B. For a consol bond, the formula for the current yield reduces to the
formula for the yield to maturity.
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.
QUESTION 34. The current yield on a coupon bond with a $5000 face value, an
8 percent coupon rate, a 4 year maturity, and a current purchase price of $4000 is
A. 5 percent
B. 8 percent
C C. 10 percent
D. 20 percent
E. none of the above.
QUESTION 35. 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. higher; higher
B. higher; lower
C. lower; higher
D. none of the above.
QUESTION 36 Which of the following statements is/are TRUE:
A. A REAL interest rate is a nominal (market) interest rate corrected for
changes in the price level.
B. REAL interest rates are a better indicator of the real worth of debt
instruments than NOMINAL interest rates since they measure the real
purchasing power of the payments generated by these instruments.
C. Currently in the U.S. there is no way to observe directly the REAL
interest rate associated with any debt instrument.
D. All of the above.
E E. Only A and B above.
QUESTION 37 Letting i denote the current yield to maturity on coupon bonds, in which
of the following situations would you prefer to be PLANNING TO BORROW through
coupon bond transactions:
A. i = 4 percent and the expected inflation rate = 1 percent
B. i = 8 percent and the expected inflation rate = 4 percent
C C. i = 9 percent and the expected inflation rate = 7 percent
D. i = 13 percent and the expected inflation rate = 8 percent
QUESTION 38. 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 $100, the market
price on January 1, 2003 is $300, and the market price on December 31,
2003 is $250, then the RETURN RATE on this coupon bond during the year
2003 equals the current yield $100/$300 plus [$250 - $300]/$300.
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 39. Suppose the inflation rate over the coming year is expected to
be 4 percent. Suppose you intend to store $1000 under your mattress for this
entire year. Then the NOMINAL return rate you should expect to earn on this
$1000 over the coming year is ____ and the REAL return rate that you should
expect to earn on this $1000 over the coming year is _____.
A A. 0 percent; -4 percent
B. 4 percent; 0 percent
C. 0 percent; 4 percent
D. 3 percent; 7 percent
E. 3 percent; -1 percent
QUESTION 40 "Interest rate risk" is the risk faced by ___ in the form of____.
A. a potential borrower; fluctuations in the interest payments the borrower
would have to make to any lender he transacts with.
B B. a bond holder; fluctuations in the yield to maturity, hence in
the period-by-period return rate on the bond.
C. a potential lender; fluctuations in the purchase price of bonds
D. a borrower who has already issued a bond; fluctuations in the interest
payments the borrower will have to make to the bond holder.