tesfatsi@iastate.edu
ANSWER OUTLINE
SECOND MIDTERM EXAM: 70 POINTS TOTAL L. Tesfatsion
Econ 353/SECTION 2
April 4, 2000
1-2 According to Mishkin, American businesses primarily obtain their external
funds from
A. government loans
B. direct finance
C. foreign savings
D D. indirect finance
E. none of the above
2-2 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A A. capital account; net trades in financial assets and existing real assets
B. capital account; net exports and net factor payments and net transfers
C. current account; net trades in financial assets and existing real assets
D. current account; net official reserve transactions
E. none of the above
3-2 Which item(s) below would be directly entered as items in the U.S.
current account CA:
A. Purchase of the U.S. Chrysler company by a German corporation
B. Dividends received by U.S. citizens on foreign-issued stocks
C. Purchases by Saudi Arabia of military equipment newly produced
within the borders of the U.S.
D. Purchase of land by the U.S. government from private U.S. land
developers
E E. Only B and C above
4-2 Which of the following be directly entered as an INCREASE in the size of
the U.S. capital account KA?
A. An increase in U.S. net investment income
B. An increase in the amount of services purchased by the U.S. from foreigners
C. A decrease in the ownership of Mexican bonds by the U.S.
D. An increase in the ownership of U.S. government bonds by Russia
E E. Both C and D
5-2 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; NKA; 0
B B. the HC current account CA; KA; 0
C. the HC capital account KA; BP; the HC current account CA
D. the HC current account CA; BP; NKA
E. none of the above
6-2 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 A. the HC current account CA; NKA; 0
B. the HC current account CA; KA; 0
C. the HC capital account KA; BP; the HC current account CA
D. the HC current account CA; BP; NKA
E. none of the above
7-2 If the balance of payments BP is POSITIVE, 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. excess demand for; decrease; buying
C. excess demand for; increase; selling
D D. excess supply of; increase; selling
E. none of the above
8-2 A HC current account CA in surplus mean 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; positive; the ROW is borrowing from the HC
B. not able; negative; the ROW is lending to the HC
C. more than able; negative; the ROW is lending to the HC
D D. more than able; negative; the ROW is borrowing from the HC
E. not able; negative; the ROW is borrowing from the HC
9-2 In GDP accounting for the HC, ROW saving is defined to be ___________
minus ______________.
A. HC national saving; HC total investment
B B. Total income received by ROW from the HC; HC exports
C. HC current account; HC total investment
D. Total income received by ROW from the HC; HC imports
E. none of the above
10-2 When the U.S. exchange rate for the Mexican peso changes from 111 pesos
per dollar to 99 pesos per dollar, then
A. the peso has appreciated and the dollar has appreciated
B. the peso has depreciated and the dollar has appreciated
C C. the peso has appreciated and the dollar has depreciated
D. the peso has depreciated and the dollar has depreciated
E. none of the above
11-2 An appreciation of the HC currency _______ the cost of ROW goods
to HC citizens and may therefore _________. Consequently,
central banks sometimes react to appreciations of their domestic currencies by
_______ their own currency in the foreign exchange market.
A A. lowers; make HC goods less competitive relative to ROW's; selling
B. raises; may lead to inflation; buying
C. lowers; make HC goods less competitive relative to ROW's; buying
D. raises; may lead to inflation; selling
E. none of the above
12-2 Given a world divided between HC and ROW, the purchasing power parity
condition in level form 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 value of HC GDP and ROW GDP will stay equal over time
D D. the HC real exchange rate will stay constant over time
E. none of the above
13-2 The theory of purchasing power parity is unable to fully explain
exchange rate movements because
A. currencies are subject to speculative attacks.
B. not all countries produce similar bundles of goods and services
C. aggregate price levels differ across countries.
D. all of the above.
E E. only A and B above.
14-2 If the inflation rate in Thailand is 4 percent during 2000, and the
inflation rate in Ireland is 6 percent during 2000, then the theory of
purchasing power parity predicts that, during 2000, 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 10 percent
B. fall by 2 percent
C C. rise by 2 percent
D. fall by 10 percent
E. none of the above
15-2 Given a world divided between HC and ROW, according to the interest
parity condition, a ROW saver attempting to decide between holding a bank
deposit account in ROW and a bank deposit in the HC with the same _______
will choose the investment with the highest ________ taking into account both
_________ and _________.
A. expected return; yield to maturity; default risk; interest rate risk
B B. risk; expected return; interest rates; expected HC exchange rate changes
C. risk; liquidity; inflation rates; price levels
D. default risk; insurance; insurance premiums; contingency fees
E. none of the above
16-2 If the average nominal interest rate on bank deposit accounts across
foreign countries who are major trading partners of the U.S. is 4 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 appreciate by 3 percent, then interest parity
predicts that, on average, nominal interest rates on U.S. bank deposit
accounts should be about
A. 3.5 percent.
B B. 1 percent
C. 7 percent.
D. -1 percent
E. none of the above
17-2 The demand curve for bonds slopes downward because, at a lower
bond price, the yield to maturity is _______ , which is an incentive
to ______ to demand more bonds.
A. lower; borrowers
B. higher; borrowers
C. lower; lenders
D D. higher; lenders
E. none of the above
18-2 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. below; excess supply of; fall
C. above; excess supply of; rise
D D. above; excess supply of; fall
E.none of the above
19-2 If the expected inflation rate for next year is expected to rise, then
(all else equal) this will tend to discourage ________ today, because they
will now foresee _________ in ___________.
A. lenders; a rise; the real value of their future interest rate costs
B. borrowers; a rise; the real value of their future interest payments
C C. lenders; a drop; the real value of their future interest receipts
D. borrowers; a drop; the real value of their future interest receipts
E. none of the above
20-2 When a decrease occurs in the expected yield to maturity 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; a higher expected capital gain from T+1 to T+2
B. a decrease; a lower expected capital gain from T to T+1
C C. an increase; a higher expected capital gain from T to T+1
D. a decrease; a lower expected capital gain from T+1 to T+2
E. none of the above
21-2 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 LOWER 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. price of bonds; lower; quantity of bonds
C. quantity of bonds; higher; price of bonds
D D. price of bonds; higher; quantity of bonds
E. none of the above.
22-2 The risk-return theory cannot always determine which of two
assets should be preferred by an investor because
A. Assets with more risk tend to have lower expected return rates.
B. Assets with high risk have uncertain return rates.
C C. Assets with more risk tend to have higher expected return rates.
D. None of the above.
23-2 Portfolio diversification (e.g., holding two securities worth $50 each
instead of one security worth $100) is potentially beneficial because
A. it reduces systematic risk
B. it can reduce nonsystematic risk if the securities are from closely
related sources (e.g., stock from companies in the same industry)
C C. it can reduce nonsystematic risk if the securities are from different
types of sources (e.g., stocks from companies in different industries)
D. it increases the beta of the portfolio
E. it raises the expected return rate of the portfolio
24-2 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; lower
B. higher; lower; systematic; higher
C. higher; higher; nonsystematic; lower
D D. higher; higher; systematic; higher
E. lower; lower; systematic; higher
25-2 The key distinction (or distinctions) between the Arbitrage Pricing
Theory (APT) and the Capital Asset Pricing Model (CAPM) is (are):
A. The APT 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 can differ from one investor to another.
C C. The APT postulates the existence of more than one source of
systematic risk.
D. The APT assumes that investors' preferences for portfolios
depend only on risk and expected return.
E. All of the above
26-2 Letting "*" denote multiplication, if the annual interest rate is 7
percent, then the present value of a 3-year payment stream ($0,$80,$50) with
$0 to be received at the end of the FIRST year, $80 at the end of the SECOND
year, and $50 at end of the THIRD year is given by
A. $80*(1 + .07)@2 + $50*(1 + .07)@3
B. $80/(1 + .07) + $50/(1 + .07)@2
C C. $80/(1 + .07)@2 + $50/(1 + .07)@3
D. [$80 + $50] divided by 3
27-2 The (annual) yield to maturity i on a coupon bond with a purchase
price $190, a face value $200, a 2-year coupon payment stream ($30,$30),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($30, $30)
B. i equals the coupon payment $30 divided by the face value $200
C. i equals the coupon payment $50 divided by the purchase price $190.
D D. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($30,$230), results in a present
value equal to $190.
28-2 Which of the following are TRUE for the current yield ic of a coupon bond:
A. The ic on a consol bond is always smaller than the yield to maturity.
B. The ic is the coupon payment divided by the bond's face value
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 the bond's face value, all else equal
E E. only C and D above
29-2 Which of the following $300 face-value securities has the HIGHEST
yield to maturity?
A. A 15 percent coupon bond selling for $400
B. A 10 percent coupon bond selling for $300
C. A 5 percent coupon bond selling for $300
D D. A 15 percent coupon bond selling for $300
30-2 Which of the the following are true concerning the distinction between
the interest rate and the return rate on a bond.
A. The return rate will not necessarily equal the interest rate.
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 rises
between T and T+1.
D D. All of the above are true.
E. Only A and B above are true.
31-2 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, dealers have negative bid-asked spreads.
B. For T-Bill quotes, discount yields (calculated for both bid and asked
prices) are reported rather than the bid and ask prices themselves.
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 B and D above
32-2 Checkable deposits in the U.S. satisfy the definition of money because
A. federal regulations mandate that they be so considered.
B. checkable deposits are federally insured.
C C. checkable deposits serve as a generally acceptable means of payment
for goods and services and for repayment of debts.
D. all of the above.
E. none of the above.
33-2 Which of the following statements accurately describe the three
different aggregate money measures used in the U.S. -- M1, M2, and M3:
A. M1 is the narrowest measure of money and corresponds most closely to the
theoretical definition of money as a generally accepted means of payment.
B. Although M1, M2 and M3 tend to move together, there have been time
periods during which large discrepancies have arisen (especially
between M1 and the remaining two measures M2 and M3).
C. Initial estimates of M1, M2, and M3 are frequently subject to
substantial revisions after more data become available.
D D. All of the above.
E. None of the above.
34-2 Which of the following properties characterize common stock shares:
A. A buyer of a common stock share acquires an ownership interest in the
assets and earnings of the issuer of the common stock share.
B. Buyers can earn profits on the common stock shares they purchase
either through dividend payments or through stock price appreciation.
C. Dividend payments cannot be negative but stock prices can depreciate.
D. Corporations are not required to pay dividends to shareholders.
E E. All of the above.
35-2 Which of the following can be described as direct finance:
A. A corporation takes out a loan from a bank.
B. You buy shares in a mutual fund.
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.