tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 1 L. Tesfatsion
SECOND MIDTERM EXAM: 40 POINTS TOTAL April 3, 2001
1-1 The U.S. Consumer Price Index (CPI) for year 2000 is calculated by
determining the
A. inflation-adjusted value of the U.S. nominal GDP level in 2000.
B. average price of the goods and services included in U.S. GDP in 2000.
C C. value of a basic basket of goods and services bought by a typical
U.S. urban household in 2000.
D. inflation-adjusted value of U.S. consumer expenditures on newly produced
goods and services in 2000
2-1 With regard to the United States, at the Federal government level
A. the current government budget deficit is an important political issue.
B. government budget deficits only exist in time of recession.
C C. the use of the current and projected government budget surpluses
is an important political issue.
D. government budget deficits have always been a short-term problem.
E. None of the above.
3-1 When compared to exchange systems that rely on money, DISADVANTAGES
of the barter payment system include:
A. the requirement of a double coincidence of wants
B. lower costs of exchanging goods over time
C. discouragement of specialization (division of labor)
D D. Only A and C
E. All of the above
4-1 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. government mandates regarding means of payment that were designed to
promote the overall efficiency of the payments system.
C. financial innovations introduced by government to ensure the overall
safety of the payments system.
D D. financial innovations introduced by private agents in order to
increase their profits.
5-1 When a person in the U.S. takes currency from under her mattress and
deposits it in a (noninstitutional) U.S. money market mutual fund, then
A. M1 and M2 both decrease
B B. M1 decreases and M2 stays the same
C. M1 and M2 both increase
D. M1 decreases and M2 increases
E. none of the above
6-1 Which of the following assets would NOT be included in a theoretical
approach to the measurement of the money supply:
A A. long-term corporate bonds
B. currency
C. traveler's checks
D. checking account deposits
7-1 The (ANNUAL) YIELD TO MATURITY i on a coupon bond with a purchase
price $260, a face value $280, a 2-year coupon payment stream ($20,$20),
and a 2-year maturity is calculated as follows:
A. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($20,$20), results in a present
value equal to $260.
B B. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($20,$300), results in a present
value equal to $260.
C. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($20,$20), results in a present
value equal to $280.
D. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($20,$300), results in a present
value equal to $280.
8-1 If a two-year security selling for $500 pays $100 at the end of the
first year and $300 at maturity (end of the second year), then (letting *
denote multiplication) its yield to maturity i is the solution to
A. $500*i = $300
B. $500*i = $100 + $300
C C. $500*(1+i)*(1+i) = $100*(1+i) + $300
D. $500*(1+i) = $100 + $300
9-1 For a coupon bond with a given coupon payment C and face value F, its
current yield is a MORE accurate measure of its yield to maturity the _______
the maturity of the bond (all else equal) and the __________ the deviation of
its purchase price from its face value (all else equal).
A. shorter; smaller
B. shorter; greater
C C. longer; smaller
D. longer; greater
10-1 A key DISTINCTION between financial intermediaries (FIs) and dealers
in financial assets is:
A. FIs are key players in over-the-counter markets.
B. an FI buys low and sells high whereas a dealer is paid by commission
C. FIs handle secondary issues of financial assets but not primary issues.
D D. the financial assets sold by an FI to buyers (lenders) differ from the
financial assets bought by the FI from sellers (borrowers).
11-1 Which of the following is TRUE for debt instruments:
A. In case of bankruptcy, debt claims are paid before the claims of
common stock holders.
B. Debt payments are 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 D. Only A and C above.
12-1 Which of the following holds for a coupon bond that has an annual coupon
payment C and that is purchased on January 1, 1999, and sold on January 1, 2000:
A. The (annual) current yield on the coupon bond is equal to the coupon
payment C divided by the purchase price.
B. The return rate on the coupon bond over 1999 can be expressed as the sum
of the current yield and the rate of capital gain or loss.
C. The return rate on the coupon bond over 1999 will be GREATER than the
current yield if the purchase price is LESS than the sale price.
D D. All of the above are true.
E. Only A and B are true.
13-1 The reason that bonds with ______ maturities are more susceptible
to interest rate risk is that ________
A A. longer; there is a greater chance of capital loss from yield changes
B. longer; there is greater risk of interest payment default
C. shorter; there is greater risk of interest payment default
D. shorter; there is less chance of capital gain from yield changes
E. none of the above
14-1 Suppose a consol bond pays $1 on January 2 of each year. Suppose you
purchased the consol bond for $100 on January 1, 1999 and sold it for $109 on
December 31, 1999. Suppose the inflation rate during 1999 was 2 percent.
Then your NOMINAL return rate on the consol bond for 1999 was _______ and
your REAL return rate on the consol bond for 1999 was _________.
A. 1 percent; -1 percent
B B. 10 percent; 8 percent
C. 1 percent; 3 percent
D. 10 percent; 12 percent
E. none of the above
15-1 In a primary bond market, the demand curve for bonds slopes downward
to the right because, at a HIGHER bond price, the yield to maturity is _____,
which discourages ______ from demanding as many bonds.
A. higher; borrowers
B. lower; borrowers
C. higher; lenders
D D. lower; lenders
16-1 When the price of bonds is BELOW the equilibrium price level, then
there is an ________ bonds and the price of bonds can be expected to ____.
A. excess demand for; fall
B B. excess demand for; rise
C. excess supply of; rise
D. excess supply of; fall
17-1 If there is a sudden market-wide INCREASE in the expected inflation
rate from this year to the next, then (all else equal) this will tend to
______ lending today due to the corresponding decrease in the current______.
A. encourage; price of bonds.
B. discourage; nominal interest rate.
C. encourage; nominal interest rate.
D D. discourage; real interest rate.
18-1 Suppose the U.S. Treasury bond market is currently in a demand=supply
equilibrium. Suddenly the Fed Chairman, Alan Greenspan, announces that he
expects that the inflation rate from this year to the next will be HIGHER
than previously anticipated. Then the analysis in Mishkin Chapter 5 predicts
that (all else equal) the effect on the market for newly issued U.S. Treasury
bonds today will be that the equilibrium PRICE of U.S. Treasury bonds will
_____ and the equilibrium QUANTITY of U.S. Treasury bonds purchased will______.
A. either increase or decrease; definitely decrease.
B B. definitely decrease; either increase or decrease.
C. definitely decrease; definitely increase.
D. definitely increase; either increase or decrease.
19-1 In a world divided between HC and ROW, multiplying any valuation V
measured in HC currency units by the HC exchange rate ______________
A. corrects V for changes in the HC inflation rate
B. transforms V into pure quantity terms
C. corrects V for changes in the HC price level
D D. transforms V into a valuation measured in ROW currency units
20-1 An APPRECIATION of a country's currency ______ the cost of foreign
goods relative to domestic goods and hence can result in domestic producers
being at a competitive _________ in global markets.
A. raises; advantage
B. raises; disadvantage
C. lowers; advantage
D D. lowers; disadvantage
21-1 Central banks sometimes use reserve transactions to offset appreciations
of their domestic currency. Specifically, they _______ domestic currency in
the foreign exchange market, which shifts _________.
A. sell; the demand curve for the domestic currency to the right
B. buy; the supply curve for the domestic currency to the left
C C. sell; the supply curve for the domestic currency to the right
D. buy; the demand curve for the domestic currency to the left
E. sell; the demand curve for the domestic currency to the left
22-1 According to the Law of One Price, if the price of Columbian coffee is
100 Colombian pesos per pound of coffee and the price of Brazilian coffee is
1000 Brazilian cruzados per pound of coffee, the coffee is of equal quality,
and there are no transaction costs, then the exchange rate between the
Columbian peso and the Brazilian cruzado should be
A. 10 pesos per cruzado
B. 100 pesos per cruzado
C C. 0.10 pesos per cruzado
D. l peso per cruzado
E. none of the above
23-1 In a world divided between HC and ROW, the HC real exchange rate is
defined to be
A. the HC nominal exchange rate times the ROW aggregate price level
divided by the HC aggregate price level
B B. the HC nominal exchange rate times the HC aggregate price level
divided by the ROW aggregate price level
C. the HC nominal exchange rate minus the HC inflation rate
D. the HC nominal exchange rate plus the ROW inflation rate minus the
HC inflation rate.
24-1 In a world divided between HC and ROW, the Purchasing Power Parity
(PPP) condition asserts that
A. the HC inflation rate will equal the ROW inflation rate over time
B. the HC nominal exchange rate will stay constant over time
C. the aggregate price levels in the HC and ROW will stay equal over time
D D. the HC real exchange rate will stay constant over time
E. none of the above
25-1 The Purchasing Power Parity (PPP) theory is unable to explain fully
the movements of exchange rates in the short run because
A. not all countries produce similar bundles of goods.
B. currencies are subject to speculative attacks.
C. aggregate price levels differ across countries.
D. all of the above.
E E. only A and B above.
26-1 If the inflation rate in Ireland is 7 percent during 2001, and the
inflation rate in Thailand is 5 percent during 2001, then the Purchasing
Power Parity (PPP) theory predicts that, during 2001, the value of the Thai
currency (bahts) measured in terms of Irish currency (punts) -- i.e., the
number of Irish punts per Thai baht -- will
A. rise by 12 percent
B B. rise by 2 percent
C. fall by 2 percent
D. fall by 12 percent
E. none of the above
27-1 Given a world divided between HC and ROW, the Interest Parity Condition
is _________ condition that predicts a short-run relationship between _____.
A. a balance of payments; HC national saving and HC borrowing
B. an accounting identity; HC savings and HC investment
C C. an equilibrium (arbitrage); HC and ROW interest rates
D. bond market clearing; HC interest rates and Row saving
E. none of the above
28-1 Given a world divided between HC and ROW, some of the key assumptions
underlying the Interest Parity Condition include
A. Investment opportunities in the HC and ROW have the same risk.
B. The HC real exchange rate stays constant over time.
C. Faced with equally risky options, savers always attempt to maximize
expected return.
D. All of the above
E E. Only A and C
29-1 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. 3 percent.
B B. 7 percent.
C. -3 percent
D. 3.5 percent
E. none of the above
30-1 In U.S. national income accounting, U.S. government saving plus U.S.
private saving must, by definition, equal
A. ROW saving minus total U.S. investment
B. U.S. national saving minus total U.S. investment
C. total U.S. investment
D D. total U.S. investment minus ROW saving
E. none of the above
31-1 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 B. current account; net exports, net factor payments, and net transfers
C. capital account; net trades in newly produced capital goods
D. capital account; net exports, net factor payments, and net transfers
32-1 According to U.S. national income accounting principles, which item
below would be directly entered as an item in the U.S. CAPITAL account KA:
A. A purchase by U.S. citizen Donald Trump of a used jet plane from
the U.S. Boeing Corporation
B. U.S. government foreign aid to Iraq
C C. A Tibetan citizen's purchase of a U.S. government bond
D. Interest income received by U.S. holders of a Kenyan bond issue
E. none of the above
33-1 According to U.S. national income accounting principles, which item(s)
below would be directly entered as items in the U.S. CURRENT account CA:
A. Purchases by French tourists of wine newly produced in California
B. U.S. government foreign aid to Mozambique
C. Interest payments received by U.S. holders of a Yemen bond issue
D. A Mongolian citizen's purchase of McDonald's stock from a U.S. dealer
E E. All but D
34-1 A U.S. current account _____ indicates that the U.S. is INCREASING its
net claims on foreign assets because the U.S. is _______ the rest of the world.
A. surplus; a net borrower from
B. deficit; a net lender to
C C. surplus; a net lender to
D. deficit; a net borrower from
35-1 Assuming the world is divided between HC and ROW, if the HC is running a
current account DEFICIT, then __________ is LESS than total HC investment.
A A. HC national saving
B. HC private saving plus HC government saving plus ROW saving
C. total ROW investment
D. ROW saving
36-1 Using the definitions for CA, KA, NKA, and BP as detailed in the
online notes for Mishkin Chapter 19, and assuming the world is divided
between HC and ROW, the HC balance of payments ACCOUNTING IDENTITY states
A. BP equals zero.
B. the sum of CA and NKA equals zero.
C C. the sum of CA and NKA equals BP.
D. the sumof CA and KA equals BP.
E. none of the above.
37-1 Using the definitions for CA, KA, NKA, and BP as detailed in the
online notes for Mishkin Chapter 19, and assuming the world is divided
between the HC and ROW, the HC is in a balance of payments EQUILIBRIUM if
A A. BP is zero
B. CA is zero
C. The sum of CA and KA is zero
D. the HC central bank is undertaking official reserve transactions to
ensure an orderly foreign exchange market
E. both A and D
38-1 If, instead, the HC is running a balance of payments SURPLUS, this
means that
A. HC tax revenues exceed HC government expenditures.
B B. the HC central bank is intervening in the foreign exchange market by
engaging in net purchases of ROW currency
C. HC exports are greater than HC imports
D. the HC is a net lender to ROW
E. none of the above
39-1 The International Monetary Fund (IMF) was established by the 1945
Bretton Woods Agreement to maintain _________ exchange rates and to provide
loans to member countries to help with _____________.
A. flexible; severe reserve shortages due to bank panics
B B. fixed; temporary balance of payments problems.
C. flexible; purchasing power parity problems
D. fixed; long-term development projects.
E. none of the above
40-1 Critics of the International Monetary Fund (IMF) argue that the
lender-of-last-resort function of the IMF can worsen _________ in the future.
A. purchasing power parity problems
B B. moral hazard problems
C. debt deflation problems
D. adverse selection problems