tesfatsi@iastate.edu
ANSWER OUTLINE
SECOND MIDTERM EXAM: 70 POINTS TOTAL L. Tesfatsion
Econ 353/Section 1
April 4, 2000
1-1 According to Mishkin, of the four sources of external funds listed below,
the most important single source of external funds for American businesses is
A A. bank loans
B. foreign direct investment
C. corporate bond issue
D. equity issue
2-1 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A. current account; net trades in financial assets and existing real assets
B. capital account; net trades in newly produced goods and services
C C. current account; net exports and net factor payments and net transfers
D. capital account; net exports and net factor payments and net transfers
E. none of the above
3-1 Which item(s) below would be directly entered as items in the U.S.
capital account KA:
A. Purchases by Saudi Arabia of military equipment newly produced
within the borders of the U.S.
B B. Purchase of the U.S. Chrysler company by a German corporation
C. Dividends received by U.S. citizens on foreign-issued stocks
D. Purchase of land by the U.S. government from private U.S. land
developers
E. All of the above
4-1 Which of the following would be directly entered as a DECREASE in the size
of the U.S. current account CA?
A. A decline in U.S. net investment income
B. An increase in the amount of services purchased by the U.S. from foreigners
C. An increase in unilateral transfers from the U.S. to foreigners
D D. All of the above
E. None of the above
5-1 Assume that the world is divided between HC and ROW, that only the HC
central bank holds offical reserve assets (HC and ROW currency reserves), and
that BP (the net change in the ROW currency reserves held by the HC central
bank) is included in the definition of the HC capital account KA, i.e., that
KA = NKA - BP where NKA = the "nonofficial" capital account.
Then the balance of payments ACCOUNTING IDENTITY for the HC requires
that the sum of _________ and ___________ equals _____________
A. the HC current account CA; BP; NKA
B. KA; BP; the HC current account CA
C C. the HC current account CA; KA; 0
D. the HC current account CA; NKA; 0
E. none of the above
6-1 Assume that the world is divided between HC and ROW, that only the HC
central bank holds offical reserve assets (HC and ROW currency reserves), and
that BP (the net change in the ROW currency reserves held by the HC central
bank) is included in the definition of the HC capital account KA, i.e., that
KA = NKA - BP where NKA = the "nonofficial" capital account.
Then balance of payments EQUILIBRIUM for the HC requires that the sum of
_________ and ___________ equals _____________
A. the HC current account CA; BP; NKA
B. KA; BP; the HC current account CA
C. the HC current account CA; KA; 0
D D. the HC current account CA; NKA; 0
E. none of the above
7-1 If the balance of payments BP is NEGATIVE, this means that there is an
_______ ROW currency and the HC central bank must ________ its holdings of
ROW currency reserves by _______ HC currency in exchange for ROW currency in
order to support the current transaction plans of HC and ROW citizens.
A. excess supply of; decrease; buying
B B. excess demand for; decrease; buying
C. excess demand for; increase; selling
D. excess supply of; increase; selling
E. none of the above
8-1 A HC current account CA in deficit means that the HC is ________
to finance total HC investment using HC national savings. This must be
offset by a _________ HC capital account KA, which indicates that
____________.
A. more than able; negative; the ROW is borrowing from the HC
B. not able; negative; the ROW is lending to the HC
C C. not able; positive; the ROW is lending to the HC
D. more than able; positive; the ROW is borrowing from the HC
E. not able; negative; the ROW is borrowing from the HC
9-1 In GDP accounting for the HC, ROW saving is defined to be ___________
minus ______________.
A. HC imports; HC exports
B. Total income received by the HC from ROW; HC imports
C C. Total income received by ROW from the HC; HC exports
D. HC national saving; HC total investment
E. none of the above
10-1 When the U.S. exchange rate for the French franc changes from 2 francs
per dollar to 3 francs per dollar, then
A. the franc has appreciated and the dollar has appreciated
B B. the franc has depreciated and the dollar has appreciated
C. the franc has appreciated and the dollar has depreciated
D. the franc has depreciated and the dollar has depreciated
E. none of the above
11-1 A depreciation of the HC's currency _______ the cost of ROW goods
to HC citizens and therefore may _________. For this reason, central banks
sometimes react to depreciations of their domestic currencies by _______ their
own currency in the foreign exchange market.
A A. raises; lead to inflation in the HC; buying
B. lowers; lead to inflation in the HC; buying
C. raises; lead to inflation in the HC; selling
D. lowers; lead to deflation in the HC; buying
E. none of the above
12-1 Given a world divided between HC and ROW, the purchasing power parity
condition in level form asserts that
A. the HC nominal exchange rate will stay constant over time
B B. the HC real exchange rate will stay constant over time
C. the HC real interest rate will stay constant over time
D. the value of HC GDP and ROW GDP will stay equal over time
E. none of the above
13-1 Given a world divided between HC and ROW, in order for the purchasing
power parity condition to reduce to a straightforward application of the "law
of one price," the following conditions need to hold:
A. the HC and ROW produce the same bundles of goods and services
B. information about the availability and price of goods and services in
the HC and ROW is freely available to everyone and there are no trade
barriers or other types of transactions costs between the HC and ROW
C. the HC and ROW have the same aggregate price levels
D. all of the above
E E. only A and B above
14-1 If the inflation rate in South Africa is 3 percent during 2000, and the
inflation rate in Malaysia is 2 percent during 2000, then the theory of
purchasing power parity predicts that, during 2000, the value of the South
African currency (rands) measured in terms of the Malaysian currency
(ringgits) -- i.e., the number of ringgits per rand -- will
A. rise by 1 percent
B. rise by 5 percent
C C. fall by 1 percent
D. fall by 5 percent
E. none of the above
15-1 Given a world divided between HC and ROW, the interest parity condition
is _______ condition that attempts to help predict the short-run relation
between _________ in the HC and ROW by determining a necessary condition
for______________.
A. an equilibrium; currency reserves; demand = supply for HC currency
B. an accounting; savings rates; equality of HC and ROW interest rates
C. a balance of payments; borrowing and lending; external balance
D D. an equilibrium; interest rates; the expected return on HC and ROW
deposit accounts to be equal for both HC and ROW savers
E. none of the above
16-1 If the average nominal interest rate on bank deposit accounts across
foreign countries who are major trading partners of the U.S. is 5 percent,
and the U.S. effective exchange rate index for these countries (i.e., a
weighted average of their exchange rates measured in foreign currency units
per U.S. dollar) is expected to depreciate by 2 percent, then interest parity
predicts that, on average, nominal interest rates on U.S. bank deposit
accounts should be about
A A. 7 percent.
B. 3 percent.
C. -3 percent
D. 3.5 percent
E. none of the above
17-1 The supply curve for bonds slopes upward because, at a higher
bond price, the yield to maturity is _______ which is an incentive
to ______ to supply more bonds.
A. higher; borrowers
B. lower; lenders
C. higher; lenders
D D. lower; borrowers
E. none of the above
18-1 When the price of bonds is _____ the equilibrium price level,
then there is an ________ bonds and the price of bonds can be
expected to ____.
A. above; excess demand for; fall
B B. below; excess demand for; rise
C. above; excess supply of; rise
D. below; excess demand for; fall
E. none of the above
19-1 If the expected inflation rate for next year is expected to fall, then
(all else equal) this will tend to discourage _________ today, because they
will now foresee ________ in ____________.
A. lenders; a drop; the real value of their future interest receipts
B B. borrowers; a rise; the real value of their future interest payments
C. lenders; a rise; the real value of their future interest costs
D. borrowers; a drop; the real value of their future interest payments
E. none of the above
20-1 When an increase occurs in the expected yield to maturity on bonds from
period T+1 to period T+2, all else remaining equal, normally one would expect
to see _________ in the demand for bonds in period T because of ________.
A. an increase; an expected increase in the price of bonds in period T+1
B B. a decrease; a lower expected capital gain from T to T+1
C. an increase; an expected decrease in the price of bonds in period T+1
D. a decrease; a lower expected capital gain from T+1 to T+2
E. none of the above
21-1 If the bond market is currently in a demand=supply equilibrium, and
suddenly Alan Greenspan at the Fed announces that he has good reason to
believe that the inflation rate will be HIGHER next year than currently
anticipated, then the analysis in Mishkin Chapter 6 predicts that (all else
equal) the effect on the bond market today will be that the equilibrium
__________ will definitely be _______ but the equilibrium _________ could
either increase or decrease.
A. quantity of bonds; lower; price of bonds
B B. price of bonds; lower; quantity of bonds
C. quantity of bonds; higher; price of bonds
D. price of bonds; higher; quantity of bonds
E. none of the above.
22-1 Consider assets A, B, C with risk and expected return rates as
follows: A = (.05, .03), B = (.08, .06), C = (.07, .02), where
.05 = riskiness of A, .03 = expected return rate for A, and so forth.
Which of the following are DEFINITELY TRUE according to the
risk-return theory of asset choice:
A. Asset C is preferable to asset B
B. Asset B is preferable to asset A
C C. Asset A is preferable to asset C
D. Asset C is preferable to asset A
E. None of the above
23-1 Portfolio diversification (e.g., holding two securities worth $50 each
instead of one security worth $100) is potentially beneficial because
A. it makes the portfolio more liquid
B. it raises the expected return rate of the portfolio
C C. it can reduce the nonsystematic risk of the portfolio
D. it increases the wealth of the portfolio holder.
E. it reduces the systematic risk of the portfolio
24-1 If portfolio A has a _____ beta than portfolio B, then portfolio A has
a _______ amount of _________ risk than portfolio B. By the CAPM theory,
portfolio A should then have a _______ expected return rate than portfolio B.
A. higher; lower; nonsystematic; higher
B B. lower; lower; systematic; lower
C. higher; higher; systematic; lower
D. lower; lower; nonsystematic; higher
E. none of the above
25-1 The key distinction (or distinctions) between the Arbitrage Pricing
Theory (APT) and the Capital Asset Pricing Model (CAPM) is (are):
A. The CAPM predicts that an increase in the systematic risk of a
portfolio will result in a higher risk premium, all else equal.
B. For the APT, the market price of a particular source of
systematic risk is the same for all investors.
C. The CAPM assumes that investors' preferences for portfolios
depend only on systematic risk.
D D. The CAPM postulates the existence of only one source of
systematic risk.
E. All of the above
26-1 Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the present value of a 3-year payment stream ($60, $0, $100)
with $60 to be received at the end of the FIRST year, $0 at the end of the
SECOND year, and $100 at the end of the THIRD year is given by
A. $60*(1 + .05) + $100*(1 + .05)@3
B B. $60/(1 + .05) + $100/(1 + .05)@3
C. $60/(1 + .05) + $100/(1 + .05)@2
D. [$60 + $100] divided by 3
27-1 The (annual) yield to maturity i on a coupon bond with a purchase
price $240, a face value $250, a 2-year coupon payment stream ($40,$40),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($40,$40)
B B. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($40,$290), results in a present
value equal to $240.
C. i equals the coupon payment $40 divided by the purchase price $240.
D. i equals the coupon payment $40 divided by the face value $250
28-1 Which of the following are FALSE for the current yield ic of a coupon bond:
A. The ic is the coupon payment divided by the purchase price of the bond.
B. For a consol bond, the formula for the ic reduces to the formula
for the yield to maturity.
C. The ic is a closer approximation to the yield to maturity the
longer the bond's time to maturity, all else equal
D. The ic is a closer approximation to the yield to maturity the closer
the bond's purchase price is to its face value, all else equal
E E. none of the above
29-1 Which of the following $500 face-value securities has the HIGHEST
yield to maturity?
A A. A 7 percent coupon bond selling for $500
B. A 5 percent coupon bond selling for $500
C. A 7 percent coupon bond selling for $600
D. A 3 percent coupon bond selling for $500
30-1 Which of the the following are true concerning the distinction between
the interest rate and the return rate on a coupon bond.
A. The return rate will not necessarily equal the interest rate.
B. The return rate 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 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 above are true.
31-1 Distinctive aspects of the financial pages reporting for bonds in major
newspapers such as the Wall Street Journal and the New York Times that one
must understand to make sense of them include:
A. For T-Bill quotes, discount yields (calculated for both bid and ask
prices) are reported rather than the bid and ask prices themselves.
B. For T-Bill quotes, dealers have negative bid-asked spreads.
C. For T-bond/notes, if two maturity dates are reported, the first is
for dealers and the second is for all other prospective buyers.
D. For T-bonds/notes and corporate bonds, the listed securities prices
are reported per $100 of face value, so numbers less than 100
correspond to prices less than face value and vice versa.
E E. Only A and D above
32-1 Whatever a society uses as money, the defining characteristic is that
A. it must be completely inflation proof.
B B. it must be generally acceptable as payment for goods and services
and repayment of debts.
C. it must contain at least some amount of a precious metal.
D. it must be produced by government.
E. none of the above
33-1 During hyperinflations
A. the real purchase value of money falls rapidly.
B. money no longer functions well as a store of value .
C. debtors benefit as the real value of their debt obligations falls.
D. lenders are hurt as their real value of their debt claims falls.
E E. all of the above occur.
34-1 Which of the following properties characterize debt instruments:
A. Debt instruments require the issuer (borrower) to periodically make
debt payments to the holder (lender).
B. Except in bankruptcy, debt payments are fixed in advance rather than
being conditional on the profits earned by the issuer (borrower).
C. Debt holders do not usually participate in the management of the
affairs of the debt issuer except under conditions of duress.
D. Debt claims have priority over equity claims in case of insolvency.
E E. All of the above
35-1 Which of the following can be described as indirect finance.
A. A corporation sells newly issued stock shares to another corporation.
B B. A bank makes a loan to a corporation.
C. A household buys stock shares on the New York Stock Exchange.
D. The U.S. government buys commercial paper newly issued by a corporation.
E. Only A and D above.