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ECO 302 Week 9 Quiz - Strayer

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Chapter 14 and 15

TRUE/FALSE

1. When a country has a deficit, its debt is growing.

2. A pay as you go social security system raises the capital stock.

3. If government budget is in deficit, then real government saving is in surplus.

4. If the government runs a deficit, households will feel wealthier.

5. A budget deficit caused by changing labor income taxes changes the labor and production.

6. The debt-to-GDP ratio typically rises during a recession.

7. The major peaks in the ratio of public debt to GDP in the U.S. reflect expenditures on Social Security.

8. Real national saving equals net investment.

9. Real government saving is positive when the real public debt increases.

10. If government expediture exceeds government revenue, then the government has a budget surplus.

MULTIPLE CHOICE

1. The governments sources of funds include:

a. taxes. c. borrowing.

b. printing money. d. all of the above.

2. The governments sources of funds include:

a. taxes. c. paying interest on past bonds.

b. government purchases. d. all of the above.

3. The governments sources of funds include:

a. transfer payments. c. paying interest on the government debt.

b. printing money. d. all of the above.

4. The governments sources of funds include:

a. government purchases. c. borrowing.

b. transfer payments. d. all of the above.

5. The governments uses of funds include:

a. government purchases. c. paying interest on the past government debt.

b. transfer payments. d. all of the above.

6. The governments uses of funds include:

a. government purchases. c. printing money.

b. borrowing. d. all of the above.

7. The governments uses of funds include:

a. printing money. c. taxes.

b. transfer payments. d. all of the above.

8. The governments uses of funds include:

a. borrowing. c. paying interest on the past government debt.

b. printing money. d. all of the above.

9. A balanced government budget is one where:

a. government purchases equal taxes. c. the governments real savings is zero.

b. government debt is zero. d. all of the above.

10. Total bond holding of all households is Bgt because:

a. the quantity of all private bonds held by the public is zero. c. the public views government bonds as less risky than private bonds.

b. the quantity of all government bonds held by the public is zero. d. the public views private bonds as less risky than government bonds.

11. Total bond holding of all households is equal to

a. the quantity of all private bonds. c. the quantity of all private bonds plus all government bonds.

b. the quantity of all government bonds. d. the quantity of all private bonds minus all government bonds.

12. If money and the price level are constant, then the government’s real budget deficit is:

a. (Bgt - Bgt-1)/P. c. (Bt + Bgt)/P.

b. Bgt/P. d. none of the above.

13. If money and the price level are constant, then the government’s real budget debt is:

a. (Bgt - Bgt-1)/P. c. (Bt + Bgt)/P.

b. Bgt/P. d. none of the above.

14. If the government reduces taxes by $1 this year without raising taxes or printing more money, then

a. future tax liabilities will rise by $1 plus the interest, R, that must be paid on the borrowing. c. future tax liabilities will fall by $1 plus the interest, R, that must be paid on the borrowing.

b. future tax liabilities will rise by $1 less the interest, R, that must be paid on the borrowing. d. future tax liabilities will fall by $1 less the interest, R, that must be paid on the borrowing.

15. Ricardian equivalence implies that a government budget deficit:

a. increases current consumption. c. reduces national saving.

b. increases future tax liabilities. d. all of the above.

16. Ricardian equivalence holds:

a. only for year to year changes in the governments budget. c. only with a government deficit not a surplus.

b. no matter how long until the bonds are to be paid off. d. only with a government surplus not a deficit.

17. A strategic budget deficit is designed to:

a. increase GDP. c. constrain the behavior of future governments.

b. increase economic activity. d. all of the above.

18. The standard view of the budget deficit is that it:

a. reduces the GDP in the long run. c. reduces the capital stock in the long run.

b. reduces investment. d. all of the above.

19. The standard view of the budget deficit is that it:

a. reduces the GDP in the long run. c. increases the capital stock in the long run.

b. increases investment. d. all of the above.

20. The standard view of the budget deficit is that it:

a. increases the GDP in the long run. c. increases the capital stock in the long run.

b. reduces investment. d. all of the above.

21. The standard view of the budget deficit is that it:

a. increases the GDP in the long run. c. reduces the capital stock in the long run.

b. increases investment. d. all of the above.

22. The standard view of the budget deficit is that a deficit:

a. does not affect the economy in the long run. c. does not affect the economy in the short run.

b. and the public debt are a burden on the economy. d. encourages economic growth.

23. Households may feel wealthier due to a tax cut, if:

a. they are very concerned about future generations. c. they are using an infinite planning horizon.

b. they expect the bonds created by the deficit to be paid off after their lifetime. d. they plan to leave a bequest to their heirs.

24. Households may feel wealthier due to a tax cut, if:

a. they are not able to borrow as much against future earnings as they wish. c. they care a lot about future generations.

b. they are not able to lend present earnings as much as they wish. d. they plan to leave a bequest to their heirs.

25. If households ignore effects on future generations, a pay as you go social security system:

a. reduces current national savings. c. reduces the future capital stock.

b. reduces investment. d. all of the above.

26. If households ignore effects on future generations, a pay as you go social security system:

a. reduces current national savings. c. raises the future capital stock.

b. raises investment. d. all of the above.

27. If households ignore effects on future generations, a pay as you go social security system:

a. raises current national savings. c. raises the future capital stock.

b. reduces investment. d. all of the above.

28. If households ignore effects on future generations, a pay as you go social security system:

a. raises current national savings. c. reduces the future capital stock.

b. raises investment. d. all of the above.

29. If households ignore effects on future generations when a pay as you go social security system starts, the then elderly:

a. have a positive income effect on their consumption. c. receive low returns on any taxes paid into the system.

b. receive benefits that in present value is less the present value of their contributions. d. all of the above.

30. If households ignore effects on future generations, when a pay as you go social security system starts, the then elderly:

a. have a negative income effect on their consumption. c. receive low returns on any taxes paid into the system.

b. receive benefits that in present value is greater than the present value of their contributions to the system. d. all of the above.

31. If households ignore effects on future generations, a pay as you go social security system:

a. increases consumption. c. reduces national saving.

b. reduces the capital stock in the long run. d. all of the above.

32. If households ignore effects on future generations, a pay as you go social security system:

a. increases consumption. c. increases national saving.

b. increases the capital stock in the long run. d. all of the above.

33. If households ignore effects on future generations, a pay as you go social security system:

a. decreases consumption. c. raises national saving.

b. reduces the capital stock in the long run. d. all of the above.

34. If households ignore effects on future generations, a pay as you go social security system:

a. decreases consumption. c. reduces national saving.

b. increases the capital stock in the long run. d. all of the above.

35. If households ignore effects on future generations, a pay as you go social security system:

a. reduces investment. c. reduces private saving.

b. reduces GDP in the long run. d. all of the above.

36. If households ignore effects on future generations, a pay as you go social security system:

a. reduces investment. c. increases private saving.

b. increases GDP in the long run. d. all of the above.

37. If households ignore effects on future generations, a pay as you go social security system:

a. raises investment. c. raises private saving.

b. reduces GDP in the long run. d. all of the above.

38. If households ignore effects on future generations, a pay as you go social security system:

a. raises investment. c. reduces private saving.

b. increases GDP in the long run. d. all of the above.

39. A pay as you go social security system only increase consumption and reduces investment, if:

a. households leave bequests. c. if the planning horizon is overlapping generations.

b. if households neglect the adverse affects on their descendants. d. households increase their savings.

40. If currently alive households take full account of the negative affects of a pay as you go social security system on their descendants, then the:

a. effects are magnified. c. effects are exponential.

b. effects are nil. d. effects are unchanged.

41. Open market operations amount to:

a. printing more money and raising taxes and lowering taxes and raising the public debt. c. printing more money and raising taxes and lowering taxes and raising the public debt.

b. printing less money and reducing taxes and raising taxes and reducing the public debt. d. printing more money and reducing taxes and raising taxes and reducing the public debt.

42. By varying its budget deficit, a government can:

a. change the timing of taxes. c. avoid accumulation of government debt.

b. avoid having to raise taxes to pay for a deficit. d. all of the above.

43. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. real GDP does not change. c. real gross investment does not change.

b. real consumption does not change. d. all of the above.

44. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. real GDP does not change. c. real gross investment falls.

b. real consumption increases. d. all of the above.

45. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. real GDP does rise. c. real gross investment rises.

b. real consumption does not change. d. all of the above.

46. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. real GDP falls. c. real gross investment does not change.

b. real consumption falls. d. all of the above.

47. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. the interest rate does not change. c. the future capital stock does not change.

b. the real wage rate does not change. d. all of the above.

48. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. the interest rate rises. c. the future capital stock does not change.

b. the real wage rate falls. d. all of the above.

49. If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a. the interest rate does not change. c. the future capital stock falls.

b. the real wage rate rises. d. all of the above.

50. If the time path of government purchases does not change and the government cuts current labor income taxes, then:

a. labor supply is shifted to the future. c. present GDP is reduced.

b. labor supply is shifted to the present. d. future GDP is increased.

51. If the time path of government purchases does not change and the government cuts current assets income taxes, then:

a. households save more and consume less in the present. c. households save less and consume more in the present.

b. households save and consume less in the present. d. households save and consume more in the present.

52. The major peaks in the ratio of public debt to GDP in the U.S. reflect

a. financing of wartime expenditures. c. major economic expansions.

b. financing of Social Security. d. major increases in technology.

53. In a business cycle recession, the debt-to-GDP ratio typically

a. falls. c. does not change.

b. rises. d. either (a) or (c).

54. In a business cycle recession, the debt-to-GDP ratio typically

a. falls because of an increase in debt. c. rises because of an increase in debt.

b. falls because of an increase in GDP. d. rises because of an increase in GDP.

55. In a business cycle recession, the debt-to-GDP ratio typically

a. falls because of an increase in debt. c. rises because of a decrease in debt.

b. falls because of an increase in GDP. d. rises because of a decrease in GDP.

56. In a business cycle expansion, the debt-to-GDP ratio typically

a. falls because of an increase in GDP. c. rises because of an increase in debt.

b. falls because of a decrease in GDP. d. rises because of a decrease in debt.

57. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public debt decreases, the government budget shows

a. an increase in the real deficit. c. a decrease in private bonds.

b. an increase in real saving. d. a decrease in printing money.

58. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public debt increases, the government’s

a. rate of money printing is greater than 50%. c. real saving is less than zero

b. real saving equals zero. d. rate of money printing is greater than zero.

59. A government budget surplus

a. is the same as the government’s real saving. c. means that government saving is positive.

b. means that government revenue exceeds its expenditure. d. all of the above.

60. Real national saving equals

a. the change in the capital stock. c. both (a) and (b).

b. net investment. d. net depreciation.

61. Real national saving is

a. the difference between government and household saving. c. both (a) and (b).

b. the sum of government and household saving. d. net depreciation.

62. An open-market operation in which the Federal Reserve purchases bonds will

a. increase the money supply and increase the price level. c. decrease the money supply and decrease real GDP.

b. decrease the money supply and increase the price level. d. decrease the money supply and increase real GDP.

63. An open-market operation in which the Federal Reserve sells bonds will

a. increase the money supply and increase the price level. c. decrease the money supply and decrease the price level.

b. decrease the money supply and increase real GDP. d. decrease the money supply and increase the price level.

64. An open-market operation in which the Federal Reserve purchases bonds will

a. decrease the money supply and increase real GDP. c. decrease the money supply and decrease real GDP.

b. increase the money supply but not change real GDP. d. increase the money supply and increase real GDP.

65. An open-market operation in which the Federal Reserve sells bonds will

a. decrease the money supply and increase real GDP. c. decrease the money supply and decrease real GDP.

b. increase the money supply and increase real GDP. d. increase the money supply but not change real GDP.

SHORT ANSWER

1. What is the government budget constraint when government borrowing is allowed?

2. What are public, private and national saving and what is the implication of real national saving?

3. What are the effects of the government lowering taxes by $1 for one period in the market clearing model with no transfer payments, the money stock fixed, no inflation and with a given time path of government purchases?

4. What is the Ricardian equivalence theorem?

5. Why might a budget deficit make households feel wealthier after a tax cut?

6. In the equillibrium business cycle model, what is the impact of an open market operation purchase by the Federal Reserve?

Chapter 15

TRUE/FALSE

1. If households misperceive prices, they may change real decisions in response to changes in the money supply in the long run.

2. If the actual price level is above the expected price level, then workers’ actual real wage will be below their expected real wage.

3. The real effect of a given monetary shock is larger the more stable the underlying monetary environment.

4. Money can only effect real variables in the short run, if people expect the increase in the money supply.

5. If monetary authorities follow a monetary rule, then monetary policy is more effective in affecting real variables like real GDP.

6. In the price-misperceptions model, market prices adjust to clear markets only very slowly.

7. In the price-misperceptions model, an increase in the price level increases the equilibrium labor input and capital services in the short- and long-run.

8. Discretionary monetary policy is more likely than a policy rule to promote a reputation for the central bank of promoting low inflation.

9. A formal provision in the law to target inflation requires secrecy about the central bank’s activities.

10. Discretionary monetary policy suffers from an incentive for the central bank to sometimes renege on its commitment to low inflation.

MULTIPLE CHOICE

1. We would expect households to have the most complete information about:

a. their own wage rate. c. products purchased occasionally like a automobile.

b. the wage rate available on other jobs. d. all of the above.

2. We would expect households to have the most complete information about:

a. the wage rate available on other jobs. c. products purchased occasionally like a automobile.

b. products they purchase frequently. d. all of the above.

3. We would expect households to have incomplete information about:

a. their own wage rate. c. products purchased occasionally like a automobile.

b. products they purchase frequently. d. all of the above.

4. We would expect households to have incomplete information about:

a. their own wage rate. c. wage rates available on other jobs.

b. products they purchase frequently. d. all of the above.

5. The workers’ perceived real wage rate is:

a. their nominal wage rate divided by the actual price level. c. their nominal wage rate divided by the expected price level.

b. the actual price level divided by their nominal wage rate. d. the expected price level divided by their nominal wage rate.

6. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then:

a. the expected real wage rate is greater than the actual real wage rate. c. the expected real wage rate is greater than the actual nominal wage rate.

b. the expected real wage rate is less than the actual real wage rate. d. the actual real wage rate is greater than the actual nominal wage rate.

7. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then expected real wage rate is:

a. $10. c. $2.50.

b. $5. d. none of the above.

8. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual real wage rate is:

a. $10. c. $2.50.

b. $5. d. none of the above.

9. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual nominal wage rate is:

a. $10. c. $2.50.

b. $5. d. none of the above.

10. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then:

a. the expected real wage rate is greater than the actual real wage rate. c. the expected real wage rate is greater than the actual nominal wage rate.

b. the expected real wage rate is less than the actual real wage rate. d. the actual real wage rate is greater than the actual nominal wage rate.

11. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4, then actual real wage rate is:

a. $10. c. $2.

b. $2.50. d. none of the above.

12. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then expected real wage rate is:

a. $10. c. $2.

b. $2.50. d. none of the above.

13. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4, then actual nominal wage rate is:

a. $10. c. $2.

b. $2.50. d. none of the above.

14. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:

a. the nominal wage is rising. c. the actual real wage is falling.

b. the expected real wage is rising. d. all of the above.

15. If the nominal wage rises from $10 per hour in period 1 to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:

a. the nominal wage is falling. c. the actual real wage is falling.

b. the expected real wage is falling. d. all of the above.

16. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:

a. the nominal wage is rising. c. the actual real wage is rising.

b. the expected real wage is falling. d. all of the above.

17. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:

a. the nominal wage is falling. c. the actual real wage is rising.

b. the expected real wage is rising. d. all of the above.

18. In the current period a perceived increase in the real wage, will cause households to:

a. work more. c. consume less leisure.

b. consume more goods. d. all of the above.

19. In the current period a perceived increase in the real wage, will cause households to:

a. work more. c. consume more leisure.

b. consume fewer goods. d. all of the above.

20. In the current period a perceived increase in the real wage, will cause households to:

a. work less. c. consume more leisure.

b. consume more goods. d. all of the above.

21. In the current period a perceived increase in the real wage, will cause households to:

a. work less. c. consume less leisure.

b. consume fewer goods. d. all of the above.

22. If the perceive real wage goes up, workers will supply more labor:

a. unless the actual real wage remains the same or falls. c. in the short run.

b. in the long run. d. all of the above.

23. If the perceive real wage goes up, real GDP increases:

a. unless the actual real wage remains the same or falls. c. in the short run.

b. in the long run. d. all of the above.

24. While price misperceptions can cause an increase labor supply and GDP in the short-run, in the long run:

a. money is neutral. c. labor supply returns to its initial position.

b. money does not affect real GDP. d. all of the above.

25. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:

a. money is no longer neutral in the model. c. labor supply returns to its initial position.

b. money negatively impacts real GDP. d. all of the above.

26. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:

a. money is neutral. c. labor supply ultimately declines.

b. money negatively affects real GDP. d. all of the above.

27. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:

a. money is no longer neutral in the model. c. labor supply falls by more than its initial increase.

b. money does not affect real GDP. d. all of the above.

28. An increase in the money supply:

a. can affect real variables temporarily in the short run. c. can affect nominal variables in the long run.

b. can not affect real variables in the long run. d. all of the above.

29. An increase in the money supply:

a. can affect real variables temporarily in the short run. c. can affect real variables in the long run.

b. can not affect nominal variables in the short run. d. all of the above.

30. An increase in the money supply:

a. can not affect real variables temporarily in the short run. c. can not affect nominal variables in the long run.

b. can not affect real variables in the long run. d. all of the above.

31. An increase in the money supply:

a. can not affect real variables temporarily in the short run. c. can affect nominal variables in the long run.

b. can affect real variables in the long run. d. all of the above.

32. An increase in the money supply and inflation can only affect real variables only:

a. if households perceive it is happening. c. in the long run.

b. if households do not perceive all of the inflation. d. if households expect it.

33. In the short run if households’ perceived money growth and inflation equals the actual money growth and inflation, then

a. money affects real variables like labor supply. c. the model is still neutral even in the short run.

b. money affects real variables like GDP. d. all of the above.

34. Monetary policy authorities can only affect the real economy, if:

a. their actions are anticipated by the public. c. their actions are fully communicated to the public.

b. their actions are consistent and predictable. d. their actions systematically fool the public.

35. A monetary shock of a given size has a larger real effect:

a. the more it is anticipated by the public. c. the more fully it is explained and communicated to the public.

b. the more stable the underlying monetary environment. d. all of the above.

36. Price misperception during a positive technology shock would cause:

a. output or GDP to rise by less than it would without price misperception. c. the expected price level to fall less than the actual price level falls.

b. labor supply to rise by less than it would without price misperception. d. all of the above.

37. Price misperception during a positive technology shock would cause:

a. output or GDP to rise by less than it would without price misperception. c. the expected price level to fall more than the actual price level falls.

b. labor supply to fall by more than it would without price misperception. d. all of the above.

38. Price misperception during a positive technology shock would cause:

a. output or GDP to fall by more than it would without price misperception. c. the expected price level to fall more than the actual price level falls.

b. labor supply to rise by less than it would without price misperception. d. all of the above.

39. Price misperception during a positive technology shock would cause:

a. output or GDP to fall by more than it would without price misperception. c. the expected price level to fall less than the actual price level falls.

b. labor supply to fall by more than it would without price misperception. d. all of the above.

40. Discretionary monetary policy is when the monetary authority:

a. does not commit to future monetary actions. c. never produces a monetary surprise to households.

b. commits to future monetary actions. d. always behaves in a predictable way.

41. A monetary policy rule is when the monetary authority:

a. does not commit to future monetary actions. c. often produces a monetary surprise to households.

b. commits to future monetary actions. d. always behaves in unpredictable ways.

42. The price misperception model predicts:

a. the price level will be procyclical while in US data the price level is countercyclical. c. the real wage is countercyclical while in US data the real wage is procyclical.

b. the nominal quantity of money is procyclical and in US data money is weakly procyclical. d. all of the above.

43. The price misperception model predicts:

a. the price level will be procyclical while in US data the price level is countercyclical. c. the real wage is procyclical and in US data the real wage is procyclical.

b. the nominal quantity of money is countercyclical while in US data money is weakly procyclical. d. all of the above.

44. The price misperception model predicts:

a. the price level will be countercyclical while in US data the price level is countercyclical. c. the real wage is procyclical and in US data the real wage is procyclical.

b. the nominal quantity of money is procyclical and in US data money is weakly procyclical. d. all of the above.

45. The price misperception model predicts:

a. the price level will be countercyclical and in US data the price level is countercyclical. c. the real wage is countercyclical while in US data the real wage is procyclical.

b. the nominal quantity of money is countercyclical while in US data money is weakly procyclical. d. all of the above.

46. Real variables can only be affected by:

a. unperceived changes in the price level. c. expected changes in the price level.

b. perceived changes in the price level. d. actual changes in the price level.

47. Monetary policy can affect real variables in the short run if monetary policy:

a. surprises households. c. is unpredictable.

b. is random. d. all of the above.

48. Monetary policy can affect real variables in the short run if monetary policy:

a. surprises households. c. is predictable.

b. is consistent. d. all of the above.

49. Monetary policy can affect real variables in the short run if monetary policy:

a. is fully explained to households. c. is predictable.

b. is random. d. all of the above.

50. Monetary policy can affect real variables in the short run if monetary policy:

a. is fully communicated to households. c. is unpredictable.

b. is consistent. d. all of the above.

51. In the price-misperceptions model, market prices of goods, wage rates, and rental prices

a. adjust rapidly to clear markets. c. give households complete information.

b. adjust slowly to clear markets. d. give households perfect information.

52. The price-misperceptions model differs from the equilibrium business cycle model in that households

a. no longer serve as providers of capital services. c. find that market-clearing prices move to equilbrium slowly.

b. sometimes misinterpret changes in nominal prices as changes in real prices. d. typically face disequilibrium because prices fail to clear markets.

53. Empirical evidence suggests that money is not always neutral, which is consistent with

a. an equilibrium business-cycle model. c. a price-misperceptions model.

b. a real business-cycle model. d. a wage-imperfections model.

54. In the price-misperceptions model, employers have

a. inaccurate information about wages and accurate information about the price of the output. c. accurate information about wages and the price of the output.

b. inaccurate information about wages and the price of the output. d. accurate information about wages and inaccurate information about the price of the output.

55. In the price-misperceptions model, workers have

a. inaccurate information about wages and accurate information about the price level. c. accurate information about wages and the price level.

b. accurate information about wages and inaccurate information about the price level. d. inaccurate information about wages and the price level.

56. In the price-misperceptions model, a rise in the real wage rate makes the demand curve for labor, in the short run, to

a. become steeper than in an equilibrium business-cycle model. c. depend about expectations about prices, not the actual price used in an equilibrium business-cycle model.

b. become less steep than in an equilibrium business-cycle model. d. remain the same as in an equilibrium business-cycle model.

57. In the price-misperceptions model, a rise in the nominal wage rate makes the supply curve of labor, in the short run,

a. shift to the right compared to an equilibrium business-cycle model. c. shift to the left compared to an equilibrium business-cycle model.

b. become less steep than in an equilibrium business-cycle model. d. remain the same as in an equilibrium business-cycle model.

58. In the price-misperceptions model, an increase in the price level in the short run,

a. lowers the quantity of labor supplied at a given real wage. c. leaves the quantity of labor supplied unchanged.

b. lowers the quantity of labor supplied at a given nominal wage. d. increases the quantity of labor supplied at a given real wage.

59. In the price-misperceptions model, an increase in the price level will, in the long run,

a. lower the quantity of labor supplied at a given real wage. c. leave the quantity of labor supplied unchanged.

b. lower the quantity of labor supplied at a given nominal wage. d. increase the quantity of labor supplied at a given real wage.

60. In the price-misperceptions model, an increase in the price level will, in the short run,

a. increase the equilibrium quantity of labor input and real GDP. c. leave the equilibrium quantity of labor input and real GDP unchanged.

b. lower the equilbirum quantity of labor input and increase real GDP. d. lower the equilibrium quantity of labor input and real GDP.

61. In the price-misperceptions model, an increase in the price level in the short-run

a. decreases the equilibrium quantity of labor input and capital services. c. leaves the equilibrium quantity of labor input and capital services unchanged.

b. increases the equilibrium quantity of labor input and capital services. d. increases the equilibrium quantity of labor input and decreases the equilibrium quantity of capital services.

62. In the price-misperceptions model, an increase in the price level in the long-run

a. decreases the equilibrium quantity of labor input and capital services. c. increases the equilibrium quantity of labor input and decreases the equilibrium quantity of capital services.

b. increases the equilibrium quantity of labor input and capital services. d. leaves the equilibrium quantity of labor input and capital services unchanged.

63. The Lucas hypothesis on monetary shocks says that the real effect of a given size monetary shock is

a. larger, the more stable the underlying monetary environment. c. larger, the less stable the underlying monetary environment.

b. smaller, the more stable the underlying monetary environment. d. independent of the stability of the underlying moentary environment.

64. Empirical evidence shows that, for countries such as the U.S., a monetary shock has

a. little or no relation to real GDP. c. little or no relation to nominal GDP.

b. a significant positive relation to real GDP. d. a signficant negative relation to real GDP.

65. In the price-misperception model, money is

a. endogenous, just as it is in the equilibrium business-cycle model. c. exogenous, but it is endogenous in the equilibrium business-cycle model.

b. exogenous, just as it is in the equilibrium business-cycle model. d. endogenous, but it is exogenous in the equilibrium business-cycle model.

66. Friedman and Schwartz’s Monetary History concludes that the procyclical pattern for money

a. does not exist in historical data for the U.S. from 1867 to 1960. c. cannot be explained entirely by endogenous money.

b. can only be explained during the times the U.S. used a commodity money. d. can be explained entirely by exogenous money.

67. One reason for preferring a rule for monetary policy is that a rule

a. allows for additional discretionary policy. c. ensures that the economy would have a negative rate of inflation.

b. ensures that the economy would have a positive rate of inflation. d. improves the credibility of the monetary authority.

68. Which of the following is likely to promote low and stable inflation?

a. inflation targeting c. a large benefit from temporarily reneging on a stated policy

b. discretionary monetary policy d. none of the above

SHORT ANSWER

1. On what types of prices do households have the best information and on what types of products may they have incomplete information?

2. What are the short run effects of a real wage misperception in the market clearing model?

3. Why even with the possibility of real wage misperceptions is the market clearing model still neutral in the long run?

4. Under what conditions do monetary policy changes have the larger real effects on an economy?

5. What is the difference between discretionary monetary policy and monetary policy under a policy rule?

6. Why might a monetary-policy rule be more likely than discretionary policy to promote low inflation?

#ECO 302 Week 9 Quiz - Strayer

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ECO 305 Week 9 Quiz – Strayer

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Quiz 8 Chapter 12 and 13

EXCHANGE-RATE DETERMINATION

MULTIPLE CHOICE

1. The relationship between the exchange rate and the prices of tradable goods is known as the:

a. Purchasing-power-parity theory

b. Asset-markets theory

c. Monetary theory

d. Balance-of-payments theory

2. If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals:

a. 20 pounds

b. 40 pounds

c. 60 pounds

d. 80 pounds

3. Low real interest rates in the United States tend to:

a. Decrease the demand for dollars, causing the dollar to depreciate

b. Decrease the demand for dollars, causing the dollar to appreciate

c. Increase the demand for dollars, causing the dollar to depreciate

d. Increase the demand for dollars, causing the dollar to appreciate

4. High real interest rates in the United States tend to:

a. Decrease the demand for dollars, causing the dollar to depreciate

b. Decrease the demand for dollars, causing the dollar to appreciate

c. Increase the demand for dollars, causing the dollar to depreciate

d. Increase the demand for dollars, causing the dollar to appreciate

5. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to:

a. Appreciate by 8 percent against the yen

b. Depreciate by 8 percent against the yen

c. Remain at its existing exchange rate

d. None of the above

6. In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if a VCR costs $400 in the United States, then in Great Britain the VCR should cost:

a. 200 pounds

b. 400 pounds

c. 600 pounds

d. 800 pounds

7. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be:

a. $.50 per pound

b. $1.00 per pound

c. $2.00 per pound

d. $8.00 per pound

8. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is:

a. Large trade surpluses for the United States

b. Relatively high inflation rates in the United States

c. Lack of investor confidence in the U.S. monetary policy

d. Relatively high interest rates in the United States

9. The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by:

a. Additional investment funds made available from overseas

b. Lack of investor confidence in U.S. fiscal policy

c. Market expectations of rising inflation in the United States

d. American tourists overseas finding costs increasing

10. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:

a. An excess demand for that currency exists in the foreign exchange market

b. An excess supply of that currency exists in the foreign exchange market

c. The demand for foreign exchange shifts outward to the right

d. The demand for foreign exchange shifts backward to the left

11. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:

a. An excess supply of that currency exists in the foreign exchange market

b. An excess demand for that currency exists in the foreign exchange market

c. The supply of foreign exchange shifts outward to the right

d. The supply of foreign exchange shifts backward to the left

12. The appreciation in the value of the dollar in the early 1980s is explained by all of the following except:

a. The United States being considered a safe haven by foreign investors

b. Relatively high real interest rates in the United States

c. Confidence of foreign investors in the U.S. economy

d. Relatively high inflation rates in the United States

13. Suppose Mexico and the United States were the only two countries in the world. There exists an excess supply of pesos on the foreign exchange market. This suggests that:

a. Mexico's current account is in surplus

b. Mexico's current account is in deficit

c. The U.S. current account is in deficit

d. The U.S. current account is in equilibrium

14. If Canada runs a trade surplus with Mexico and exchange rates are floating:

a. The peso will depreciate relative to the dollar

b. The dollar will depreciate relative to the peso

c. The prices of all foreign goods will fall for Canadians

d. The prices of all foreign goods will rise for Canadians

15. If Mexico's labor productivity rises relative to Europe's labor productivity:

a. The peso tends to depreciate against the euro in the short run

b. The peso tends to appreciate against the euro in the short run

c. The peso tends to depreciate against the euro in the long run

d. The peso tends to appreciate against the euro in the long run

16. The international exchange value of the U.S. dollar is determined by:

a. The rate of inflation in the United States

b. The number of dollars printed by the U.S. government

c. The international demand and supply for dollars

d. The monetary value of gold held at Fort Knox, Kentucky

17. For the United States, suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent. These variables would cause investment funds to flow from:

a. The United States to Japan, causing the dollar to depreciate

b. The United States to Japan, causing the dollar to appreciate

c. Japan to the United States, causing the yen to depreciate

d. Japan to the United States, causing the yen to appreciate

18. For the United States, suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent. For Japan, suppose the annual interest rate equals 5 percent. These variables would cause investment funds to flow from:

a. The United States to Japan, causing the dollar to depreciate

b. The United States to Japan, causing the dollar to appreciate

c. Japan to the United States, causing the yen to depreciate

d. Japan to the United States, causing the yen to appreciate

19. Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger:

a. An increase in the demand for imports and an increase in the demand for foreign currency

b. An increase in the demand for imports and a decrease in the demand for foreign currency

c. A decrease in the demand for imports and an increase in the demand for foreign currency

d. A decrease in the demand for imports and a decrease in the demand for foreign currency

20. Given a system of floating exchange rates, weaker U.S. preferences for imports would trigger:

a. An increase in the demand for imports and an increase in the demand for foreign currency

b. An increase in the demand for imports and a decrease in the demand for foreign currency

c. A decrease in the demand for imports and an increase in the demand for foreign currency

d. A decrease in the demand for imports and a decrease in the demand for foreign currency

21. Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in:

a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar

b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar

d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

22. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in:

a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar

b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar

d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

23. Which example of market expectations causes the dollar to appreciate against the yen--expectations that the U.S. economy will have:

a. Faster economic growth than Japan

b. Higher future interest rates than Japan

c. More rapid money supply growth than Japan

d. Higher inflation rates than Japan

24. Which example of market expectations causes the dollar to depreciate against the yen--expectations that the U.S. economy will have:

a. Faster economic growth than Japan

b. Higher future interest rates than Japan

c. Less rapid money supply growth than Japan

d. Lower inflation rates than Japan

25. For an American investor, the expected rate of return on European securities depends on all of the following factors except the:

a. Rate of return on equivalent American securities

b. The current exchange rate between the dollar and the pound

c. Exchange rate anticipated to prevail when the securities mature

d. Interest rate paid on European securities

26. Which of the following is likely to result in long-run depreciation of the U.S. dollar relative to the euro?

a. Relatively low interest rates in the United States

b. �� Relatively high labor productivity in the United States

c. Tariffs levied by the United States on steel imports from Europe

d. Stronger American preferences for goods produced in Europe

27. Which of the following is likely to result in long-run appreciation of the U.S. dollar relative to the peso?

a. Relatively high interest rates in Mexico

b. Relatively high labor productivity in Mexico

c. Tariffs applied by Mexico on computer imports from the United States

d. Stronger Mexican preferences for goods produced in the United States

28. Long-run determinants of the dollar's exchange value include all of the following except:

a. Preferences of Americans for foreign produced goods

b. U.S. tariffs placed on imports of foreign produced goods

c. Productivity of the American worker

d. Interest rates in U.S. financial markets

29. Which theory of exchange-rate determination best views the foreign exchange market as being similar to a stock exchange where future expectations are important and prices are volatile?

a. Balance-of-payments approach

b. Purchasing-power-parity approach

c. Asset-markets approach

d. Monetary approach

30. According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-power parity if it depreciates by an amount equal to the excess of:

a. U.S. interest rates over foreign interest rates

b. Foreign interest rates over U.S. interest rates

c. U.S. inflation over foreign inflation

d. Foreign inflation over U.S. inflation

31. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.

a. Overshoot

b. Undershoot

c. Depreciate

d. Appreciate

32. Concerning exchange rate forecasting, ____ is a common sense approach based on a wide array of political and economic data.

a. Econometric analysis

b. Technical analysis

c. Judgmental analysis

d. Sunspot analysis

33. Concerning exchange rate forecasting, ____ involves the use of historical exchange rate data to estimate future values, while ignoring the economic determinants of exchange rate movements.

a. Econometric analysis

b. Judgmental analysis

c. Technical analysis

d. Sunspot analysis

34. Concerning exchange rate forecasting, ____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.

a. Fundamental analysis

b. Technical analysis

c. Judgmental analysis

d. Sunspot analysis

35. Concerning exchange-rate determination, "market fundamentals" include all of the following except:

a. Monetary policy and fiscal policy

b. Profitability and riskiness of investments

c. Speculative opinion about future exchange rates

d. Productivity changes affecting production costs

36. In the short run, exchange rates respond to market forces such as:

a. Inflation rates

b. Expectations of future exchange rates

c. Investment profitability

d. Government trade policy

37. Long-run exchange rate movements are governed by all of the following except:

a. National productivity levels

b. Consumer tastes and preferences

c. Rates of inflation

d. Interest rate levels

38. Exchange rate determination in the short run is underlied by which of the following assumptions:

a. Tariffs and quotas affect trade patterns only in the short run

b. Prices of goods and services affect trade patterns only in the short run

c. Expected returns on financial assets affect investment flows in the short run

d. Preferences for goods and services affect trade flows only in the short run

39. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the:

a. Monetary approach to exchange-rate determination

b. Law of one price

c. Fundamentalist approach to exchange-rate determination

d. Exchange-rate-overshooting principle

40. The Canadian dollar would depreciate on the foreign exchange market if:

a. Canadian consumer tastes change in favor of goods produced domestically

b. The profitability of assets in Canada rises relative to the profitability of assets abroad

c. Canada experiences a disastrous wheat-crop failure, leading to imports of more wheat

d. Canada realizes technological improvements in the production of manufactured goods, leading to relatively low costs for Canada

41. The demand in the United States for yen will increase if, other things remaining equal:

a. Labor costs rise in Japan

b. Income rises in Japan

c. Prices rise in Japan

d. Interest rates rise in Japan

42. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal:

a. Preferences for imports rise in Canada

b. Labor productivity increases in Canada

c. Prices of goods and services decrease in Canada

d. Import tariffs rise in Canada

43. The U.S. demand for pesos would shift to the right if there occurred a (an):

a. Change in preferences toward U.S. manufactured goods

b. Increase in the dollar/peso exchange rate

c. Decrease in the U.S. population

d. Increase in the U.S. price level

44. The supply of francs, would shift to the right for all of the following reasons except:

a. An increase in Swiss real income

b. An increase in Swiss prices

c. An increase in the Swiss population

d. An increase in Swiss interest rates

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates.

Figure 12.1 The Market for Francs

45. Refer to Figure 12.1. Should preferences for imports rise in the United States and fall in Switzerland, there would occur a (an):

a. Increase in the demand for francs--decrease in the supply of francs-depreciation of the dollar

b. Increase in the demand for francs--decrease in the supply of francs-appreciation of the dollar

c. Decrease in the demand for francs--decrease in the supply of francs-appreciation of the dollar

d. Decrease in the demand for francs--increase in the supply of francs-depreciation of the dollar

46. Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a (an):

a. Increase in the demand for francs--decrease in the supply of francs-depreciation of the dollar

b. Increase in the demand for francs--decrease in the supply of francs-appreciation of the dollar

c. Decrease in the demand for francs--increase in the supply of francs-appreciation of the dollar

d. Decrease in the demand for francs--decrease in the supply of francs-depreciation of the dollar

47. Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would occur a (an):

a. Increase in the demand for francs--increase in the supply of francs-appreciation of the dollar

b. Decrease in the demand for francs--decrease in the supply of francs-depreciation of the dollar

c. Increase in the supply of francs--decrease in the demand for francs-appreciation of the dollar

d. Decrease in the supply of francs--increase in the demand for francs-depreciation of the dollar

48. Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a (an):

a. Increase in the demand for francs and a depreciation of the dollar

b. Decrease in the demand for francs and an appreciation of the dollar

c. Decrease in the supply of francs and an appreciation of the dollar

d. Increase in the supply of francs and a depreciation of the dollar

49. Refer to Figure 12.1. Should Swiss labor productivity rise, leading to a decrease in Swiss manufacturing costs, there would occur a (an):

a. Increase in the supply of francs and a depreciation of the dollar

b. Increase in the supply of francs and an appreciation of the dollar

c. Decrease in the demand for francs and an appreciation of the dollar

d. Increase in the demand for francs and a depreciation of the dollar

50. Refer to Figure 12.1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an:

a. Increase in the supply of francs and an appreciation of the dollar

b. Increase in the supply of francs and a depreciation of the dollar

c. Increase in the demand for francs and a depreciation of the dollar

d. Increase in the demand for francs and an appreciation of the dollar

51. Given floating exchange rates, if Japan increases its demand for Canadian goods at the same time that Canada increases its demand for Japanese goods, then we would expect the yen's exchange value to:

a. Appreciate against the dollar

b. Depreciate against the dollar

c. Remain constant against the dollar

d. Appreciate, depreciate, or remain constant against the dollar

52. Given floating exchange rates, assume that the Swiss decrease their import purchases from Italy while at the same time the Italians increase their purchases of Swiss government securities. The first action by itself would lead to a (an) ____ of the franc against the lira while the second action by itself would lead to a (an) ____ of the franc against the lira.

a. Appreciation, appreciation

b. Depreciation, depreciation

c. Appreciation, depreciation

d. Depreciation, appreciation

53. Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):

a. Appreciation of the pound against the dollar

b. Depreciation of the pound against the dollar

c. Unchanged pound/dollar exchange rate

d. None of the above

54. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in Japan is in excess of domestic investment needs. If Japanese residents invest abroad, the yen's exchange value will ____ and the Japanese trade balance will move toward ____.

a. Appreciate, deficit

b. Appreciate, surplus

c. Depreciate, deficit

d. Depreciate, surplus

55. Given a system of floating exchange rates, assume that Boeing Inc. of the United States places a large order, payable in yen, with a Japanese contractor for jet engine parts. The immediate effect of this transaction will be a shift in the:

a. Supply curve of yen to the left which causes the dollar to appreciate against the yen

b. Supply curve of yen to the right which causes the dollar to depreciate against the yen

c. Demand curve for yen to the left which causes the dollar to appreciate against the yen

d. Demand curve for yen to the right which causes the dollar to depreciate against the yen

56. For purchasing-power parity to exist:

a. Flows of currency in the trade account must be offset by flows of currency in the capital account

b. The nominal interest rate must be equal to the real interest rate in all countries

c. Converting a sum of funds from one currency to another does not alter its purchasing power

d. A country's trade account must always be in balance

57. Assume that interest rates in the United States and Britain are the same. If a U.S. resident anticipates that the exchange value of the dollar is going to appreciate against the pound, she should:

a. Borrow needed funds from British banks rather than U.S. banks

b. Borrow needed funds from U.S. banks rather than British banks

c. Convert U.S. dollars into British pounds

d. Any of the above

58. Given a system of floating exchange rates, if Canada's labor productivity rises relative to the labor productivity of its trading partners:

a. Canadian imports will fall and the dollar will appreciate

b. Canadian imports will fall and the dollar will depreciate

c. Canadian imports will rise and the dollar will appreciate

d. Canadian imports will rise and the dollar will depreciate

59. Assume that labor productivity growth is slower in the United States than in its trading partners. Given a system of floating exchange rates, the impact of this growth differential for the United States will be:

a. Increased exports and an appreciation of the dollar

b. Increased exports and a depreciation of the dollar

c. Increased imports and an appreciation of the dollar

d. Increased imports and a depreciation of the dollar

60. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become

a. 72 yen per dollar

b. 81 yen per dollar

c. 99 yen per dollar

d. 108 yen per dollar

61. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, the exchange rate will become:

a. 72 yen per dollar

b. 81 yen per dollar

c. 99 yen per dollar

d. 108 yen per dollar

62. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, the exchange rate will become:

a. 72 yen per dollar

b. 81 yen per dollar

c. 99 yen per dollar

d. 108 yen per dollar

63. Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. One can say that the:

a. Yen has appreciated against the dollar and the dollar has depreciated against the yen

b. Yen has depreciated against the dollar and the dollar has appreciated against the yen

c. Yen has appreciated against the dollar and the dollar has appreciated against the yen

d. Yen has depreciated against the dollar and the dollar has depreciated against the yen

64. Given a floating exchange rate system an increase in ____ would cause the dollar to appreciate against the euro.

a. U.S. labor costs

b. The U.S. money supply

c. U.S. prices of goods

d. U.S. real interest rates

65. Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a (an):

a. Rise in the dollar price of the yen

b. Fall in the dollar price of the yen

c. Rise in the yen price of the dollar

d. Unchanged dollar/yen exchange rate

66. When deciding between U.S. and British government securities, an American investor typically considers:

a. U.S. and British interest rates and anticipated changes in the exchange rate

b. Budget deficits of the U.S. government and British government

c. Shifts in the demand for U.S. goods and British goods

d. U.S. and British inflation rates and anticipated changes in the exchange rate

67. In the long run, exchange rates are primarily determined by:

a. Agreements among governments of the world's industrial countries

b. Relative interest rates in developing countries and industrial countries

c. Economic fundamentals such as relative productivity levels

d. The rate at which country's currencies exchange for gold

68. Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____.

a. Appreciate, long run

b. Depreciate, long run

c. Appreciate, short run

d. Depreciate, short run

69. Lower tariffs on U.S. agricultural imports cause the dollar to ____ in the ____.

a. Appreciate, long run

b. Depreciate, long run

c. Appreciate, short run

d. Depreciate, short run

70. Relatively high interest rates in the United States causes the dollar to ____ in the ____.

a. Appreciate, long run

b. Depreciate, long run

c. Appreciate, short run

d. Depreciate, short run

71. The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is:

a. Expected return on these assets relative to one another

b. Ability of these assets to easily be converted into cash

c. Riskiness of these assets relative to one another

d. Level of government restrictions on trade and investment flows

72. With floating exchange rates, easy credit and low short term interest rates lead to

a. Exchange rate depreciation in the short run

b. Exchange rate appreciation in the short run

c. Exchange rate depreciation in the long run

d. Exchange rate appreciation in the long run

73. With floating exchange rates, relatively high productivity growth for a nation leads to

a. Exchange rate depreciation in the short run

b. Exchange rate appreciation in the short run

c. Exchange rate depreciation in the long run

d. Exchange rate appreciation in the long run

74. All of the following are important long-run determinants of exchange rates except

a. Consumer tastes

b. Trade policy

c. Labor productivity

d. Interest rates

75. The purchasing-power parity theory suffers from the problem

a. Of choosing the appropriate price index

b. That it overlooks the influence of capital flows

c. That government policy may modify exchange rates

d. All of the above

TRUE/FALSE

1. In a free market, exchange rates are determined by market fundamentals and market expectations.

2. Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.

3. Market expectations include news about market fundamentals, speculative opinion about future exchange rates, and profitability and riskiness of investments.

4. In a free market, the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.

5. Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as central banks do not intervene in the foreign exchange markets.

6. Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.

Figure 12.2. The Market for Swiss Francs

7. Refer to Figure 12.2. If the United States decreases tariffs on imports from Switzerland, there would occur a decrease in the demand for francs and a decrease in the dollar price of the franc.

8. Refer to Figure 12.2. If Swiss manufacturing costs increase relative to those of the United States, there would occur an increase in the supply of francs and an appreciation in the dollar's exchange value.

9. Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, the demand for francs would decrease, the supply of francs would increase, and the dollar's exchange value would appreciate.

10. Refer to Figure 12.2. As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value.

11. Refer to Figure 12.2. If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, the demand for francs decreases, the supply of francs increases, and the dollar's exchange value appreciates.

12. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real interest rates and shifting expectations of future exchange rates.

13. Day-to-day influences on foreign exchange rates always cause rates to move in the same direction as changes in long-term market fundamentals.

14. With floating exchange rates, a country experiencing faster economic growth than its trading partners find its currency's exchange value appreciating.

15. If U.S. labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum, the dollar will depreciate against the franc under a system of floating exchange rates.

16. In 1985 and 1986 U.S. interest rates fell relative to interest rates in Japan. Under floating exchange rates, this would lead to the dollar's exchange value depreciating against the yen.

17. A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.

18. Economies with relatively high growth rates in labor productivity tend to find their currencies' exchange values appreciating under a floating exchange-rate system.

19. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency's exchange value while relatively high domestic interest rates lead to currency appreciation.

20. Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent. With floating exchange rates, the dollar would appreciate against the franc.

21. The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.

22. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers.

23. The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, the dollar's exchange value will appreciate by 4 percent against the yen.

24. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S. inflation rate is 2 percent and the Japanese inflation rate is 7 percent, the exchange rate should move to 105 yen per dollar according to the purchasing-power-parity theory.

25. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S. inflation rate is 8 percent and the U.K. inflation rate is 3 percent, the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

26. If consumer tastes in the United States change in favor of goods produced in France, the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.

27. As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

28. If the United States experiences an enormous wheat crop failure, it will have to import more wheat and the dollar's exchange value will depreciate under a system of floating exchange rates.

29. If Japan realizes technological improvements in the production of automobiles, which lowers its production costs relative to foreign producers, Japanese exports will rise and the yen's exchange value will appreciate under a system of floating exchange rates.

30. If Mexico applies tariffs to imports of manufactured goods, Mexico's demand for foreign exchange will rise and the peso will depreciate under a system of floating exchange rates.

31. According to the "Big Mac" index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25), the Danish krone is an undervalued currency.

32. According to the "Big Mac" index, if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent to $1.91), the baht is an undervalued currency.

33. Long-run determinants of exchange rate include labor productivity levels, inflation rates, consumer preferences for goods and services, and trade barriers.

34. In the short run, exchange rates are primarily determined by investor expectations of returns on assets such as government securities and bank accounts.

35. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.

36. If it is widely expected that the British economy will experience more rapid inflation than the Australian economy, the pound will depreciate against the dollar under a system of floating exchange rates.

37. According to the asset-markets approach, adjustments among financial assets are a key determinant of long-run movements in exchange rates.

38. The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are volatile and expectations are important.

39. According to the principle of exchange-rate overshooting, a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

40. Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short run than in the long run.

41. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period.

42. Concerning exchange rate forecasting, fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

43. Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

44. Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates.

45. Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

46. A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the pound's spot rate.

47. A forward discount on Mexico's peso serves as a rough benchmark of the expected appreciation in the peso's spot rate.

48. If you were considering hiring a forecasting firm to predict future spot rates of the yen, you would hope that the firm could predict better what would be implied by the yen's forward rate.

49. Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actually occurring.

50. If real interest rates decline in the United States relative to real interest rates abroad, the dollar's exchange value will appreciate under a floating exchange-rate system.

SHORT ANSWER

1. What is the purchasing power parity approach to exchange rate determination?

2. What is exchange rate overshooting?

ESSAY

1. In a free market, what determines exchange rates in the long run and the short run?

2. What is the asset market approach to exchange rate determination?

CHAPTER 13—BALANCE-OF-PAYMENTS ADJUSTMENTS

MULTIPLE CHOICE

1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

a. Domestic income

b. Foreign prices

c. Domestic prices

d. Foreign par values

2. The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:

a. Income-adjustment mechanism

b. Flexible-exchange-rate-adjustment mechanism

c. Price-adjustment mechanism

d. Rank-reserve-adjustment mechanism

3. Which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism?

a. Increasing money supply--increasing domestic prices--rising imports--falling exports

b. Increasing money supply--falling domestic prices--rising imports--falling exports

c. Decreasing money supply--increasing domestic prices--falling imports--rising exports

d. Decreasing money supply--decreasing domestic prices--falling imports--rising exports

4. Which chain of events would promote payments equilibrium for a deficit nation, according to the price-adjustment mechanism?

a. Increasing money supply--increasing domestic prices--rising imports--falling exports

b. Increasing money supply--falling domestic prices--rising imports--falling exports

c. Decreasing money supply--increasing domestic prices--falling imports--rising exports

d. Decreasing money supply--decreasing domestic prices--falling imports--rising exports

5. During the gold standard era, central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism. Which of the following best represents the above statement?

a. Income-adjustment mechanism

b. Price-adjustment mechanism

c. Rules of the game

d. Discretionary fiscal policy

6. During the gold standard era, the "rules of the game" suggested that:

a. Surplus countries should increase their money supplies

b. Deficit countries should increase their money supplies

c. Surplus and deficit countries should increase their money supplies

d. Surplus and deficit countries should decrease their money supplies

7. Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?

a. Income-adjustment mechanism

b. Price-adjustment mechanism

c. Interest-rate-adjustment mechanism

d. Output-adjustment mechanism

8. Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

a. Rise in its interest rate and a short-term financial inflow

b. Rise in its interest rate and a short-term financial outflow

c. Fall in its interest rate and a short-term financial inflow

d. Fall in its interest rate and a short-term financial outflow

9. Under the gold standard, a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:

a. Rise in its interest rate and a short-term financial inflow

b. Rise in its interest rate and a short-term financial outflow

c. Fall in its interest rate and a short-term financial inflow

d. Fall in its interest rate and a short-term financial outflow

10. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates increase to levels higher than those abroad. For Canada, this tends to promote:

a. Net financial inflows

b. Net financial outflows

c. Net merchandise exports

d. Net merchandise imports

11. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates fall to levels below those abroad. For Canada, this tends to promote:

a. Net financial inflows

b. Net financial outflows

c. Net merchandise exports

d. Net merchandise imports

12. Suppose the United States levies an interest equalization tax, which taxes Americans on dividend and interest income from foreign securities. Such a tax would be intended to:

a. Encourage financial movements from the United States to overseas

b. Discourage financial movements from the United States to overseas

c. Discourage financial movements from overseas to the United States

d. None of the above

13. Assume that interest rates on comparable securities are identical in the United States and foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will appreciate against foreign currencies. Investment funds would thus be expected to:

a. Flow from the United States to foreign countries

b. Flow from foreign countries to the United States

c. Remain totally in foreign countries

d. Not be affected by the expected dollar appreciation

14. Suppose Japan increases its imports from Sweden, leading to a rise in Sweden's exports and income level. With a higher income level, Sweden imports more goods from Japan. Thus a change in imports in Japan results in a feedback effect on its exports. This process is best referred to as the:

a. Monetary approach to balance-of-payments adjustment

b. Discretionary income adjustment process

c. Foreign repercussion effect

d. Price-specie flow mechanism

Exhibit 13.1

Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.

15. Refer to Exhibit 13.1. The value of the multiplier for the United States equals:

a. 2

b. 3

c. 4

d. 5

16. Refer to Exhibit 13.1. The change in the level of U.S. income resulting from the additional investment spending equals

a. $20 billion

b. $30 billion

c. $40 billion

d. $50 billion

17. Refer to Exhibit 13.1. The change in the level of U.S. imports resulting from the rise in U.S. income equals:

a. $5 billion

b. $10 billion

c. $15 billion

d. $20 billion

18. The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:

a. Too high interest rates in the home country

b. Too low interest rates in the home country

c. Excess money supply over money demand in the home country

d. Excess money demand over money supply in the home country

19. The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:

a. Too high interest rates in the home country

b. Too low interest rates in the home country

c. Excess money supply over money demand in the home country

d. Excess money demand over money supply in the home country

20. Starting from a position where the nation's money demand equals the money supply, and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation a:

a. Decrease in the money supply

b. Increase in the money demand

c. Decrease in the money demand

d. None of the above

21. Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?

a. Absorption approach

b. Elasticities approach

c. Monetary approach

d. Purchasing-power-parity approach

22. According to the "rules of the game" of the gold standard era, a country's central bank agreed to react to international gold flows so as to:

a. Officially devalue a currency during eras of payments surpluses

b. Officially revalue a currency during eras of payments deficits

c. Offset the automatic-adjustment mechanism (e.g., prices)

d. Reinforce the automatic-adjustment mechanism

23. According to the quantity theory of money, a change in the domestic money supply will bring about:

a. Inverse and proportionate changes in the price level

b. Inverse and less-than-proportionate changes in the price level

c. Direct and proportionate changes in the price level

d. Direct and less-than-proportionate changes in the price level

24. The formulation of the so-called income adjustment mechanism is associated with:

a. Adam Smith

b. David Ricardo

c. David Hume

d. John Maynard Keynes

25. The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:

a. Save plus import

b. Import plus invest

c. Consume plus export

d. Save plus import

26. Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation:

a. An increase in the money supply

b. A decrease in the money supply

c. An increase in money demand

d. None of the above

27. Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:

a. A decrease in the money supply

b. An increase in the money supply

c. A decrease in the money demand

d. None of the above

28. Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:

a. An increase in the money demand

b. A decrease in the money demand

c. An increase in the money supply

d. None of the above

29. Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to:

a. Flow from the United States to foreign countries

b. Flow from foreign countries to the United States

c. Remain totally in foreign countries

d. Remain totally in the United States

30. Suppose that rising U.S. income leads to higher sales and profits in the United States. This would likely result in:

a. Increasing portfolio investment into the United States

b. Decreasing portfolio investment into the United States

c. Increasing direct investment into the United States

d. Decreasing direct investment into the United States

Figure 13.1. U.S. Capital and Financial Account

31. Refer to Figure 13.1. Upward movements along U.S. capital and financial account schedule CA0 would be caused by:

a. U.S. interest rates rising relative to foreign interest rates

b. U.S. interest rates falling relative to foreign interest rates

c. Taxes placed on income earned by U.S. residents from their foreign investments

d. Taxes placed on income earned by foreign residents from their U.S. investments

32. Refer to Figure 13.1. Downward movements along U.S. capital and financial account schedule CA0 would be caused by:

a. U.S. interest rates rising relative to foreign interest rates

b. U.S. interest rates falling relative to foreign interest rates

c. Taxes placed on income earned by U.S. residents from their foreign investments

d. Taxes placed on income earned by foreign residents from their U.S. investments

33. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:

a. U.S. interest rates exceeded foreign interest rates

b. Foreign interest rates exceeded U.S. interest rates

c. Taxes were placed on income earned by U.S. residents from their foreign investments

d. Taxes were placed on income earned by foreign residents from their U.S. investments

34. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:

a. U.S. residents receive subsidies to invest in foreign nations

b. U.S. interest rates rise relative to foreign interest rates

c. Taxes are reduced on income earned by U.S. residents from their foreign investments

d. Expected profits decline on U.S. investments in foreign manufacturing

35. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 for all of the following reasons except:

a. U.S. political stability improves relative to foreign political stability

b. U.S. interest rates fall relative to foreign interest rates

c. Taxes are placed on income earned by U.S. residents from foreign investments

d. Restrictions are imposed on foreign loans granted by U.S. banks

36. Refer to Figure 13.1. U.S. capital and financial account schedule CA0 would shift upwards, or downwards, for all of the following reasons except:

a. U.S. residents being taxed on income earned from foreign investments

b. U.S. banks being restricted on loans that can be made abroad

c. U.S. political stability changing relative to foreign political stability

d. U.S. interest rates changing relative to foreign interest rates

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates

Export Function X = 3000

Investment Function I = 1000

Saving Function S = -1000 + 0.2Y

Import Function M = 500 + 0.25Y

37. Referring to Table 13.1, if Canada's income rises by $200 billion, saving would rise by:

a. $10 billion

b. $20 billion

c. $30 billion

d. $40 billion

38. Referring to Table 13.1, if Canada's income rises by $200 billion, imports would rise by:

a. $50 billion

b. $75 billion

c. $100 billion

d. $125 billion

39. Referring to Table 13.1, Canada's foreign trade multiplier equals:

a. 1.75

b. 2.05

c. 2.22

d. 2.64

40. Referring to Table 13.1, Canada's equilibrium level of income is:

a. $8000 billion

b. $9000 billion

c. $10,000 billion

d. $11,000 billion

41. Refer to Table 13.1. If improved business optimism leads to increases in Canada's planned investment spending from $1000 billion to $1200 billion, Canada's equilibrium income rises by approximately:

a. $444 billion

b. $555 billion

c. $666 billion

d. $777 billion

42. Refer to Table 13.1. If weak economic conditions abroad result in Canada's exports falling from $3000 billion to $2500 billion, Canada's equilibrium income falls by approximately:

a. $888 billion

b. $990 billion

c. $1110 billion

d. $1220 billion

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

43. Refer to Figure 13.2. The slope of the (X-M) schedule and (S-I) schedule indicates that Australia's foreign trade multiplier is:

a. 0.5

b. 1.0

c. 1.5

d. 2.0

44. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, surplus of $2.5 billion

b. Rises to $60 billion, surplus of $5 billion

c. Falls to $40 billion, deficit of $2.5 billion

d. Falls to $40 billion, deficit of $5 billion

45. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S- I)0 intersects (X-M)0, suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, surplus of $2.5 billion

b. Rises to $60 billion, surplus of $5 billion

c. Falls to $40 billion, deficit of $2.5 billion

d. Falls to $40 billion, deficit of $5 billion

46. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, deficit of $2.5 billion

b. Rises to $60 billion, deficit of $5 billion

c. Falls to $40 billion, surplus of $2.5 billion

d. Falls to $40 billion, surplus of $5 billion

47. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, deficit of $2.5 billion

b. Rises to $60 billion, deficit of $5 billion

c. Falls to $40 billion, surplus of $2.5 billion

d. Falls to $40 billion, surplus of $5 billion

48. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that increased thriftiness leads to an autonomous increase in Australian saving of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, deficit of $2.5 billion

b. Rises to $60 billion, deficit of $5 billion

c. Falls to $40 billion, surplus of $2.5 billion

d. Falls to $40 billion, surplus of $5 billion

49. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, deficit of $2.5 billion

b. Rises to $60 billion, deficit of $5 billion

c. Falls to $40 billion, surplus of $2.5 billion

d. Falls to $40 billion, surplus of $5 billion

50. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, surplus of $2.5 billion

b. Rises to $60 billion, surplus of $5 billion

c. Falls to $40 billion, deficit of $2.5 billion

d. Falls to $40 billion, deficit of $5 billion

51. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous decrease in Australian imports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

a. Rises to $60 billion, surplus of $2.5 billion

b. Rises to $60 billion, surplus of $5 billion

c. Falls to $40 billion, deficit of $2.5 billion

d. Falls to $40 billion, deficit of $5 billion

52. In explaining balance-of-payments adjustments, the classical economists

a. Focused on interest rates exclusively

b. Remained aware of the role of interest rates

c. Only focused their attention on short-term interest rates

d. Paid exclusive attention to long-tem interest rates

53. J. M. Keynes suggested that a trade deficit nation

a. Would experience a fall in income

b. Would experience a decline in imports

c. Would require active intervention by the government

d. Both a and b

54. The classical gold standard

a. Existed from early 1800's to early 1900's

b. Did not allow for imports and exports of gold

c. Led to the outflow of gold from surplus nations

d. Led to the inflow of gold to deficit nations

55. The classical economists assumed

a. That the volume of final output is fixed at the full-employment level in the long-run

b. The velocity of money is constant

c. The velocity of money depends on physical, structural, and institutional factors

d. All of the above

TRUE/FALSE

1. Under a fixed exchange rate system, adjustment mechanisms work for the automatic return to current-account balance after the initial balance has been disrupted.

2. When a country's current account moves into disequilibrium, automatic adjustments in tariffs and quotas occur which move the current account back into equilibrium.

3. Prices, interest rates, and income are the automatic adjustment variables that help restore current-account equilibrium under a system of fixed exchange rates.

4. That the balance of payments could be adjusted by prices and interest rates, under a fixed exchange rate system, originated with Keynesian theory during the 1930s.

5. David Hume's price-adjustment mechanism supported the mercantilist view that a nation could maintain a trade surplus indefinitely.

6. Under the price-adjustment mechanism, a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

7. Under the gold standard of the 1800s, exchange rates were allowed to float freely in the currency markets.

8. Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

9. Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic price level.

10. The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

11. According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

12. Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

13. According to the quantity theory of money, a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

14. Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

15. The price-adjustment mechanism's relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

16. According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

17. Under the price-adjustment mechanism, trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

18. Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

19. Under the classical gold standard, a trade surplus nation would realize gold inflows, an increase in its money supply, rising interest rates, and net investment inflows.

20. The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

21. The gold standard's "rules of the game" required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

22. The "rules of the game" served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

23. Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA0, thus moving towards capital and financial account surplus.

24. Refer to Figure 13.3. Decreases in U.S. interest rates relative to foreign interest rates would shift U.S. capital and financial account schedule CA0 downward toward CA1, resulting in net financial outflows from the United States.

25. Refer to Figure 13.3. Falling investment profitability in the United States, relative to investment profitability abroad, would shift the U.S. capital and financial account schedule downward from CA0 to CA1, resulting in net financial outflows from the United States.

26. Refer to Figure 13.3. As the U.S. government decreases taxes on income earned by U.S. residents from foreign investments, the U.S. capital and financial account schedule shifts downward from CA0 to CA1 and the United States realizes net financial outflows.

27. Refer to Figure 13.3. If the political and economic stability of foreign countries worsens relative to that of the United States, the U.S. capital and financial account schedule would shift downward from CA0 to CA1, resulting in net financial outflows from the United States.

28. According to the Keynesian income-adjustment mechanism, income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

29. Keynesian theory asserts that, under a system of fixed exchange rates, the influence of income changes in surplus and deficit countries will automatically promote current-account equilibrium.

30. The Keynesian income-adjustment mechanism contends that a trade-surplus nation tends to realize falling income and falling imports, thus accentuating the trade surplus.

31. The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.

32. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, the foreign-trade multiplier equal 2.0.

33. For an open economy subject to international trade, equilibrium income occurs where saving plus investment equals imports plus exports.

34. If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3, an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

35. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

36. For the income adjustment mechanism to reverse a trade deficit, economic policymakers must be willing to permit domestic income to increase which leads to rising imports.

37. Reliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since it requires them to accept price deflation and/or falling income as a cost of reducing imports.

38. An "automatic" adjustment mechanism would require a trade-surplus nation to accept price deflation and/or falling income as the cost of increasing imports.

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System

39. Referring to Figure 13.4, Canada's marginal propensity to save equals 0.25 and marginal propensity to import equal 0.5.

40. Referring to Figure 13.4, Canada's foreign-trade multiplier equals 2.0.

41. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S - I)0 intersects (X - M)0, an autonomous decrease in Canadian imports of $10 billion leads to a $20 billion decrease in income and a trade deficit of $5 billion.

42. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S - I)0 intersects (X - M)0, an autonomous increase in Canadian investment of $10 billion leads to a $20 billion increase in income and no change in the country's trade account.

43. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S - I)0 intersects (X - M)0, an autonomous decrease in saving of $10 billion leads to a $20 billion increase in income and a trade deficit of $5 billion.

44. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S - I)0 intersects (X - M)0, an autonomous decrease in Canadian exports of $10 billion leads to a $20 decrease in income and a trade deficit of $5 billion.

45. According to the monetary approach, balance-of-payments disequilibriums are the result of imbalances in a country's money supply and money demand.

46. The monetary approach contends that, under a fixed exchange rate system, an excess supply of money leads to a trade surplus.

47. The monetary approach contends that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.

48. The monetary approach contends that, under a fixed exchange rate system, policies that increase the supply of money relative to the demand for money lead to a trade surplus.

SHORT ANSWER

1. Compared to classical economists, how did Keynesian economics change the discussion of trade adjustment?

2. What is the foreign repercussion effect?

ESSAY

1. Explain David Hume's theory of automatic adjustment for balance of payments disequilibria.

2. Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?

#ECO 305 Week 9 Quiz – Strayer

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ECO 405 Week 9 Quiz – Strayer

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Quiz 8 Chapter 11 and 12

Economic Growth: Why Is The Economic Road So Bumpy?

Multiple Choice Questions

1. Which Of The Following Is Consistent With Economic Growth? A. Lower Unemployment B. Increased Gdp C. Increased Aggregate Demand D. Increased Sales E. All Of The Above

2. Why Is Economic Growth An Important Economic And Social Issue? A. Economic Growth Leads To Improvements In Our Standard Of Living B. Lower Levels Of Unemployment And Poverty Can Be Achieved Through Economic Growth C. A Growing Economy Provides Consumers With More Choices And Opportunities D. All Of The Above E. Economic Growth Is Not An Important Economic Issue

3. Which Of The Following Statements Is About Economic Growth? A. Economic Growth Is A Short-Run Process B. Growth Of An Economy Is Generally A Smooth Process That Occurs Over Time C. Economic Growth Is A Long-Run Process Resulting From The Compounding Of Many Events D. To Measure Economic Growth, Economists Analyze Changes In The National Debt E. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth

4. Which Of The Following Is The Most Commonly Used Measurement Of Economic Growth? Changes In A. Real Gdp B. The Money Supply C. Nominal Gdp D. The Federal Government Debt E. The Level Of International Trade

5. Why Do Small Differences In Economic Growth Rates Today Result In Significant Differences In The Level Of Economic Activity In The Future? A. Growth Rates Discount Over Time B. Economic Growth Compounds Year After Year C. Economics Grow In An Arithmetic Fashion D. Business Cycles Are Less Likely At Higher Rates Of Growth E. All Of The Above

6. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country A's Level Of Real Gdp After 3 Years? A. $1,000 B. $1,050 C. $1,158 D. $1,500 E. $2,500

7. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country B's Level Of Real Gdp After 3 Years? A. $1,000 B. $1,100 C. $1,210 D. $1,300 E. $1,331

8. Of The Following, Which Of The Following Values Most Closely Approximates The Average Annual Rate Of Growth For The U.S. Economy Since 1960? A. 1.65% B. 10.22% C. 5.35% D. 4.02% E. 3.26%

9. Which Decade Resulted In The Lowest Average Annual Rate Of Economic Growth In The U.S.? A. 1950s B. 1960s C. 1970s D. 1980s E. Unknown

10. Which Of The Following Decades Had The Highest Average Annual Rate Of Economic Growth In The U.S.? A. 1930s B. 1960s C. 1970s D. 1980s E. 1990s

11. What Term Is Used To Describe An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend? A. Economic Depression B. Economic Boom C. Business Cycle D. Recession E. Diminishing Returns

12. Which Of The Following Is Not A Phase Of Every Business Cycle? A. Trough B. Expansion C. Contraction D. Depressions E. Peak

13. Which Of The Following Lists The Four Phases Of The Business Cycle In The Correct Sequence? A. Expansion, Peak, Contraction, Trough B. Expansion, Contraction, Peak, Trough C. Expansion, Peak, Contraction, Depression D. Expansion, Peak, Depression, Trough E. Peak, Recession, Trough, Depression

14. Which Phase Of The Business Cycle Best Describes An Economy That Is Experiencing A Positive Rate Of Economic Growth? A. Expansion B. Peak C. Contraction D. Trough E. Depression

15. When The Economy Ends An Expansion, It Enters Which Phase Of The Business Cycle? A. Expansion B. Peak C. Contraction D. Trough E. Depression

16. A Decline In The Level Of Economic Activity Occurs During Which Phase Of The Business Cycle? A. Expansion B. Peak C. Contraction D. Trough E. Depression

17. When Economic Output Hits A Short-Run Economic Low, The Economy Is In Which Phase Of The Business Cycle? A. Expansion B. Peak C. Contraction D. Trough E. Depression

18. An Exceptionally Strong And Prolonged Contraction Is Known As A. A Trough B. A Recession C. An Economic Bust D. A Super Contraction E. A Business Cycle

19. The Last Depression Experienced By The U.S. Economy Occurred A. During The 1970s B. In 1982 C. During The 1930s D. Between 1974-1975 E. In 1990

20. What Is The Average Length Of A Typical Business Cycle In The Modern U.S. Economy? A. 12 Months B. 36 Months C. 60 Months D. 95 Months E. 120 Months

21. Which Group Is Responsible For Announcing The Dates For Each Phase Of A U.S. Business Cycle? A. The Federal Reserve B. The National Bureau Of Economic Research C. The Department Of Commerce D. The Bureau Of Labor Statistics E. The Federal Business Cycle Committee

22. The Most Commonly Used Tool To Forecast Future Changes In Economic Activity Is The A. Leading Economic Indicators Index B. Supply Of Money C. Unemployment Rate D. Lagging Economic Indicators Index E. Federal Budget Deficit

23. The Economic Variables That Make Up The Leading Economic Indicators Index Tend To Move In The ______ Direction As Overall Economic Output And Do So _____ Changes In Real Gdp. A. Opposite; Prior To B. Same; After C. Opposite; After D. Same; Prior To E. Same; Simultaneously As

24. Which Of The Following Is Not About Business Cycles? A. All Business Cycles Have Four Distinct Phases B. The Average Length Of A U.S. Business Cycle Is About 60 Months C. Since 1960, The U.S. Has Experienced Six Complete Business Cycles D. The Last Economic Depression In The U.S. Occurred In The 1930s E. The Turning Points Of A Business Cycle Can Be Easily Predicted

25. What Do You Call Business Cycle Theories Based On The Belief That Economic Activity Follows General Trends Of Optimism And Pessimism? A. Theories Of Expectations B. Real Business Cycle Theories C. Theories Of Innovation D. Theories Of Externalities E. Sunspot Theories

26. Which Of The Following Economists Is Associated With The Business Cycle Theory Of Innovations? A. John Maynard Keynes B. William Stanley Jones C. Joseph Schumpeter D. Ansel Sharp E. Adam Smith

27. Monetary Theories Of The Business Cycle Postulate That Cycles Are Strongly Influenced By The Policy Actions Of The A. U.S. Congress B. Federal Reserve C. World Trade Organization D. National Bureau Of Economic Research E. U.S. Department Of Commerce

28. Which Of The Following Focuses Primarily On Aggregate Supply Variables? A. Theory Of Expectations B. Exogenous Theories C. Monetary Theories D. Real Business Cycle Theories E. Jevons' Sunspot Theory

29. What Was The First Theory Put Forth By An Economist To Explain The Phenomena Of Business Cycles? A. Inventory Theory B. Schumpeter's Theory Of Innovation C. Real Business Cycle Theories D. Theory Of Expectations E. Jevons' Sunspot Theory

30. What Are The Two Primary Determinants Of Economic Growth? A. The Availability Of Resources And Productivity Factors B. Technology And Money C. The Quantity Of Capital And The Quantity Of Money D. The Ability To Trade And The Size Of The Labor Force E. Comparative Advantage And The Law Of Diminishing Returns

31. What Is The Result Of A Growing Labor Force? A. Lower Rates Of Interest In The Capital Market B. Higher Rates Of Unemployment C. The Economy's Production Possibilities Curve Shifts Outward D. The Economy's Production Possibilities Curve Shifts Inward E. The Economy's Rate Of Growth Must Slow To Accommodate More People

32. Which Of The Following Terms Is Used To Describe The Purchase Of Capital? A. Savings B. Consumption C. Technology D. Investment E. Production

33. Why Does Spending On Capital Tend To Increase Economic Growth More Than Spending Of Consumption Goods? Because A. Capital Lasts Longer Than Consumer Goods B. Capital Can Be Used To Produce Future Goods And Services C. Capital Puts Technology To Use D. People Prefer To Invest In Capital In Order To Generate Income E. Capital Purchases Are Taxed At A Lower Rate Than Consumption Purchases

34. What Was The Primary Opportunity Cost Of The Former Soviet Union's Policy To Heavily Invest In Capital For Economic Growth? A. An Inability To Trade With Other Nations B. Democracy C. Foregone Consumer Goods D. Technological Innovations E. Foregone Military Goods

35. Initially 10 Workers Produce 100 Units Of Output In An Economy. The Next Year, 20 Workers Produce 250 Units Of Output In The Same Economy. Productivity In The Economy Has A. Doubled B. More Than Doubled C. Increased D. Decreased E. Not Changed

36. Which Of The Following Is The Best Definition Of "Productivity"? A. A Measurement Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process B. A Measurement Of How Technology Increases The Ability Of An Economy To Produce Goods And Services C. The Ratio Of Inputs To Output D. The Quantity Of Goods And Services Produced During A Given Period Of Time By Labor E. The Total Output Produced In An Economy Given Its Set Of Resources And The Current State Of Technology

37. How Do You Calculate The Average Product Of Labor? A. Total Quantity Of Inputs Divided By Total Output B. The Average Number Of Workers Times The Average Level Of Output Produced C. Total Output Produced Divided By Total Units Of Labor Employed D. Total Units Of Labor Employed Divided By The Total Output Produced E. The Average Number Of Labor Units Employed Times The Quantity Of Capital Employed

38. In An Economy, 100 Workers Can Produce 500 Units Of Output And 110 Workers Produce 600 Units Of Output. Which Of The Following Is ? The Average Product With A. 100 Workers Is 500 B. 100 Workers Is 5 C. 110 Workers Is 600 D. 10 Workers Is 100 E. Both A) And C)

39. In An Economy, 10 Workers Can Produce 500 Units Of Output And 20 Workers Produce 800 Units Of Output. Which Of The Following Is ? The Average Product With A. 10 Workers Is 500 B. 10 Workers Is 5 C. 20 Workers Is 800 D. 20 Workers Is 300 E. 20 Workers Is 40.

40. What Is Technology? A. The Tools Of Production B. The Human Input Of Production C. Computers, Robots, And Factories D. The Means And Methods Of Production E. The Mix Of Labor And Capital Used In Production

41. Which Of The Following Is Cited As Contributing To The Recent Slowdown In Economic Growth? A. Slower Rates Of Technological Advancement B. Changes In Composition Of The Labor Force C. Low Rates Of Saving And Investment D. Government Regulation And Public Debt E. All Of The Above

42. How Has The Increasing Importance Of The U.S. Service Sector Contributed To The Slowdown In Economic Growth? A. Services Are Less Important To The Economy Than Goods B. The Productivity Of The Service Sector Is Hard To Accurately Measure C. Most Investment Takes Place In The Goods Producing Sector Of The Economy D. Services Cannot Be Easily Exported To Foreign Nations E. Technological Advances Have Had A Smaller Impact On The Service Sector

43. What Is The "Crowding Out" Effect? A. Consumption Spending Is Reduced Because Of Spending On Capital B. Capital Spending Is Reduced Because People Purchase Great Quantities Of Consumer Goods C. Private Investment Is Reduced Because Government Borrowing Diverts Dollars Away D. Government Spending Creates A Larger Demand For Capital Goods E. Savings Is Insufficient To Support The Level Of Capital Investment In The Economy

44. Which Of The Following Is A "Pro-Growth" Economic Policy? A. Raising The Tax On Capital Gains B. Encouraging People To Save Less C. Reducing Public Dollars Available For Education D. Investing In Human Capital E. None Of The Above

45. How Much Does The Federal Government Spend Annually On Research And Development? A. Less Than 1% Of Gdp B. About 10% Of Gdp C. More Than 25% Of Its Budget D. Zero E. Exactly 5% Of Its Budget

46. Which Theories Concerning The Business Cycle Focus On Factors Outside Of The Economy? A. Expectations Theories B. Inventory Theories C. Exogenous Theories D. Monetary Theories E. Theories Of Innovation

47. The Economic Growth Of An Economy Is Generally Measured By Examining Changes In A. Employment B. Real Gdp C. Income D. Government Revenues E. Current Gdp

48. Which Of The Following Statements Is ? A. The U.S. Economy Grew At A Higher Rate In The 1980s Than It Did In The 1960s B. The Leading Economic Indicators Index Is Useful For Predicting Economic Recessions, But Not Economic Expansions C. The Economist Most Often Associated With Theories Of Innovation Used To Explain Business Cycles Is Milton Friedman D. A Small Reduction In Economic Growth Can Have Large Long-Run Effects On Real Gdp E. All Of The Above Statements Are

49. How Many Complete Business Cycles Has The U.S. Experienced Since 1960? A. 7 B. 1 C. 12 D. 2 E. 23

50. Relative To The Past, Business Cycles In The U.S. Are Becoming A. Shorter In Duration B. More Severe C. Longer In Duration D. (A) And (B) E. Non-Existent

51. Which Of The Following Is Responsible For Officially Tracking The Index Of Leading Economic Indicators? A. The U.S. Department Of Commerce B. The Conference Board C. The Bureau Of Labor Statistics D. The Council Of Economic Advisors E. The Federal Reserve Board Of Governors

52. Which Of The Following Is Not A Component Of The Index Of Leading Economic Indicators? A. Stock Market Prices B. An Index Of Consumer Expectations C. New Building Permits Granted D. Real Money Supply E. None Of The Above. All Are Part Of The Index

53. In Response To An Economic Recession, Monetary Theories Of The Business Cycle Predict That The Federal Reserve Would A. Increase The Supply Of Money To Create An Expansion B. Reduce The Supply Of Money To Create An Expansion C. Raise Interest Rates To Increase Real Economic Growth D. Increase The Demand For Money To Bring About Economic Growth E. Lower Taxes To Avoid A Full Depression

54. Which Famous Economist Is Associated With The Sunspot Theory Of Business Cycles? A. Joseph Schumpeter B. Milton Friedman C. William Stanley Jevons D. John Maynard Keynes E. Charles Alan Register

55. Which Set Of Theories Can Be Used To Explain All Business Cycles? A. Exogenous Theories B. Theories Of Innovation C. Inventory Theories D. Monetary Theories E. None Of The Above. No One Theory Can Explain Every Business Cycle

56. For An Economy To Expand Its Investment In The Production Of Capital Goods, It Must A. Enhance Its Current Level Of Technology B. Forego Some Production Of Consumer Goods And Services C. Expand Its Geographic Territory D. Increase Its Real Supply Of Money E. Reduce The Level Of Savings By Consumers

57. The Quantity Of Capital In The U.S. Economy Has Grown At A Rate ________ The Growth In The Labor Force. A. Slower Than B. About The Same As C. Faster Than D. Only Half As Much As E. Unknown

58. Human Capital Refers To A. Foregone Earnings Of Students Enrolled In College B. Money Required To Enroll In Educational Programs C. Slaves Owned By Capitalists D. Skills And Training That Increase A Worker's Productivity E. Factories And Equipment Owned By Workers

59. The First Decade Of The 21st Century Has Been Characterized By ______. A. A Booming Economy Through The Period B. A Recession At The Start Of The Decade, Followed By A Slow Recovery And Then A Second Recession C. Stagflation D. One Recession Followed By An Unprecedented Economic Boom E. None Of The Above

60. Which Of The Following Statements Is ? A. In The Foreseeable Future, Real Gdp Will Grow Slower Than The U.S. Population B. Based On Past Economic Performance, It Is Likely That Standards Of Living In The U.S. Will Fall During The Early Part Of The 21st Century C. Real Per Capita Gdp Will Likely Increase In The Near Future Due In Part To The Slowdown In The Rate Of Population Growth D. In Economics, The Past Is A Very Poor Predictor Of The Future E. The Rate Of Economic Growth Does Not Affect Individual People

Questions 61 - 65 Refer To The Graph Below.

61. An Economy's Production Possibilities Curve Will Shift Out The Farthest In 2017 If It Chooses To Operate At Which Point In 2012? A. A B. B C. C D. F E. E

62. An Increase In Labor Resources Will Cause Which Of The Following Shifts On The Graph? A. Bf To Ag B. Ag To Bf C. D To C D. C To D E. D To E

63. Economic Growth Is Represented On The Graph As A Movement From A. Bf To Ag B. Ag To Bf C. D To C D. C To D E. D To E

64. An Increase In Productivity Is Consistent With Which Of The Following Movements? A. Bf To Ag B. Ag To Bf C. D To C D. C To D E. D To E

65. A Movement From Point D To Point C Is Consistent With A. An Increase In Capital Goods Without A Decrease In Consumer Goods B. Technological Change Between 2012 And 2017 C. An Increase In Productivity Between 2012 And 2017 D. All Of The Above E. None Of The Above

Questions 66 - 70 Refer To The Graph Below.

66. An Economic Expansion Is Illustrated On The Graph A. At Point T2 B. At Point T3 C. Between T1 And T2 D. Between T2 And T3 E. Along The Straight Line

67. An Economic Contraction Is Illustrated On The Graph A. At Point T2 B. At Point T3 C. Between T1 And T2 D. Between T2 And T3 E. Along The Straight Line

68. A Peak In The Business Cycle Is Illustrated On The Graph A. At Point T2 B. At Point T3 C. Between T1 And T2 D. Between T2 And T3 E. Along The Straight Line

69. A Trough In The Business Cycle Is Illustrated On The Graph A. At Point T2 B. At Point T3 C. Between T1 And T2 D. Between T2 And T3 E. Along The Straight Line

70. The Straight Line On The Graph Represents A. An Economic Expansion B. An Economic Contraction C. A Business Cycle D. A Long-Run Growth Trend E. A Boom Period

71. The Longest Sustained Period Of Economic Growth In Modern U.S. History Occurred During The A. 1920s B. 1950s C. 1960s D. 1980s E. 1990s

72. Which Of The Following Factors Was Not One Of The Reasons Why A Recession Started In 2008? A. The Collapse Of A Speculative Bubble In The Real Estate Market B. A Spike In Interest Rates C. A Significant Rise In The World Price Of Oil D. A Series Of Financial Fraud Schemes In The Financial Industry E. All Of The Above

73. The Decline That Occurred In Real Gdp In The Fourth Quarter Of 2008 Was ________ .

A. The Smallest Decrease On Record B. The Average Reduction C. Smaller Than The Decrease In The Third Quarter D. The Largest In Over 50 Years E. There Was No Decline In Real Gdp During 2008

74. Which Of The Following Contributed To The Inflation-Free Economic Expansion Of The 1990s And Early 2000s? A. Fed Policies To Raise Interest Rates B. An Increase In Aggregate Supply C. Improvements In Productivity D. Improvements In Technology E. All Of The Above

75. Productivity Gains In The 1990s Were A Result Of Which Of The Following? A. Capital Investment B. Improved Labor Quality C. Technological Progress D. Increased Use Of Computers E. All Of The Above

76. Saving In An Economy Is Important For Economic Growth Because A. If Households Don't Save, They Cannot Consume In The Future B. Without Saving, Aggregate Demand Increases C. One Person's Saving Is Another Person's Consumption D. It Is The Source Of Funds For Investment E. Of None Of The Above; Saving Is Not Important For Economic Growth

77. Which Of The Following Is Not Something That Will Increase Economic Growth? A. Expenditures On Research And Development B. Increased Education C. Using Resources To Develop Additional Capital D. Replacing Old Machinery E. All Of The Above Will Increase Economic Growth

78. According To Real Business Cycle Theory, The Primary Factor That Increases Aggregate Supply Is A. Savings B. Increases In The Size Of The Labor Force C. Technological Improvements D. Government Spending E. Reductions In Regulation

True / False Questions

79. Economic Growth Is Necessary To Create New Jobs, Increase Incomes, And Raise Standards Of Living.

80. Economic Growth Is An Important Social Issue, But It Is Not Related To Other Problems Such As Unemployment And Poverty.

81. Economists Consider Economic Growth As A Short-Run Process.

82. Between 1960 And The Mid-1990s, The American Economy More Than Tripled Its Level Of Real Gdp.

83. During The Past Three Decades, The U.S. Economy Experienced Significant Periods Of Growth Without Interruption.

84. Even Small Differences In Growth Rates Can Result In Significant Gaps In Gdp Between Two Countries Over The Long Run.

85. Economic Growth Compounds Over Time.

86. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth.

87. U.S. Economic Growth Rates In The 1990s Have Been Higher Than Those Experienced In The 1960s.

88. An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend Is Called A Business Cycle.

89. Every Business Cycle Has Four Distinct Phases; Expansion, Peak, Contraction, And Trough.

90. Strong Economic Expansions Are Sometimes Referred To As Economic Booms.

91. Another Name For The Trough Of A Business Cycle Is Recession.

92. Each Phase Of A Business Cycle Has Approximately The Same Duration.

93. Since Wwii, The Average Length Of A Typical U.S. Business Cycle Is Approximately 60 Months.

94. Given Modern Data Collection Techniques, It Is Very Easy To Identify When The Economy Is About To Move Into The Next Phase Of A Business Cycle.

95. In The U.S., The Official Dates For Each Phase Of A Business Cycle Are Determined After The Fact By The National Bureau Of Economic Research (Nber).

96. The Index Of Leading Economic Indicators Is Used By Economists To Forecast Changes In Economic Performance Over Time.

97. The Components Of The Index Of Leading Economic Indicators Tend To Change Prior To Changes In The Economy As A Whole.

98. The Components Of The Index Of Leading Economic Indicators Lead Changes In The Aggregate Economy, But Move In An Opposite Direction.

99. Economists Have Agreed Upon One Widely Accepted Theory To Explain Business Cycle Behavior.

100. Expectations About The Future Influence The Economic Decisions That People Make Today.

101. Joseph Schumpeter Theorized That Business Cycles Were Determined Primarily By Long-Run Waves Of Innovation.

102. Monetary Theories Of Business Cycles Are Based On How The Federal Reserve Manages The Money Supply In Response To Changing Economic Conditions.

103. Real Business Cycle Theorists Postulate That Economic Fluctuations Are Primarily Due To Changes In Aggregate Demand.

104. Jevons' Sunspot Theory Of The Business Cycle Is Widely Used By Economists Today To Forecast Future Levels Of Economic Activity.

105. The Primary Determinants Of Economic Growth Include The Availability Of Resources And Productivity Factors.

106. As An Economy's Labor Force Increases In Size, Its Production Possibilities Frontier Shifts Outward.

107. The U.S. Labor Force Has Not Grown Substantially During The Past Four Decades.

108. The Term Investment Is Used To Describe The Purchase Of Consumer Goods By Households In The Economy.

109. Investments In Capital Goods Increase An Economy's Ability To Produce Consumer Goods In The Future.

110. In Recent Years, Capital Has Grown At A Slower Rate Than The Labor Force Within The U.S. Economy.

111. Productivity Is A Measure Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process.

112. The Total Output Produced Divided By The Total Units Of Labor Employed Is Called The Average Product Of Labor.

113. Productivity Is Not Influenced By The Law Of Diminishing Returns.

114. The Average Level Of Educational Attainment In The U.S. Has Been Gradually Declining Since The Mid-1970s.

115. Technology Refers To The Means And Methods Of Production.

116. On Average, The U.S. Economy Has Grown About 3.12% Annually Since 1960.

117. The U.S. Economy Grew At A Faster Rate In The 1980s Relative To The 1960s.

118. In The 1990s, The U.S. Economy Grew At An Average Annual Rate Of Only 2.1%.

119. The Rate Of Technological Growth In The U.S. Economy Is Higher Today Than It Was In The 1960s.

120. Capital Accumulation In An Economy Is Dependent Upon Savers To Provide Funds For Investors.

121. The Increasing Importance Of The Service Sector In The American Economy May Lead To An Overestimation Of Economic Growth.

122. Some Forms Of Government Regulation Of Business May Reduce Productivity And Therefore Contribute To The Slowdown Of Economic Growth.

123. "Crowding Out" Occurs When Government Borrowing To Finance Its Debt Diverts Funds Away From The Private Sector.

123. The Size Of The American Economy Will Double Within The Next Ten Years.

125. Currently, The Population Of The U.S. Is Growing At A Faster Rate Than Real Gdp Is Growing.

126. To Stimulate Additional Economic Investment, Some Policy Makers Favor Increasing The Tax Rate On Capital Gains.

127. Government Policies That Subsidize Higher Education Should Stimulate Labor Productivity And Enhance Long-Run Economic Growth.

128. The U.S. Government Spends Less Than 1% Of Gdp On Research And Development Each Year.

129. In Economics, The Past Is A Very Poor Predictor Of The Future.

130. The Slowdown In The Rate Of Population Growth Has Increased The Growth Rate In The Real Per Capita Gdp For The U.S.

131. The Rate Of Economic Growth Affects Everyone Living In An Economy.

132. Most Economic Forecasts Of The Near Future Predict That The Standard Of Living In The United States Will Fall.

133. One Strategy To Promote Economic Growth Is To Encourage People To Save More.

134. Savings Can Only Occur When The Economy Is In The Expansion Phase Of A Business Cycle.

135. A Reduction In Savings Will Lead To A Reduction In The Level Of Investment.

136. The Average Annual Rate Of Growth For The U.S. Economy During The Twentieth Century Was Between 3% And 3.5%.

137. The Most Important Determinants Of Economic Growth Are The Availability Of Resources And Productivity Factors.

138. Close Examination Of The Recent History Of Real Gdp In The U.S. Reveals That The Rate Of Economic Growth Has Been Diminishing Over Time.

Chapter 12

Money, Banking, And The Financial System: Old Problems With New Twists

Multiple Choice Questions

1. Commercial Banks Operate A. By Attracting Deposits And Making Loans B. Both Pay And Charge Interest C. By Engaging In Financial Intermediation D. All Of The Above E. Under The Control Of State Governments

2. Commercial Banks A. Attract Deposits By Offering To Pay Interest B. Sell New Issues Of Stocks And Bond C. Operate On A Non-Profit Basis D. Attract Deposits By Offering Free Toasters E. None Of The Above

3. Commercial Banks A. Started By Offering Credit To Wealthy Landowners B. Began As Goldsmiths That Provided Receipts To Customers Who Stored Their Gold With The Goldsmith C. Operate In Both The Primary And Secondary Financial Markets D. Operate Only In Cities With Major Financial Markets E. Began In Germany

4. A Financial Intermediary A. Seeks Deposits B. Makes Loans C. Matches Up Savers And Borrowers D. All Of The Above E. Operates In Between Two Banks

5. Investment Banks A. Make Loans To Individual Households To Buy Houses And Cars B. Work With Corporations To Finance Their Operations Through Primary Financial Markets C. Work With Corporations To Finance Their Operations Through Secondary Financial Markets D. Work With Investments From Private Individuals E. None Of The Above

6. A Stock Is

A. A Financial Instrument That Provides Ownership Rights To Shareholders B. A Financial Instrument That Provides Annual Payments Of Interest C. A Financial Instrument That Is Traded Only In Primary Financial Markets

D. A Financial Instrument That Is Bought And Sold By Commercial Banks E. All Of The Above

7. A Dividend

A. Must Be Paid By A Commercial Banks B. Must Be Paid By Corporations To Owners Of The Company’s Stock C. Is A Distribution Of A Corporation’s Profits To Stockholders

D. Is A Financial Instrument That Is Bought And Sold By Commercial Banks E. None Of The Above

8. Corporations Raise Funds In A. The Money Market B. The Primary Financial Market C. The Secondary Financial Market

D. Both The Primary And Secondary Financial Markets E. None Of The Above

9. When A Person Buys A Stock On A Stock Exchange They Are Participating In

A. The Money Market B. The Primary Financial Market C. The Secondary Financial Market

D. Both The Primary And Secondary Financial Markets E. None Of The Above

10. Insurance Policies

A. Require An Initial, One-Time Payment By Policy Holders But No Further Outlay

B. Make Payments To Policy Holders On A Monthly Basis C. Require A Regular Payment Of Insurance Premiums By Policy Holders

D. Require An Initial Payment And Regular Payments Of Insurance Premiums By Policy Holders E. None Of The Above

11. The Financial Crisis Of 2008 Affected

A. Only Commercial Banks

B. Only Investment Banks

C. Only Insurance Companies

D. All Of The Above E. The Revenues Of Only State Governments

12. In The Early Years Of The American Republic, The First Bank Of The United States Was Established Through The Efforts Of

A. Thomas Jefferson

B. George Washington

C. James Madison

D. Alexander Hamilton

E. Aaron Burr

13. During Most Of The 1800s, The Federal Monetary Authority Was Called

A. The Bank Of America

B. The Bank Of Washington

C. The First National Bank

D. The Third Bank Of The United States

E. None Of The Above

14. Throughout The History Of The U.S., Until The Creation Of The Federal Reserve System In 1913, The Monetary System Was

A. Characterized By A Series Of Panics And Periods Of Instability B. Under The Control Of The Second Bank Of The United States C. The Product Of The Work Of President Andrew Jackson

D. Based Upon The English System E. Under The Supervision Of The Us Mint

15. Prior To The Creation Of The Federal Reserve System, The Money Supply

A. Was Very Stable And Highly Valued B. Was Comprised Of Currency Printed By The Department Of The Treasury C. Was Produced By Local Banks And Often Traded At A Discount D. Was Available Only To Bank Depositors E. Was Comprised Of Gold

16. Money Serves As A. A Unit Of Account B. A Store Of Value C. A Medium Of Exchange D. All Of The Above E. An Emblem Of Personal Wealth

17. When You Use Dollar Bills To Pay For A Purchase At A Store, Money Is Serving Which Function? A. A Medium Of Exchange B. A Measure Of Value C. A Store Of Value D. A Barter Facilitator E. All Of The Above

18. When You Compare A Dollar's Worth Of Apples To A Dollar's Worth Of Oranges, Money Is Serving Which Function? A. A Medium Of Exchange B. A Measure Of Value C. A Store Of Value D. A Barter Facilitator E. A Measure Of Wealth

19. If You Keep Some Cash In A Safe Place So That You Have It To Use Later, Money Is Serving Which Function? A. A Medium Of Exchange B. A Measure Of Value C. A Store Of Value D. A Barter Facilitator E. All Of The Above

20. Banking Regulation Is Intended To Prevent A. Bank Failures B. Excess Bank Profits C. Bank Losses D. Banks From Selling Securities E. Banking Monopolies

21. The Gramm-Leach-Bliley Act Allows Banks To A. Sell Insurance B. Underwrite Insurance C. Sell Securities D. Invest In Real Estate E. Do All Of The Above

22. Money Is "Liquid" Because A. It Loses Value With Inflation B. Coins Can Be Melted To Use Their Metal To Make Goods C. It Serves As A Measure Of Value D. It Does Not Have To Be Sold To Buy Goods And Services E. It Is A Valuable Asset

23. Which Of The Following Is Of A Fractional Reserve Banking System? A. Banks Must Hold All Of Depositors' Deposits In Their Vaults B. Banking Is Only A Fraction Of The Services Banks Provide To Their Customers C. Banks Lend Out Part Of Their Depositors' Deposits D. The Reserve Ratio Is 100% E. Banks May Not Hold Excess Reserves

24. If The Reserve Ratio Is 10% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible? A. $1,000 B. $9,000 C. $10,000 D. $90,000 E. $100,000

25. If The Reserve Ratio Is 10% And A New Demand Deposit Of $5,000 Is Made, What Is The Maximum Deposit Creation Possible? A. $500 B. $4,500 C. $5,000 D. $45,000 E. $50,000

26. If The Reserve Ratio Is 20% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible? A. $1,500 B. $10,000 C. $15,000 D. $40,000 E. $50,000

27. Money Does Not Serve As A A. Medium Of Exchange B. Store Of Value C. Measure Of Value D. Price Index E. It Serves As All Of The Above

28. M1 Includes A. Currency And Coins In Circulation, Traveler's Checks, Demand Deposits At Commercial Banks, And Other Checkable Deposits B. Currency And Coins In Circulation, All Demand Deposits, And All Time Deposits C. All Demand Deposits And All Time Deposits D. Just Currency And Coins In Circulation E. None Of The Above

29. Banks Make Loans From Their A. Required Reserves B. Excess Reserves C. Net Worth D. U.S. Government Securities E. None Of The Above

30. Which Of The Following Is Among The Assets Of A Commercial Bank? A. Demand Deposits B. Net Worth C. Any Liability D. Loans And Investments E. Time Deposits

31. M2 Includes A. M1, Plus Savings And Time Deposits Of Small Denomination, And Money Market Mutual Funds B. M1 Plus Savings And Time Deposits Of Large Denomination (Over $100,000) C. M1 Plus Banks Acceptances And Treasury Bills D. M1 Plus Currency And Demand Deposits E. None Of The Above

32. The Basic Money Supply Is A. Composed Of Small Denomination Time Deposits Plus Coin And Currency Held By The Nonbank Public B. Composed Of Assets That Are Completely Liquid And Easily Accessible C. Our Broadest Measure Of Money D. Simply The Coins And Currency Held By The Nonbank Public E. None Of The Above

33. Excess Reserves Refer To A. Reserves That Banks Are Required By Law To Hold B. The Major Assets Of The Bank C. Reserves A Bank Holds In Case Of Unexpected Case Needs D. Reserves Over And Above The Bank's Required Reserves E. None Of The Above

34. The Money Multiplier Is A. 1/R B. Er C. R/E D. E/R E. 1+1/Er

35. Suppose The Legal Reserve Requirement Is 0.20, And A Bank Has Excess Reserves Of $1,000,000. The Ultimate Increase In The Money Supply Will Be A. $2,000,000 B. $200,000 C. $800,000 D. $5,000,000 E. $500,000

36. The Inflation Rate And The Growth In The Money Supply Are

A. Usually Inversely Related B. Usually Directly Related C. Never Directly Related D. Not Related To One Another E. Negatively Related

37. Who Controls The Aggregate Volume Of Demand Deposits In The Banking System? A. The U.S. Treasury B. The Federal Reserve Board Of Governors C. Congress D. Bankers E. The President Of The United States

38. To Reduce Inflationary Pressures, The Federal Reserve Authorities Should A. Sell Government Securities, Raise Reserve Requirements, And Lower The Discount Rate B. Sell Government Securities, Lower Reserve Requirements, And Lower The Discount Rate C. Buy The Government Securities, Raise Reserve Requirements, And Raise The Discount Rate D. Sell Government Securities, Raise Reserve Requirements, And Raise The Discount Rate E. Buy Government Securities, Decrease Reserve Requirements, Decrease The Discount Rate

39. If The Open Market Committee Of The Federal Reserve Sells Securities, This Action Will A. Decrease The Money Supply B. Increase The Money Supply C. Reduce The Reserve Requirement D. Decrease The Discount Rate E. Do None Of The Above

40. When A Central Bank Wants To Increase The Money Supply, It A. Sells Bonds B. Buys Bonds C. Sells Good And Services D. Buys Goods And Services E. Does None Of The Above

41. The Federal Reserve Can Decrease The Supply Of Money By A. Selling U.S. Government Securities B. Buying U.S. Government Securities C. Selling Goods And Services D. Buying Goods And Services E. Decreasing The Reserve Requirement

42. The Federal Open Market Committee (Fomc) Is Highly Concerned With

A. The National Unemployment Rate

B. The Growth Of Real Gdp

C. Interest Rates

D. The Level Of The Stock Market E. All Of The Above

43. When The Open Market Committee (Fomc) Purchases Government Securities, Their Actions Are An Attempt To

A. Raise Interest Rates

B. Lower Interest Rates

C. Reduce Borrowing

D. Raise The Inflation Rate

E. Influence Voters In The Next Presidential Election

44. When The Fed Increases The Money Supply, It Generally Has The Effect Of

A. Making Banks More Profitable

B. Increasing The Value Of Stocks

C. Lowering Interest Rates

D. Lowering The Inflation Rate

E. Increasing The Size Of Bank Deposits

45. When The Fed Wishes To Increase The Money Supply, It Can Do So By

A. Purchasing Government Securities Through Open Market Operations

B. Lowering The Discount Rate

C. Reducing The Reserve Requirement

D. All Of The Above

E. Increasing The Size Of Bank Deposits

Questions 46 - 49 Refer To The Graph Below.

46. Suppose That The Fed Has Increased The Money Supply. This Is Shown In The Diagram By

A. Q1 To Q0

B. Q0 To Q1

C. Ms1

D. Ms2

E. None Of The Above

47. Based On The Diagram, The Opportunity Cost Of Money Is Higher If

A. The Interest Rate Is I0

B. The Interest Rate Is I1

C. The Money Supply Is Curve Ms1

D. The Money Supply Is Curve Ms2

E. The Opportunity Cost Of Money Is Not Shown In The Diagram

48. A Shift From Ms1 To Ms2 Would Be The Result Of

A. An Increase In Aggregate Demand

B. An Increase In Aggregate Supply

C. A Decision By The Fed To Purchase Government Securities By The Fomc

D. A Decision By The Fed To Sell Government Securities By The Fomc

E. A Change In The Stock Market

49. If The Fed Wanted To Stimulate Business Investment, It Could Do So By

A. Increasing Interest Rates From I1 To I0

B. Decreasing The Money Supply From Ms2 To Ms1

C. Increasing The Money Supply From Ms1 To Ms2

D. Raising The Reserve Requirement

E. Increasing The Discount Rate

50. The Equation Of Exchange Is A. Mp = Qv B. Mv = Pq C. M = V/Pq D. P = Q/Mv E. Pv = Qm

51. The Value Of Money Varies A. Directly With The Interest Rate B. Directly With The Price Level C. Directly With The Volume Of Employment D. Inversely With The Price Level E. With None Of The Above

52. According To The Equation Of Exchange, A. The Right-Hand Side Will Equal The Left-Hand Side Only If Velocity Does Not Change From Year To Year B. Velocity Must Be Constant C. An Increase In The Quantity Of Money Will Lead To An Increase In The Price Level, Other Things Constant D. Prices Cannot Change E. All Of The Above

53. The Quantity Theory Of Money Emphasizes A. Government Taxation Policies B. Government Spending Policies C. Labor Productivity D. Changes In The Money Supply E. None Of The Above

54. A Key Assumption In The Quantity Theory Of Money Is That

A. The Supply Of Money Is Increasing At A Constant Rate

B The Price Level Is Stable Over Long Periods Of Time

C. The Level Of Output Of Goods And Services Changes Frequently In Response To Changes In Velocity

D. The Velocity Of Money Is Constant

E. None Of The Above

55. The Residential Housing Market Saw Remarkable Increases In

A. Housing Prices At The End Of The 1990’s And Through The First Half Of The 2000’s

B. Housing Prices At The End Of The 1980’s And Beginning Of The 1990’s

C. Foreclosure Rates At The End Of The 1990’s And Through The First Half Of The 2000’s

D. Foreclosure Rates At The End Of The 1980’s And Beginning Of The 1990’s

E. Both A And C

56. The Growth In The Residential Real Estate Market Is Largely A Product Of

A. A Large Increase In The Demand For Housing

B. An Unexpected Growth In Us Population

C. A Decline In Housing Prices

D. A Tightening Of Government Policies That Restrict Homeownership

E. A Decrease In Mortgage Availability

57. The Federal National Mortgage Association (Or Fannie Mae) Was Created To

A. Make Mortgages Hard To Obtain

B. Make Mortgages Less Likely To Go Into Foreclosure

C. Make A Larger Market In Mortgages By Establishing A Secondary Financial Market In Mortgages

D. Make Mortgages Available To New Immigrants To The Us

E. None Of The Above

58. A Mortgage Backed Security Is

A. A Share Of Common Stock Based Upon Home Mortgages

B. A Financial Instrument That Reduces Risk By Pooling Together A Large Number Of Mortgages Into One Asset

C. A Financial Instrument Developed To Reduce Liquidity In The Housing Market

D. A Financial Instrument That Is The Combination Of Only Subprime Mortgages

E. All Of The Above

59. A Subprime Mortgage

A. Made Obtaining A Mortgage Easier For Low Income Households

B. Is A Mortgage That Does Not Meet The Requirements For A Conventional Mortgage

C. Is Usually Structured As An Adjustable Rate Mortgage

D. All Of The Above

E. Is No Different From A Conventional Mortgage

60. A Collateralized Debt Obligation (Or Cdo)

A. Is Generally Riskier Than A Single Debt Of An Equal Value

B. Sells For A Lower Price Than Re-Sales Of Individual Mortgages That Comprise Them

C. Is Sold In The Primary Financial Market

D. Is A Financial Instrument That Obscures The Underlying Risks Of The Mortgages That Comprise Them

E. Is Always A Bad Financial Investment

61. The Interest Rate On An Adjustable Rate Mortgage (Arm) Is

A. Set To Equal The Fed Funds Rate

B. Adjusted On A Daily Basis

C. Set To Rise At The End Of Every Year For The Life Of The Mortgage

D. Adjusted Periodically Based Upon Current Market Conditions

E. Adjusted Based Upon The Value Of The House Purchase

62. Home Equity Loans

A. Allow A Home Owner To Recapture Some Of The Increase In The Value Of Their Home Without Selling The Home

B. A Way For Homeowners To Issue Stock, Or Equity, In Their Home

C. Only Used When Home Prices Are Increasing

D. A Way For The Market To Eliminate Paper Profits

E. None Of The Above

63. Besides Homeowners, Who Attempted To Profit From Increasing Home Prices During The Housing Bubble In The Early Part Of The 2000s?

A. Large Corporations

B. Speculators

C. Foreign Investors

D. Individuals Who Had Low Incomes

E. All Of The Above

64. A Credit Default Swap

A. Is What Happens When Homeowners Swap Their Mortgages With Their Neighbors

B. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Make Even More Money

C. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Reduce The Risk Of An Increase In Mortgage Foreclosures

D. Is A Way For Investors To Increase The Risks To Homeowners

E. Exists Only In Markets With Subprime Mortgages

65. Assets That Are “Marked To Market” Will Be Priced At

A. Their Original Purchase Price

B. Their Original Purchase Price Less The Depreciation Of The Asset

C. A Price That Is Equal To The Original Purchase Price Plus The Rate Of Inflation

D. A Price That Is Based Upon The Asset’s Current Market Value

E. A Price Determined In The Stock Market

66. Many Large Banks And Wall Street Investment Firms Got Into Financial Problems Due To

A. Investments In Subprime Mortgages

B. Required Payments On Credit Default Swaps

C. Failures Of Collateralized Debt Obligations Resulting From Home Foreclosures

D. Having To Mark Down A Significant Number Of Their Assets Due To The “Mark To Market” Accounting Requirement

E. All Of The Above

67. The Federal Government Stepped In During 2008 To Prevent Several Commercial Banks And Investment Banks From Failing Based Upon The Idea That

A. They Were “Too Big To Fail”

B. Any Business Failure Would Hurt Shareholders

C. These Banks Made Large Political Contributions And This Was A Way For Politicians To Pay Them Back

D. Government Would Make Large Profits By Doing So

E. None Of The Above

68. In Late 2008, The Us Treasury Department Began

A. Closing Banks That Were Not Following Regulations

B. To Implement The Troubled Asset Relief Program (Tarp)

C. Raising Interest Rates To Stimulate The Economy

D. Engaging In Open Market Operations

E. To Implement The Opening Of A New Bank Of The United States

69. Each Of The Following Is A Financial Intermediary Except

A. Commercial Banks

B. Investment Banks

C. Insurance Companies

D. Credit Unions

E. All Of The Above Are Financial Intermediaries

70. A Capital Gain Exists

A. When One Political Party Increases The Number Of Its Members In Congress

B. When An Interest Payment Is Made

C. When The Price Of An Asset Goes Up

D. When The Price Of An Asset Exceeds The Price Paid For It

E. When Taxes Are Paid On The Asset

71. Liquidity Of An Asset Increases When

A. It Is Easier To Convert The Asset Into Cash

B. The Asset’s Value Is Below Its Original Price

C. The Asset Is Purchased

D. The Asset Depreciates

E. The Asset Is Put On The Market

72. When A Share Of Stock Is Sold On The New York Stock Exchange, It Is Traded

A. In A Prime Financial Market

B. In A Primary Financial Market

C. For A Promise To Pay A Fixed Return

D. To Another Stock Exchange

E. In A Secondary Financial Market

73. The Financial Crisis That Began In 2008 Is A Result Of All Of The Following Except

A. The Bursting Of The Dot.Com Bubble

B. Problems In The Residential Real Estate Market

C. Changes In Accounting Rules About Asset Valuation

D. Large Firms Taking On Assets Whose Value Was Not Well Determined

E. Policies That Allowed Many Unqualified Homebuyers To Receive Mortgages That They Could Not Pay

74. Historically, Many Commercial Banks Began As

A. Coffee Houses And Taverns Where Stocks Were Traded

B. Jewelry Stores That Specialized In The Sale Of Precious Stones

C. Businesses That Engaged In Small Loans

D. Goldsmiths That Held Stores Of Gold For Their Customers

E. None Of The Above

75. An Increase In The Reserve Requirement Can

A. Decrease Interest Rates

B. Increase Liquidity

C. Decrease The Money Supply

D. Increase The Money Supply

E. Decrease The Profits Of Banks

True / False Questions

76. Commercial Banks Are Financial Intermediaries But Insurance Companies Are Not.

77. Investment Banks Assist Corporations In Issuing Stocks And Bonds In The Primary Financial Market.

78. Silversmiths Became Banks When They Started Lending Out Money Based Upon The Excess Silver That They Held For Their Customers.

79. Residential Real Estate Is Generally Considered To Be More Liquid Than A Savings Account.

80. The Us Has, Over Its History, Had Only One National Bank, That Is, A Bank Of The United States.

81. The Most Important Function Of Money Is As A Medium Of Exchange.

82. If The Supply Of Money Decreases, The Value Of A Dollar Increases.

83. The Key To The Federal Reserve's Control Over The Money Supply Is Its Ability To Create Money By Making Loans.

84. A Commercial Banking System With Excess Reserves Has The Ability To Create Money In The By Making Loans.

85. A Credit Union, Unlike A Bank, Is Not A Financial Intermediary, Since It Is A Cooperative Banking Venture.

86. In The U.S. Banking System, The Ratio Of A Bank's Reserves And Its Outstanding Deposits Is Usually Less Than One.

87. During Inflationary Periods, The Federal Reserve Should Lower The Discount Rate So That Member Banks May More Easily Obtain Needed Reserves To Enable Them To Increase Their Loans.

88. The Money Supply Consists Primarily Of Gold, Silver, And Other Metals Held By The Government.

89. Monetary Policy Refers To Control Of The Money Supply By The Federal Reserve Authorities.

90. Appropriate Federal Reserve Actions To Combat Inflation Are An Increase In The Discount Rate, An Increase In The Reserve Ratio And The Sale Of Government Securities.

91. The Reserve Ratio Is The Rate Of Interest Charged Commercial Banks When They Borrow From The Federal Reserve.

92. During Inflationary Periods, The Federal Reserve Should Buy Securities So That Commercial Banks Will Have More Reserves To Loan Out.

93. One Of The Main Functions Of Banks Is To Create Money.

94. When A Bank Makes A Loan To One Of Its Customers, It Increases Its Liabilities.

95. The Maximum Demand Deposit Creation Possible From A New Deposit Is Derived From The Equation D = E X 1/R.

96. The Discount Rate Is The Ratio Of Demand Deposits To Reserves That Banks Have To Maintain.

97. Policy Actions That Affect Changes In The Growth Rate Of The Money Supply To Keep Interest Rates At Levels That Promote Economic Stability And Growth Are Called "Fine Tuning" Policies.

98. The Issue Of The Appropriate Monetary Policy Target Has Been Resolved To The Satisfaction Of All Policy Makers.

99. The Quantity Theory Of Money States That Increases In The Money Supply Cause Increases In Both The Price Level And Output.

100. A Credit Union Is A Cooperative Banking Venture Where The Members Or Owners Of The Organization Have A Common Employer Or Union.

101. The Main Purpose Of The Fed Is To Control The Rate Of Interest.

102. The Annual Growth Rate In The Money Supply Has Been Held Constant By The Federal Reserve.

103. The Quantity Theory Of Money Stresses The Importance Of The Velocity Of Money.

104. The Money Multiplier Is Derived From The Legal Reserve Requirement.

105. An Increase In The Supply Of Money Will Decrease Interest Rates.

106. The Federal Reserve Open Market Committee’s Primary Function Is To Open New Banks.

107. The Discount Rate Charged By The Federal Reserve, Is Lower For More Creditworthy Banks.

108. Any Time The Discount Rate Increases, The Money Supply Also Increases.

109. If The Required Reserve Ratio Is Increased By The Fed, One Could Assume That The Fed Is Attempting To Control Inflation.

110. Prior To The Enactment Of The Monetary Control Act Of 1980, State-Chartered Banks Had The Option Of Whether Or Not They Wanted To Be A Member Of The Federal Reserve System.

111. Interest Rates Increase Or Decrease So That An Equilibrium Exists In The Money Market.

112. The Federal Government, Through The Work Of Agencies Like The Federal National Mortgage Association, Has Worked To Increase The Supply Of Funds Available To Mortgage Lenders.

113. A Policy Implemented By The Clinton Administration Resulted In Tighter Financial Requirements For Less Creditworthy Borrowers, So That Financial Markets Were Less Risky.

114. A Subprime Mortgage Is A Mortgage Issued To A Highly Qualified Borrower At Reduced Interest Rates.

115. Subprime Mortgages And Home Equity Loans Contributed Little To The Increase In The Demand For Residential Real Estate, Increasing Prices Dramatically.

116. A Homeowner Whose House Is Worth $500,000 But Who Owes $600,000 On Their Mortgage Is A Good Candidate For A Home Equity Loan, So That The Homeowner Can Build Their Equity.

117. Collateralized Debt Obligations Are A Way That Lenders Can Reduce The Risk Of Individual Mortgage Lending.

118. Collateralized Debt Obligations Always Exclude Subprime Mortgages, Because These Are Too Risky For Most Investors.

119. A Credit Default Swap Is One Way That Lenders Can Offset Some Of The Risks Associated With Investing In Subprime Mortgages.

120. A Number Of Banks Encountered Problems Because A Change In Accounting Rules Required Firms To Mark Assets At Their Original Purchase Price.

121. Borrowers Who Obtain A Mortgage Will Always Find That Their Mortgage Payments Rise Over Time.

122. The Definition Of The Money Supply Called M1 Includes All Of The Assets Included In The Definition Of M2.

123. An Increase In The Required Reserve Ratio Will Allow Banks To Create Less Money.

124. The Open Market Committee Of The Federal Reserve System Meets Regularly To Determine The Required Reserve Ratio.

125. Because Of Recent Changes In The Regulatory System, Commercial Banks Are Able To Offer A Smaller Variety Of Financial Products And Services Than In The Past.

126. The Distinctions Between Commercial Banks And Other Financial Institutions Has Blurred In Recent Years.

127. Large Corporations Enter The Secondary Financial Market To Provide Themselves Adequate Liquidity To Conduct Their Day To Day Operations.

128. Stockholders Can Receive A Capital Gain When They Purchase A Financial Asset.

129. Stocks And Bonds Are Essentially Interchangeable Financial Assets, Since Owners Of Both Of These Instruments Receive Regular Interest Payments.

130. When Ben Bernanke Became Fed Chairman, The Federal Reserve Began Explicitly Announcing Money Supply Targets.

#ECO 405 Week 9 Quiz – Strayer

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ECO 410 Week 9 Quiz – Strayer

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Quiz 8 Chapter 15 and 16

Multinational Tax Management

15.1 Tax Principles

Multiple Choice

1) The issue of ethics in the reporting of income and the payment of taxes is a considerable one. The authors state that most MNEs operating in foreign countries tend to follow the general principle of:

A) "when in Rome, do as the Romans do."

B) full disclosure to the tax authorities.

C) maintain a competitive playing field by cheating as much as the local competition, no more, no less.

D) none of the above

2) Which of the following is an unlikely objective of U.S. government policy for the taxation of foreign MNEs?

A) to raise revenues

B) to provide an incentive for U.S. private investment in developing countries

C) to improve the U.S. balance of payments

D) All of the above are objectives.

3) A ________ tax policy is one that has no impact on private decision-making, while a ________ policy is designed to encourage specific behavior.

A) flat; tax incentive

B) neutral; flat

C) neutral; tax incentive

D) none of the above

4) Which of the following is NOT an example of a tax incentive policy?

A) The federal government gives a tax credit to MNEs that make domestic capital improvements but not foreign capital improvements.

B) Corporations are allowed to take a direct tax credit for each dollar of matching donations they make to institutions of higher education.

C) A tax law is passed that makes interest on property non tax-deductible, but interest payments on durable goods are.

D) All are examples of a tax incentive policy.

5) Toyota Motor Company operates in many different countries and pays taxes at many different rates. However, they always pay the same rate as their local competitors. Toyota Motor Company is operating in an environment of ________ tax policy.

A) domestic neutrality

B) foreign neutrality

C) territorial approach

D) none of the above

6) The United States taxes the domestic and remitted foreign earnings of U.S. based MNEs no matter where the earnings occurred. This is an example of a/an ________ approach to levying taxes.

A) worldwide

B) territorial

C) neutral

D) equitable

7) The United States taxes all earnings on U.S. soil by both domestic and foreign firms. This is an example of a ________ approach to levying taxes.

A) worldwide

B) neutral

C) territorial

D) none of the above

8) Bacon Signs Inc. is based in a country with a territorial approach to taxation but generates 100% of its income in a country with a worldwide approach to taxation. The tax rate in the country of incorporation is 25%, and the tax rate in the country where they earn their income is 50%. In theory, and barring any special provisions in the tax codes of either country, Bacon should pay taxes at a rate of:

A) 75%.

B) 62.5%.

C) 0%.

D) 50%.

9) The territorial approach to taxation policy is also termed the ________ approach.

A) source

B) ethical

C) greedy

D) location

10) A tax that is effectively a sales tax at each stage of production is defined as a/an ________ tax.

A) flat

B) equitable

C) value-added tax

D) none of the above

11) What is the total value of taxes paid in the following example if the value added tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.

A) $0.15

B) $0.20

C) $0.30

D) $0.40

TABLE 15.1

Use the information to answer following question(s).

BayArea Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

12) Refer to Table 15.1. If BayArea pays out 50% of its earnings from each subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea respectively.

A) Ukraine = $0; Korea = ($30,000)

B) Ukraine = $100,000; Korea = $0

C) Ukraine = $0; Korea = $66,250

D) none of the above

13) Refer to Table 15.1. The additional U.S. taxes due on the repatriation of income from the Ukraine to the United States, alone, assuming a 50% payout rate, is:

A) excess foreign tax credits of $110,000.

B) additional U.S. taxes due of $97,000.

C) additional U.S. taxes due of $36,500.

D) excess foreign tax credits of $18,500.

14) Refer to Table 15.1. How much in additional U.S. taxes would be due if BayArea averaged the tax credits and liabilities of the two foreign units, assuming a 50% payout rate from each?

A) $3,750

B) $13,750

C) $2,500

D) $0

15) Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary at 25%, how should BayArea set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill?

A) 28.5%

B) 24.5%

C) 42.6%

D) 82.3%

16) Refer to Table 15.1. What is the minimum effective tax rate that BayArea can achieve on its foreign-sourced income?

A) 26%

B) 35%

C) 40%

D) 0%

17) Tax-haven subsidiaries are typically established in a country that can meet the following requirements:

A) a low tax on foreign investment or sales income earned by resident corporations and a low dividend withholding tax on dividends paid to the parent firm.

B) the facilities to support financial services, for example, good communications, professional qualified office workers, and reputable banking services.

C) a stable government that encourages the establishment of foreign-owned financial and service facilities within its borders.

D) all of the above

18) A tax that is a form of social redistribution of income is defined as a/an ________ tax.

A) un-American

B) transfer

C) flat

D) none of the above

19) A ________ is a direct reduction of taxes whereas a ________ reduces the taxable income before taxes.

A) foreign tax credit; domestic tax credit

B) tax deduction; tax credit

C) tax credit; tax deduction

D) none of the above

Instruction 15.1:

Use the information to answer the following question(s).

Green Valley Exporters USA has $100,000 of before tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.

20) Refer to Instruction 15.1. If the U.S. has no bilateral trade agreement with the host country, what is the total amount of income taxes Green Valley Exporters will pay?

A) $25,000

B) $35,000

C) $51,250

D) $60,000

21) Refer to Instruction 15.1. If the U.S. has a bilateral trade agreement with the host country that calls for the total tax paid to be equal to the maximum amount that could be paid in the highest taxing country, what is the total amount of income taxes Green Valley Exporters will pay to the host country, and how much will they pay in U.S income taxes on the foreign earned income?

A) $25,000; $10,000

B) $25,000; $26,250

C) $35,000; $0

D) none of the above

22) Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-deductible expense, then Green Valley's total U.S. corporate tax on the foreign earnings would be:

A) $10,000.

B) $26,250.

C) $35,000.

D) $51,250.

23) Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-credit, then Green Valley's total U.S. corporate tax on the foreign earnings would be:

A) $51,250.

B) $35,000.

C) $26,250.

D) $10,000.

24) Tax treaties typically result in ________ between the two countries in question.

A) lower property taxes for U.S. citizens overseas

B) elimination of differential tax rates

C) increased double taxation

D) reduced withholding tax rates

25) Transfer pricing is a strategy that may be used by MNEs to:

A) reduce consolidated corporate income taxes.

B) partially finance a subsidiary in another country.

C) transfer funds from a subsidiary to the parent corporation.

D) all of the above

26) ________ is the pricing of goods, services, and technology between related companies.

A) Among pricing

B) Retail pricing

C) Transfer pricing

D) Wholesale pricing

True/False

1) The primary objective of multinational tax planning is to minimize the firm's worldwide tax burden.

2) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.

3) Tax treaties generally have the effect of increasing the withholding taxes between the countries that are negotiating the treaties.

4) A value-added tax has gained widespread usage in Western Europe, Canada, and parts of Latin America.

5) All indications are that the value-added tax will soon be the dominant form of taxation in the U.S.

6) Among the G7 nations, the U.S. has a below average corporate income tax rate that makes it attractive for other countries to invest in the U.S.

7) In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates than the U.S.

8) The ideal tax should not only raise revenue efficiently but also have as few negative effects on economic behavior as possible.

9) The worldwide approach, also referred to as the residential or national approach to tax policy, levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned (domestically or abroad).

10) The territorial approach, also referred to as the source approach to tax policy, levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned (domestically or abroad).

11) Of the OECD 30 countries, most employ a worldwide approach to tax policy, but a few, including the United States, use the worldwide approach.

12) FEW governments rely on income taxes, both personal and corporate, for their primary revenue source.

13) Between 2006 - 2012, global corporate tax rates have trended upward.

14) Tax credits are LESS valuable on a dollar-for-dollar basis than are deductible expenses.

15) Tax treaties typically result in reduced withholding tax rates between the two signatory countries.

16) Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses.

17) The U.S. Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making, thus establishing a "guilty until proved innocent" tax approach.

18) Tax haven subsidiaries of MNEs are categorically referred to as international offshore financial centers.

Essay

1) Explain the worldwide and territorial approaches of national taxation. The authors state that the United States uses both approaches. How can this be? Give an example of each taxation approach.

2) What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose this form of taxation has NOT been widely accepted in the United States?

Chapter 16 International Portfolio Theory and Diversification

16.1 International Diversification and Risk

Multiple Choice

1) Beta may be defined as:

A) the measure of systematic risk.

B) a risk measure of a portfolio.

C) the ratio of the variance of the portfolio to the variance of the market.

D) all of the above

2) ________ risk is measured with beta.

A) Systematic

B) Unsystematic

C) International

D) Domestic

3) A fully diversified domestic portfolio has a beta of:

A) 0.0

B) 1.0

C) -1.0

D) There is not enough information to answer this question.

4) Unsystematic risk:

A) is the remaining risk in a well-diversified portfolio.

B) is measured with beta.

C) can be diversified away.

D) all of the above

5) A well-diversified portfolio has about ________ of the risk of the typical individual stock.

A) 8%

B) 19%

C) 27%

D) 52%

6) An internationally diversified portfolio:

A) should result in a portfolio with a lower beta than a purely domestic portfolio.

B) has the same overall risk shape as a purely domestic portfolio.

C) is only about 12% as risky as the typical individual stock.

D) all of the above

7) In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because:

A) the investor is attempting to combine assets that are perfectly correlated.

B) investors are trying to reduce systematic risk.

C) investors are trying to reduce the total risk of the portfolio.

D) all of the above

8) In some respects, internationally diversified portfolios are different from a domestic portfolio because:

A) investors may also acquire foreign exchange risk.

B) international portfolio diversification increases expected return but does not decrease risk.

C) investors must leave the country to acquire foreign securities.

D) all of the above

Instruction 16.1:

Use the information to answer the following question(s).

In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro.

9) Refer to Instruction 16.1. How many euros will the U.S. investor acquire with his initial $500,000 investment?

A) €650,000

B) €370,370

C) €500,000

D) €384,615

10) Refer to Instruction 16.1. At an average price of €60/share, how many shares of stock will the investor be able to purchase?

A) 8333 shares

B) 6410 shares

C) 6173 shares

D) 10,833 shares

11) Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of €57. What is the investor's average rate of return before converting the stock back into dollars?

A) 5.0%

B) -3.0%

C) -5.0%

D) 3.0%

12) Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of €57. What is the investor's average rate of return after converting the stock back into dollars?

A) -1.35%

B) 5.0%

C) -5.0%

D) -7.24%

13) A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

A) 22.00%

B) 23.12%

C) 6.00%

D) 4.88%

14) Which of the following statements is NOT true?

A) International diversification benefits induce investors to demand foreign securities.

B) An international security adds value to a portfolio if it reduces risk without reducing return.

C) Investors will demand a security that adds value.

D) All of the above are true.

True/False

1) Portfolio diversification can eliminate 100% of risk.

2) Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

3) International diversification benefits may induce investors to demand foreign securities.

4) If the addition of a foreign security to the portfolio of the investor aids in the reduction of risk for a given level of return, then the security adds value to the portfolio.

5) If the addition of a foreign security to the portfolio of the investor decreases the expected return for a given level of risk, then the security adds value to the portfolio.

16.2 Internationalizing the Domestic Portfolio

Multiple Choice

1) Portfolio theory assumes that investors are risk-averse. This means that investors:

A) cannot be induced to make risky investments.

B) prefer more risk to less for a given return.

C) will accept some risk, but not unnecessary risk.

D) All of the above are true.

2) The efficient frontier of the domestic portfolio opportunity set:

A) runs along the extreme left edge of the opportunity set.

B) represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return.

C) contains the portfolio of risky securities that the logical investor would choose to hold.

D) all of the above

3) The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier:

A) down and to the left.

B) up and to the right.

C) up and to the left.

D) down and to the right.

4) Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier.

A) to the left of

B) to the right of

C) on

D) to the right or left of

5) The ________ connects the risk-free security with the optimal domestic portfolio.

A) security market line

B) capital asset pricing model

C) capital market line

D) none of the above

Instruction 16.2:

Use the information to answer the following question(s).

A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds.

6) Refer to Instruction 16.2. What is the expected return of the proposed portfolio?

A) 9.2%

B) 9.0%

C) 19.2%

D) 19%

7) Refer to Instruction 16.2. What is the standard deviation of the proposed portfolio?

A) 38.00

B) 19.20

C) 19.00

D) 14.45

True/False

1) The graph for the efficient frontier has beta on the vertical axis and standard deviation of the horizontal axis.

2) The portfolio with the least risk among all those possible in the domestic portfolio opportunity set is called the minimum risk domestic portfolio.

3) The optimal domestic portfolio of risky securities is always the portfolio of minimum risk.

4) The standard deviation of a portfolio is the sum of the weighted average standard deviations of the individual assets.

5) The optimal domestic portfolio combines the risk-free asset and a portfolio of domestic securities found on the efficient frontier.

6) The internationally diversified portfolio opportunity set shifts TO THE RIGHT of the purely domestic opportunity set.

Essay

1) Draw the curve representing the Optimal Domestic Efficient Frontier. Be sure to draw and label the following: The vertical axis and the horizontal axis, the risk-free security, the minimum risk portfolio, the domestic portfolio opportunity set, the optimal domestic portfolio, and the capital market line. Choose a point along the domestic portfolio opportunity set between the optimal domestic portfolio and the minimum risk domestic portfolio and explain why that point is not the optimal risky domestic portfolio for investors to hold.

16.3 National Markets and Asset Performance

Multiple Choice

1) The authors present a comparison of correlation coefficients between major global equity markets over a variety of different periods. The comparison yields a number of conclusions listed here EXCEPT:

A) the correlation between equity markets for the full twentieth century shows quite low levels of correlation between some of the largest markets (close to 0.50 in some cases).

B) that same century of data, however, yields a high correlation between the U.S. and Canada (0.80).

C) the correlation coefficients between those same equity markets for selected sub periods over the last quarter of the twentieth century, however, show significantly different correlation coefficients.

D) None of the answers listed are inaccurate conclusions.

True/False

1) Capital markets around the world are on average less integrated today than they were 20 years ago.

2) In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002) determined that the equity returns in the United States out-performed the other 15 countries in the study.

3) In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002) found that just under one-half of the 16 countries in the study had negative average returns in their equity markets.

4) In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002) determined that due to high levels of correlation or returns between countries, there is almost NO BENEFIT to international portfolio diversification.

5) Of the major trading partners with the United States, Canada has among the LOWEST correlation of returns with the U.S.

Essay

1) If an investor is able to determine a global beta for his portfolio and holds a portfolio that is well-diversified with international investments, which performance measure is more appropriate, the Sharpe Measure or the Treynor Measure? Why? Explain each performance measure.

16.4 Market Performance Adjusted for Risk: The Sharpe and Treynor Performance Measures

Multiple Choice

1) The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk.

A) standard deviation; variance

B) beta; variance

C) standard deviation; beta

D) beta; standard deviation

TABLE 16.1

Use the information to answer following question(s).

2) Refer to Table 16.1. What is the value of the Sharpe Measure for France?

A) 0.113

B) 0.0071

C) either A or B

D) neither A nor B

3) Refer to Table 16.1. What is the value of the Treynor Measure for the Netherlands?

A) 0.197

B) 0.0109

C) either A or B

D) neither A nor B

4) Refer to Table 16.1. ________ appears to have the greatest amount of risk as measured by monthly standard deviation, but ________ has the best return per unit of risk according to the Sharpe Measure.

A) United States; Austria

B) France; Austria

C) United States; Netherlands

D) France; Netherlands

5) The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios:

A) are poorly diversified.

B) are properly diversified.

C) contain only U.S. equity investments.

D) none of the above

True/False

1) The Sharpe and Treynor measures are each measures of return per unit of risk.

2) Good financial advice would suggest that investors should examine returns by the amount of return per unit of risk accepted, rather than in isolation.

3) The denominator of the Treynor measure is portfolio risk as measured by the standard deviation of the portfolio.

4) The denominator of the Sharpe measure is portfolio risk as measured by the standard deviation of the portfolio.

5) The denominator of the Sharpe measure is the portfolio's beta, the systematic risk of the portfolio, as measured against the world market portfolio.

6) The denominator of the Treynor measure is the portfolio's beta, the systematic risk of the portfolio, as measured against the world market portfolio.

#ECO 410 Week 9 Quiz – Strayer

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ECO 450 Week 9 Quiz – Strayer

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Quiz 7 Chapter 13 and 14

Chapter 13

The Theory of Income Taxation

True/False Questions

1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.

2. Comprehensive income excludes unrealized capital gains.

3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.

4. Homeowners earn rental income-in-kind from their home that would be taxable under a comprehensive income tax.

5. A comprehensive income tax is a lump-sum tax.

6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.

7. A comprehensive income tax will always reduce work effort by taxpayers.

8. The substitution effect of a tax-induced decline in wages always leads workers to work less.

9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero.

10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.

11. Comprehensive income is the sum of annual consumption and the change in net worth.

12. A tax on interest income does not prevent credit market from efficiently allocating resources.

13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.

14. Because a tax on interest income results in income and substitution effects, it is not possible to predict the effect it will have on saving.

15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.

16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.

17. The Haig-Simons definition of income is different from comprehensive income.

18. Comprehensive income equals consumption plus the change in net worth.

Multiple Choice Questions

1. Comprehensive income:

a. is the sum of annual consumption and realized capital gains.

b. is the sum of annual consumption and changes in net worth.

c. excludes corporation income.

d. is the sum of annual consumption and net worth.

2. A tax on labor income:

a. results only in an income effect that always decreases hours worked per year.

b. results in a substitution effect that always decreases hours worked per year.

c. results in an income effect that increases hours worked per year if leisure is a normal good.

d. both (a) and (b)

e. both (b) and (c)

3. The market supply of labor is perfectly inelastic. Then it follows that:

a. the substitution effect of wage changes is zero.

b. the income effect of wage changes is zero.

c. leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.

d. the excess burden of a tax on labor income will be zero.

4. The compensated labor supply curve:

a. will always be vertical.

b. will always be upward sloping.

c. will always be downward sloping.

d. reflects both the income and substitution effects of wage changes.

5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:

a. result in an accurate estimate of the excess burden.

b. overestimate the excess burden.

c. underestimate the excess burden.

d. accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.

6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:

a. very elastic.

b. almost perfectly inelastic.

c. always upward sloping.

d. perfectly elastic.

7. A flat-rate tax on labor income will:

a. always reduce hours worked per year.

b. always increase hours worked per year.

c. either increase or decrease hours worked per year.

d. never have any effect on the amount of leisure hours per year.

8. A tax on interest income:

a. causes the gross interest rate paid by investors to exceed the net interest rate received by savers.

b. will always reduce saving.

c. will always increase saving.

d. is equivalent to a lump-sum tax.

9. If the market supply curve of savings is upward sloping, a tax on interest income will:

a. increase the amount of saving.

b. increase the market rate of interest.

c. decrease the market rate of interest.

d. have no effect on the market rate of interest.

10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:

a. borne by employers as a reduction in profits.

b. split between workers and employers.

c. paid entirely by workers.

d. shifted forward to consumers.

11. Which of the following is true about comprehensive income?

a. Only labor income is included.

b. Only capital income is included.

c. Capital gains are not included.

d. Both realized and unrealized capital gains are included.

12. Which of the following will increase a person’s comprehensive income?

a. an increase in the market value of the person’s home

b. a decrease in the value of the person’s stock portfolio

c. a decrease in labor income

d. a decrease in consumption

13. A tax on labor income will:

a. increase the net wage received by workers.

b. decrease the net wage received by workers.

c. cause that net wage received by workers to decline below the gross wage paid by employers.

d. both (b) and (c)

14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:

a. r

b. t

c. (1 + r)

d. [1 + r(1 – t)]

15. The higher the compensated elasticity of supply of savings,

a. the lower the excess burden of a tax on capital income.

b. the higher the excess burden of a tax on capital income.

c. the higher the excess burden of a tax on labor income.

d. both (b) and (c)

16. The Haig-Simons definition of income:

a. is the sum of annual consumption and realized capital gains.

b. is the sum of annual consumption and changes in net worth.

c. excludes corporation income.

d. is the sum of annual consumption and net worth.

17 Comprehensive income:

a. includes realized capital gains, but not unrealized capital gains

b. includes both realized and unrealized capital gains.

c. excludes cash from the sale of assets.

d. excludes increases in the value of assets.

18. Income-in-kind:

a. is exemplified by nonpecuniary returns.

b. is generally non-taxable because there is no monetary transaction.

c. is generally taxable.

d. both (a) and (b).

19. An example of a nonpecuniary return is:

a. job satisfaction.

b. unemployment benefits.

c. employer contributions to a retirement plan.

d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?

a. 90%

b. 75%

c. 60%

d. 50%

Chapter 14

Taxation of Personal Income in the United States

True/False Questions

1. Taxable income in the United States exceeds adjusted gross income.

2. Taxable income in the United States includes all capital gains earned, whether or not they are realized.

3. Taxable income in the United States amounts to less than 50 percent of personal income.

4. Tax preferences are really subsidies to certain activities.

5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.

6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.

7. The U.S. personal income tax is not a progressive tax.

8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent.

9. Under current rules, only real interest earned is subject to income tax.

10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation.

11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.

12. Tax credits vary with a person’s marginal tax rate.

13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax preferences.

14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.

15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.

16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.

17. Tax preferences are exclusions, exemptions, and deductions from the tax base.

18. Income-in-kind is not considered a tax preference.

Multiple Choice Questions

1. Adjusted gross income, as defined by the United States Tax Code,

a. exceeds taxable income.

b. equals taxable income.

c. is less than taxable income.

d. is greater than comprehensive income.

2. Tax preferences:

a. are exclusions, exemptions, and deductions from the tax base.

b. are in the tax code by accident.

c. are extra taxes on certain taxpayers.

d. increase the amount of income that is taxable.

e. both (a) and (d)

3. Currently, the tax treatment of capital gains in the United States is such that:

a. all capital gains are taxed.

b. all realized capital gains are taxed.

c. most realized capital gains are taxed.

d. only capital gains adjusted for inflation are taxed.

4. The exclusion of interest of state and local bonds from taxation by the federal government:

a. decreases interest costs for state and local governments.

b. increases interest costs for state and local governments.

c. benefits lower-income taxpayers more than upper-income taxpayers.

d. discourages borrowing by local governments.

5. The value of personal exemptions in terms of taxes saved:

a. is the same for all taxpayers.

b. varies with family size.

c. varies with taxpayers’ marginal tax rates.

d. both (b) and (c)

6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:

a. 6 percent.

b. 9 percent.

c. 20 percent.

d. 25 percent.

7. Tax expenditures are:

a. expenditures made to collect taxes.

b. losses in revenue due to tax preferences.

c. less than 1 percent of tax revenue.

d. both (b) and (c)

8. Under the federal personal income tax rules prevailing as of 2009,

a. all interest expense is tax deductible.

b. the interest expense for mortgages on first and second homes is tax deductible.

c. the interest expense for mortgages only on first homes is tax deductible.

d. no interest is tax deductible.

9. The reduction in marginal tax rates will:

a. increase the excess burden of tax preferences.

b. increase tax expenditures.

c. decrease the excess burden of tax preferences.

d. have no effect of tax expenditures.

10. “Bracket creep” is no longer a problem in the United States because:

a. the tax brackets are indexed.

b. capital gains are now fully taxable.

c. only real interest is taxed.

d. capital gains are indexed.

11. Which of the following is true for the federal income tax in the United States?

a. All income irrespective of its source or use is taxed at the same rate.

b. Comprehensive income is the tax base.

c. The tax base is less than 50 percent of comprehensive income.

d. All realized and unrealized capital gains are included in the tax base.

12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:

a. only 15 percent.

b. higher than that paid by upper-income taxpayers.

c. zero.

d. negative.

13. The excess burden of tax preferences:

a. depends on average tax rates.

b. will be higher, the higher the marginal tax rate is.

c. will be lower, the higher the marginal tax rate is.

d. is independent of marginal tax rates.

14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:

a. reduce the tax burden on upper-income groups.

b. increase the tax burden on upper-income groups.

c. increase the share of taxes paid by lower-income groups.

d. both (a) and (c)

15. Removing savings from the tax base of the personal income tax is likely to:

a. increase work effort.

b. decrease work effort.

c. lower market equilibrium interest rates by increasing the supply of loanable funds.

d. increase market equilibrium interest rates, thereby increasing the demand for loanable funds.

16. Which is a justification for tax preferences?

a. administrative difficulties

b. improving equity

c. encouraging private expenditures that create external benefits

d. all of the above

17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:

a. more than $10 million.

b. less than $10 million.

c. remain at $10 million.

d. none of the above is certain to occur

18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?

a. reduction of the highest marginal tax rate

b. increased the marriage penalty

c. created a new 40% tax bracket

d. both (a) and (c)

19. As of 2009, the highest marginal tax rate is:

a. 39.6%

b. 38%

c. 35%

d. 32.5%

20. Which is an example of an itemized deduction under the U.S. code as of 2009?

a. state and local income tax

b. state and local property tax

c. all medical expenses

d. both (a) and (b)

#ECO 450 Week 9 Quiz – Strayer

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ECO 550 Week 9 Assignment 3 – Strayer

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Assignment 3: Long-Term Investment Decisions Due Week 9 and worth 300 points

Assume that the low-calorie frozen, microwavable food company from Assignments 1 and 2 wants to expand and has to make some long-term capital budgeting decisions. The company is currently facing increases in the costs of major ingredients.

Use the Internet and Strayer databases to research government policies and regulation.

Write a six to eight (6-8) page paper in which you:

1. Outline a plan that managers in the low-calorie, frozen microwaveable food company could follow in anticipation of raising prices when selecting pricing strategies for making their products response to a change in price less elastic. Provide a rationale for your response.

2. Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.

3. Determine whether or not government regulation to ensure fairness in the low-calorie, frozen microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response.

4. Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities.

5. Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact to profitability of such a convergence. Provide two (2) examples of instances that support your response.

6. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

Your assignment must follow these formatting requirements:

· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

· Propose how differences in demand and elasticity lead managers to develop various pricing strategies.

· Analyze the economic impact of contracting, governance and organizational form within organizations.

· Use technology and information resources to research issues in managerial economics and globalization.

· Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

#ECO 550 Week 9 Assignment 3 – Strayer

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Week 9 Discussion

"Impact of Government Regulation" Please respond to the following:

John Stossel (TV personality) on Regulation

http://www.youtube.com/watch?v=FMpt7JYF_Lc

http://www.youtube.com/watch?v=L478SB2uoOM

http://www.youtube.com/watch?v=HucEOBf9OMs

http://www.youtube.com/watch?v=pAg3TUX5MYk

http://www.youtube.com/watch?v=dZL25NSLhEA

Government regulation- various videos

http://www.youtube.com/watch?v=OPbw3Csj6I8

http://www.youtube.com/watch?v=lZfbZDK0hLw

http://www.youtube.com/watch?v=KMoRgHZPVgI

There is a economics phrase "The Seen and The Unseen." or unintended consequences of government regulation. This is the title of a famous essay by French economist Frederic Bastiat. It is easier to see the seen, the effects or unintended effects or consequences, but harder to see the unseen which is what would have been, what inventions were stifled, what production was stifled by regulation.

Frederic Bastiat on the Seen and Unseen

YouTube URL: http://www.youtube.com/watch?v=ZFxy6BmMJd8

#ECO 550 Week 9 Discussion Question – Strayer New

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FIN 320 Week 9 Quiz – Strayer

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Quiz 7 Chapter 17 and 18

Chapter 17: ___________________________________________________________________________

Today's futures markets are dominated by trading in _______ contracts.

metals

agriculture

financial

commodity

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

decrease substantially

increase substantially

remain unchanged

increase or decrease substantially

If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

long call option

long put option

long futures contract

short futures contract

The clearing corporation has a net position equal to ______.

the open interest

the open interest times 2

the open interest divided by 2

zero

The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

cash; cash

cash; actual

actual; cash

actual; actual

Which one of the following contracts requires no cash to change hands when initiated?

Listed put option

Short futures contract

Forward contract

Listed call option

Synthetic stock positions are commonly used by ______ because of their ______.

market timers; lower transaction cost

banks; lower risk

wealthy investors; tax treatment

money market funds; limited exposure

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

Investors; regulators

Hedgers; speculators

Speculators; hedgers

Regulators; investors

Futures contracts have many advantages over forward contracts except that _________.

futures positions are easier to trade

futures contracts are tailored to the specific needs of the investor

futures trading preserves the anonymity of the participants

counterparty credit risk is not a concern on futures

10.

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

an arbitrage

a cross-hedge

an over hedge

a spread hedge

11.

The open interest on silver futures at a particular time is the number of __________.

all outstanding silver futures contracts

long and short silver futures positions counted separately on a particular trading day

silver futures contracts traded during the day

silver futures contracts traded the previous day

12.

An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

13.

An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

14.

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

liquidity; all traders must trade a small set of identical contracts

credit risk; all traders understand the risk of the contracts

pricing; convergence is more likely to take place with fewer contracts

trading cost; trading volume is reduced

15.

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

market

credit

interest rate

basis

16.

In the futures market the short position's loss is ___________ the long position's gain.

greater than

less than

equal to

sometimes less than and sometimes greater than

17.

A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

sell wheat futures

buy wheat futures

buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18.

Which of the following provides the profit to a long position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

19.

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

cross-hedge

reversing trade

spread position

straddle

20.

Interest rate futures contracts exist for all of the following except __________.

federal funds

Eurodollars

banker's acceptances

repurchase agreements

21.

Initial margin is usually set in the region of ________ of the total value of a futures contract.

5%-15%

10%-20%

15%-25%

20%-30%

22.

Margin must be posted by ________.

buyers of futures contracts only

sellers of futures contracts only

both buyers and sellers of futures contracts

speculators only

23.

The daily settlement of obligations on futures positions is called _____________.

a margin call

marking to market

a variation margin check

the initial margin requirement

24.

Which of the following provides the profit to a short position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

25.

Margin requirements for futures contracts can be met by ______________.

cash only

cash or highly marketable securities such as Treasury bills

cash or any marketable securities

cash or warehouse receipts for an equivalent quantity of the underlying commodity

26.

An established value below which a trader's margin may not fall is called the ________.

daily limit

daily margin

maintenance margin

convergence limit

27.

Which one of the following is a true statement?

A margin deposit can be met only by cash.

All futures contracts require the same margin deposit.

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28.

At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

marking to market

the convergence property

the open interest

the triple witching hour

29.

A futures contract __________.

is a contract to be signed in the future by the buyer and the seller of a commodity

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

gives the buyer the right, but not the obligation, to buy an asset some time in the future

30.

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

Index arbitrage

Marking to market

Reversing trades

Settlement transactions

31.

Which one of the following refers to the daily settlement of obligations on future positions?

Marking to market

The convergence property

The open interest

The triple witching hour

32.

The most actively traded interest rate futures contract is for ___________.

LIBOR

Treasury bills

Eurodollars

Treasury bonds

33.

The CME weather futures contract is an example of ______________.

a cash-settled contract

an agricultural contract

a financial future

a commodity future

34.

Single stock futures, as opposed to stock index futures, are _______________.

not yet being offered by any exchanges

offered overseas but not in the United States

currently trading on One Chicago, a joint venture of several exchanges

scheduled to begin trading in 2015 on several exchanges

35.

You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

a cross-hedge

a reversing trade

a speculation

marking to market

36.

A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

cross-hedging

long hedging

spreading

speculating

37.

Futures markets are regulated by the __________.

CFA Institute

CFTC

CIA

SEC

38.

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

cross-hedging

short hedging

spreading

speculating

39.

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

that the market believed that Obama had a 57% chance of winning

that the market believed that Obama would not win the election

nothing about the market's belief concerning the odds of Obama winning

that the market believed Obama's chances of winning were about 43%

40.

An investor would want to __________ to exploit an expected fall in interest rates.

sell S&P 500 Index futures

sell Treasury-bond futures

buy Treasury-bond futures

buy wheat futures

41.

Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

are; are

are; are not

are not; are

are not; are not

42.

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43.

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

44.

Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

make; make

make; take

take; make

take; take

45.

An investor would want to __________ to hedge a long position in Treasury bonds.

buy interest rate futures

buy Treasury bonds in the spot market

sell interest rate futures

sell S&P 500 futures

46.

Futures contracts are said to exhibit the property of convergence because _______________.

the profits from long positions and short positions must ultimately be equal

the profits from long positions and short positions must ultimately net to zero

price discrepancies would open arbitrage opportunities for investors who spot them

the futures price and spot price of any asset must ultimately net to zero

47.

In the context of a futures contract, the basis is defined as ______________.

the futures price minus the spot price

the spot price minus the futures price

the futures price minus the initial margin

the profit on the futures contract

48.

The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

CBOE

CBOT

CME

Eurex

49.

Violation of the spot-futures parity relationship results in _______________.

fines and other penalties imposed by the SEC

arbitrage opportunities for investors who spot them

suspension of delivery privileges

suspension of trading

50.

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

F1 = S0(1 + rf)

F0 = S0(1 + rf - d)T

F0 = S0(1 + rf + d)T

F0 = S0(1 + rf)T

51.

An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

F0 - FT

F0 - S0

FT - F0

FT - S0

52.

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

53.

Approximately __________ of futures contracts result in actual delivery.

less than 1% to 3%

less than 5% to 15%

less than 60% to 80%

54.

A long hedger will __________ from an increase in the basis; a short hedger will __________.

be hurt; be hurt

be hurt; profit

profit; be hurt

profit; profit

55.

At year-end, taxes on a futures position _______________.

must be paid if the position has been closed out

must be paid if the position has not been closed out

must be paid regardless of whether the position has been closed out or not

need not be paid if the position supports a hedge

56.

A speculator will often prefer to buy a futures contract rather than the underlying asset because: I. Gains in futures contracts can be larger due to leverage. II. Transaction costs in futures are typically lower than those in spot markets. III. Futures markets are often more liquid than the markets of the underlying commodities.

I and II only

II and III only

I and III only

I, II, and III

57.

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.)

-$12,500

-$15,000

$15,000

$12,500

58.

The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

1,274.33

1,286.95

1,268.61

1,291.29

59.

The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.

$1,504.99

$1,569.08

$1,554.04

$1,557.73

60.

If you expect a stock market downturn, one potential defensive strategy would be to __________.

buy stock-index futures

sell stock-index futures

buy stock-index options

sell foreign exchange futures

61.

At contract maturity the basis should equal ___________.

the risk-free interest rate

-1

62.

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________.

buy the September contract and sell the June contract

sell the September contract and buy the June contract

sell the September contract and sell the June contract

buy the September contract and buy the June contract

63.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________.

$3.27

$4.39

$5.24

$6.72

64.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Buy gold in the spot with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

65.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

$95.24

$100

$105

$107

66.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

$76.29

$93.46

$107

$131.08

67.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. After Monday's close the balance on your margin account will be ________.

$2,700

$2,000

$3,137.50

$2,262.50

68.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. At the close of day on Tuesday your cumulative rate of return on your investment is _____.

16.2%

-5.8%

-.16%

-2.2%

69.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. On which of the given days do you get a margin call?

Monday

Tuesday

Wednesday

None of these options

70.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. The cumulative rate of return on your investment after Wednesday is a ____.

79.9% loss

2.6% loss

33% gain

53.9% loss

71.

The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

$40 million

$400 million

$400 billion

$400 trillion

72.

If the risk-free rate is greater than the dividend yield, then we know that _______________.

the futures price will be higher as contract maturity increases

F0<S0

FT>ST

arbitrage profits are possible

73.

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________.

17%

LIBOR

LIBOR + 1%

LIBOR - 1%

74.

Interest rate swaps involve the exchange of ________________.

actual fixed-rate bonds for actual floating-rate bonds

actual floating-rate bonds for actual fixed-rate bonds

net interest payments and an actual principal swap

net interest payments based on notional principal, but no exchange of principal

75.

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

long call

short call

short stock position

long stock position

76.

The _________ contract dominates trading in stock-index futures.

S&P 500

DJIA

Nasdaq 100

Russell 2000

77.

The ________ and the _______ have the lowest correlations with the large-cap indexes.

Nasdaq Composite; Russell 2000

NYSE; DJIA

S&P 500; DJIA

Russell 2000; S&P 500

78.

The use of leverage is practiced in the futures markets due to the existence of _________.

banks

brokers

clearinghouses

margin

79.

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested.

31%

41%

52%

64%

80.

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

$10,400

$14,300

$16,500

$21,300

81.

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Convergence

Margin

Basis

Volatility

82.

A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

buy T-bond futures

sell T-bond futures

buy stock-index futures

sell stock-index futures

83.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn?

$27,500

$31,875

$33,875

$35,950

84.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

$2,000

$31,875

$33,875

85.

A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

sell T-bond futures

buy T-bond futures

buy stock-index futures

sell stock-index futures

86.

A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________.

buy T-bond futures and sell stock-index futures

sell T-bond futures and buy stock-index futures

buy stock-index futures and buy T-bond futures

sell stock-index futures and sell T-bond futures

87.

The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could: I. Engage in a swap to pay fixed and receive variable interest payments II. Engage in a swap to pay variable and receive fixed interest payments III. Buy T-bond futures IV. Sell T-bond futures

I and II only

I and IV only

II and III only

II and IV only

Chapter 18: ___________________________________________________________________________

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

must have had superior stock selection ability.

must have had superior asset allocation ability.

must have had superior timing ability.

may or may not have outperformed the S&P 500 on a risk-adjusted basis.

The comparison universe is __________.

the bogey portfolio

a set of mutual funds with similar risk characteristics to your mutual fund

the set of all mutual funds in the United States

the set of all mutual funds in the world

Which one of the following performance measures is the Sharpe ratio?

Average excess return to beta ratio

Average excess return to standard deviation ratio

Alpha to standard deviation of residuals ratio

Average return minus required return

The M2 measure is a variant of ________________.

the Sharpe measure

the Treynor measure

Jensen's alpha

the appraisal ratio

A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills.

84.6%

118%

18%

15.4%

Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

dollar-weighted return method; dollar-weighted return method

dollar-weighted return method; time-weighted return method

time-weighted return method; dollar-weighted return method

time-weighted return method; time-weighted return method

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified.

Sharpe; Sharpe

Sharpe; Treynor

Treynor; Sharpe

Treynor; Treynor

Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________.

is better than the performance of portfolio B

is the same as the performance of portfolio B

is poorer than the performance of portfolio B

cannot be measured since there is no data on the alpha of the portfolio

10.

Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

The Treynor-Black model

The single-index model

The Fama-French three-factor model

The Sharpe model

11.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio A?

12.38%

2.38%

.91%

3.64%

12.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the M2 measure for portfolio B?

.43%

1.25%

1.77%

1.43%

13.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

S&P 500

14.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

-1.33%

1.43%

15.

Which one of the following is largely based on forecasts of macroeconomic factors?

Security selection

Passive investing

Market efficiency

Market timing

16.

Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

$100

$1,626

$1.5 million

$36.7 billion

17.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

18.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

19.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

fund A

fund B

fund C

S&P 500

20.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total excess return on the managed portfolio was __________.

21.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total excess return was __________.

1.5%

2.5%

3.5%

22.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total excess return was __________.

1.5%

2.5%

3.5%

23.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total extra return on the managed portfolio was __________.

24.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total extra return was __________.

-1%

25.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total extra return was __________.

-1%

26.

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

Geometric average

Arithmetic average

Dollar weighted

Internal

27.

The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

Sharpe ratio

Treynor measure

Jensen measure

appraisal ratio

28.

28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

alpha

beta

excess return

standard deviation

29.

The M2 measure of portfolio performance was developed by ______________.

Modigliani and Miller

Modigliani and Modigliani

Merton and Miller

Fama and French

30.

Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

the markets are efficient

portfolio risk is constant over time

diversification pays off

security selection is more valuable than asset allocation

31.

Perfect-timing ability is equivalent to having __________ on the market portfolio.

a call option

a futures contract

a put option

a forward contract

32.

One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

51.3%

65.9%

67.1%

10.83%

33.

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

a market portfolio

a passive portfolio

an active portfolio

an index portfolio

34.

If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

be skewed to the left

be skewed to the right

exhibit kurtosis

exhibit neither skewness nor kurtosis

35.

Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision.

68%

74%

88%

97%

36.

In the Treynor-Black model, the active portfolio will contain stocks with __________.

alphas equal to zero

negative alphas

positive alphas

some negative and some positive alphas

37.

Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____.

III

All contribute equally to fund performance.

38.

The theory of efficient frontiers has __________.

no adherents among practitioners

a small number of adherents among practitioners

a significant number of adherents among practitioners

complete support by practitioners

39.

In the Treynor-Black model, security analysts __________.

analyze a relatively small number of stocks

analyze all stocks that are publicly traded

are redundant

devote their attention to market timing rather than fundamental analysis

40.

In the Treynor-Black model, security analysts __________.

analyze the entire universe of stocks

assume that markets are inefficient

treat market index as a baseline portfolio from which an active portfolio is constructed

focus on selecting the best-performing bogey

41.

Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing

I and II only

II and III only

I, II, and III only

I, II, III, and IV

42.

A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

decreases

increases

remains the same

may increase or decrease

43.

In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________.

alpha

beta

residual variance

information ratio

44.

If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

alphas; zero

alphas; positive

betas; positive

standard deviations; positive

45.

In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

alpha/beta

alpha/residual variance

beta/residual variance

none of these options

46.

The critical variable in the determination of the success of the active portfolio is the stock's __________.

alpha/nonsystematic risk ratio

alpha/systematic risk ratio

delta/nonsystematic risk ratio

delta/systematic risk ratio

47.

Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

48.

Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

49.

The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

macroeconomic; macroeconomic

macroeconomic; microeconomic

microeconomic; macroeconomic

microeconomic; microeconomic

50.

Active portfolio managers try to construct a risky portfolio with _______.

a higher Sharpe ratio than a passive strategy

a lower Sharpe ratio than a passive strategy

the same Sharpe ratio as a passive strategy

very few securities

51.

In performance measurement, the bogey portfolio is designed to _________.

measure the returns to a completely passive strategy

measure the returns to a similar active strategy

measure the returns to a given investment style

equal the return on the S&P 500

52.

__________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods.

No; no

No; some

Some; no

Some; some

53.

A passive benchmark portfolio is: I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II. One in which an indexed portfolio is held within each asset class III. Often called the bogey

I only

I and III only

II and III only

I, II, and III

54.

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

-5%

10%

95%

55.

It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

Portfolio composition is rarely stable long enough to identify abnormal performance.

Even if successful, there is really not much value to be added by active strategies such as market timing.

56.

The term alpha transport refers to _____.

establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Krueger is __________.

20%

60%

75%

120%

58.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger's imperfect forecasting ability is __________.

$30,000

$67,500

$108,750

$217,500

59.

Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

$31,250

$200,000

$500,000

$625,000

60.

A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

Russell 2000 Index

S&P 500 Index

Wilshire 5000 Index

Dow Jones Industrial Average

61.

Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000 (there was no mortgage on the property). At the time of the sale, you paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the end of the year), what annual rate of return did you earn?

11%

21%

25%

62.

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4. What was the manager's return in the month?

2.07%

2.21%

2.24%

4.8%

63.

2.07%

2.21%

2.24%

4.8%

64.

Underperformance = .03%

Overperformance = .03%

Overperformance = .14%

Underperformance = 3%

65.

-.15%

.15%

-.3%

.3%

66.

-.18%

.18%

-.15%

.15%

67.

Morningstar's RAR produce results that are similar but not identical to ________.

Jensen's alpha

the Treynor ratio

the Sharpe ratio

68.

The Treynor-Black model assumes that security markets are _________.

completely efficient

nearly efficient

very inefficient

random walks

69.

The information ratio is equal to the stock's ____ divided by its ______.

diversifiable risk; beta

beta; alpha

alpha; beta

alpha; diversifiable risk

70.

Empirical tests to date show ______________.

that many investors have earned large rewards by market timing

little evidence of market-timing ability

clear-cut evidence of substantial market-timing ability

evidence that absolutely no market-timing ability exists

71.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

.58%

.68%

.78%

.88%

72.

A portfolio generates an annual return of 17%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

2.15%

2.76%

2.94%

3.14%

73.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

.1143

.1233

.1354

.1477

74.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?

.0833

.1083

.1114

.1163

75.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

.3978

.4158

.4563

.4706

76.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?

.4757

.5263

.6842

.7252

77.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen's alpha of the portfolio if the risk-free rate is 5%?

.017

.034

.067

.078

78.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen's alpha of the portfolio if the risk-free rate is 6%?

.017

.028

.036

.078

79.

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

the bogey portfolio

the Vanguard Index

Jensen's alpha

the Treynor measure

80.

An attribution analysis will not likely contain which of the following components?

Asset allocation

Index returns

Risk-free returns

Security selection

81.

Which of the following investment strategies would have produced the highest returns in the time period since 1926?

T-bills portfolio

S&P 500 Index fund

Perfect market timing

Random stock selection

82.

What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

Solely active management

Enhanced index approach

Passive management

Random selection

83.

What is the term for the process used to assess portfolio manager performance?

Active analysis

Attribution analysis

Passive analysis

Treynor-Black Analysis

84.

A fund has excess performance of 1.5%. In looking at the fund's investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund's equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________.

security selection ability

better sector weightings in the equity portfolio

the asset allocation decision

finding securities with positive alphas

85.

For a market timer, the _____________ will be higher when RM is higher.

portfolio's alpha and beta

portfolio's unsystematic risk

portfolio's beta and slope of the characteristic line

security selection component of the portfolio

86.

The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to: I. Improve the diversification of the overall portfolio II. Improve the overall portfolio's Sharpe ratio III. Reach a higher CAL than would otherwise be possible

I only

I and II only

II and III only

I, II, and III

#FIN 320 Week 9 Quiz – Strayer

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FIN 350 Week 9 Quiz – Strayer

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Quiz 8 Chapter 18 and 19

Bank Regulation

1. Deposit insurance has a limit of:

$10,000.

$25,000.

$100,000.

$250,000.

2. The opening of a commercial bank in the United States

does not require a charter.

always requires a charter from a state government.

always requires a charter from the federal government.

requires a charter from a state or the federal government.

requires a charter from both the state and federal government.

3. Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed's reserve requirements.

may; are

may; are not

may not; are not

may not; are

4. National banks are regulated by ____, and state banks are regulated by ____.

the Comptroller of the Currency; their state agency

the Comptroller of the Currency; the Comptroller of the Currency

their state agency; their state agency

their state agency; the Comptroller of the Currency

5. All Fed member banks must hold

private insurance on deposits.

FDIC insurance on deposits.

both FDIC and private insurance on deposits.

none of the above

6. Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ allowed to use borrowed or deposited funds to purchase common stock.

are; are

are; are not

are not; are

are not; are not

7. Banks commonly use depositor funds to invest in stocks.

a. True

b. False

8. An "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a

standby letter of credit.

federal funds agreement.

repurchase agreement.

discount window agreement.

9. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own

reserve requirements.

capital ratios.

interest rates on savings deposits.

corporate loan interest rates.

10. The Glass-Steagall Act of 1933 prevented

any firm that accepts deposits from underwriting stocks and bonds of corporations.

any firm that accepts deposits from underwriting general obligation bonds of states and municipalities.

any firm that accepts deposits from holding any corporate bonds in its asset portfolio.

state-chartered banks from offering commercial loans.

11. Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980?

phase-out of deposit rate ceilings

allowance of checkable deposits for all depository institutions

new lending flexibility of depository institutions

allowance of interstate banking for depository institutions in most states

12. The Financial Reform Act was intended to:

prevent another credit crisis.

reduce capital ratios.

impose interest rate ceilings on deposits.

prevent banks from offering securities services.

13. The Garn-St. Germain Act of 1982

permitted depository institutions to offer money market deposit accounts.

prevented depository institutions from acquiring problem institutions across geographical boundaries.

required the Fed to explicitly charge depository institutions for its services.

allowed the Fed to provide check clearing to depository institutions at no charge.

14. Which of the following is not a specific criterion the FDIC uses to monitor banks?

capital adequacy

dollar value of fixed assets

asset quality

earnings

sensitivity to financial market conditions

15. The potential risk that financial problems can spread through financial institutions and the financial system is referred to as:

systemic

systematic

unsystematic

market

16. The Basel framework recommends capital requirements in proportion to:

mortgages

commercial paper

liabilities

risk-weighted assets

17. The Basel Accord

forces banks with greater risk to maintain more deposits.

forces banks with greater risk to maintain more capital.

forces banks with greater risk to maintain less capital.

none of the above

18. In general, a bank defines its value-at-risk as the estimated potential loss from its traditional businesses that could result from adverse movements in market prices.

a. True

b. False

19. Which of the following statements is incorrect?

The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period.

Some banks supplement the VAR estimate with stress tests.

In general, the VAR model does not lend itself to determine capital requirements.

All of the statements above are correct.

20. Which of the following is an "off-balance-sheet commitment?"

long-term debt

additional paid-in capital

notes payable

guarantees backing commercial paper issued by firms

21. The liquidity component of the CAMELS rating refers to

regulators' concern about how a bank's earnings would change if economic conditions change.

how well the bank's management would detect its own financial problems.

a bank's sensitivity to financial market conditions.

monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.

excessive borrowing by banks from outside sources, such as the discount window.

22. Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank?

Regulators may examine such banks frequently and thoroughly.

Regulators may request that a bank boost its capital level or delay its plans to expand.

Regulators can require that additional financial information be periodically updated to allow continued monitoring.

Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies.

All of the above are possible corrective actions taken by bank regulators.

23. The fee banks pay to the FDIC for deposit insurance is now

a fixed dollar amount for all banks.

a fixed percentage of the bank's deposit level for all banks.

a fixed percentage of the bank's loan volume for all banks.

based on the risk of the bank.

24. Generally, the failure of small banks

causes more widespread concern about the safety of the banking system than the failure of large banks.

causes equal concern about the safety of the banking system as the failure of large banks.

causes less concern about the safety of the banking system than the failure of large banks.

Either A or B can be true, depending on the type of business cycle that exists while the failures occur.

25. The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.

a. True

b. False

26. Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the capital and asset quality criteria?

Bank A is perceived as safer by both criteria.

Bank B is perceived as safer by both criteria.

Bank A is perceived as safer according to capital, but more risky according to asset quality.

Bank B is perceived as safer according to capital, but more risky according to asset quality.

27. The key reason for regulatory examinations (such as CAMELS ratings) is to

rate past performance.

detect problems of a bank in time to correct them.

check for embezzlement.

monitor reserve requirements.

28. Deposit insurance now covers all bank deposits without imposing any limit.

a. True

b. False

29. Which banking act allowed banks to cross state lines in order to acquire a failing institution?

McFadden Act

Glass-Steagall Act

DIDMCA

Garn-St. Germain Act

30. Which banking act allowed for the creation of NOW accounts?

McFadden Act

Glass-Steagall Act

DIDMCA

Garn-St. Germain Act

31. Which banking act allowed interstate banking?

Reigle-Neal Interstate Banking and Branching Efficiency Act

Glass-Steagall Act

DIDMCA

Sarbanes-Oxley Act

32. Which banking act permanently increased FDIC insurance up to $250,000?

DIDMCA

Sarbanes-Oxley Act

Financial Reform Act

Garn-St. Germain Act

33. Which banking act removed deposit rate ceilings?

McFadden Act

Glass-Steagall Act

DIDMCA

Garn-St. Germain Act

34. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on

economies of scale.

financial leverage.

diseconomies of scale.

capital adequacy theory.

35. Federal deposit insurance

existed since the 1800s.

was created in 1933.

was created after World War II.

was created in 1960.

36. ____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks.

Capital adequacy

Current stock price

Asset quality

Management

All of the above are used by the FDIC to rate banks.

37. The moral hazard problem is minimized when deposit insurance premiums are

zero (not imposed by the FDIC).

the same percentage of assets for all banks.

set at a fixed percentage of assets for large banks, and is zero for small banks.

set at a percentage of assets that is based on the bank's risk level.

38. Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999?

It complemented the Glass-Steagall Act.

It enabled commercial banks to more easily pursue securities and insurance activities.

It gave securities firms and insurance companies the right to acquire banks.

The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.

All of the above are true.

39. The ____ is the fund used to cover insured depositors.

Bank Insurance Fund

Federal Deposit Insurance Corporation (FDIC)

money market mutual fund

growth fund

none of the above

40. ____ is not a rating criterion used by the FDIC.

Capital adequacy

Off-balance sheet financing

Asset quality

Management

Liquidity

41. The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from

issuing commercial paper and bonds.

retaining earnings and issuing commercial paper.

retaining earnings and issuing common stock.

issuing bonds and common stock.

42. During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities.

Riegle Program

Sarbanes-Oxley Program

FDIC Program

Troubled Asset Relief Program (TARP)

43. The act of taking a risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem.

a. True

b. False

44. The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on productivity and the financial condition of the firm.

a. True

b. False

45. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.

a. True

b. False

46. Publicly-traded banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley Act.

a. True

b. False

47. The Financial Services Modernization Act of 1999

gave banks and other financial service firms less freedom to merge.

allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints.

offers very few benefits to a financial institution's clients.

increased the reliance of financial institutions on the demand for the single service they offer.

48. Which of the following is not true regarding the Financial Services Modernization Act of 1999?

It provided more momentum for the consolidation of financial services.

Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer.

Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired.

Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed.

all of the above are true

49. All state banks are required to be members of the Federal Reserve System.

a. True

b. False

50. State banks are regulated by the Comptroller of the Currency.

a. True

b. False

51. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC.

a. True

b. False

52. Commercial banks are allowed to invest in junk bonds.

a. True

b. False

53. In general, banks would prefer to maintain a high amount of capital to boost their return on equity ratio, yet regulators have argued that banks need only a sufficient amount of capital to absorb potential operating losses.

a. True

b. False

54. The provision of a letter of credit by a bank to issue commercial paper issued by a corporation is an example of an off-balance sheet commitment.

a. True

b. False

55. As a result of the Reigle-Neal Act, bank customers have benefited because of lower costs to banks and because of convenience.

a. True

b. False

56. There is much emphasis by regulators on the bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates.

a. True

b. False

57. If regulators reduce bank failures by imposing regulations that reduce competition, bank efficiency will be increased.

a. True

b. False

58. An ideal solution to react to a large failing bank would prevent a run on deposits of other large banks, yet not reward a poorly performing bank with a bailout.

a. True

b. False

59. ____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC).

Capital adequacy

Off-balance sheet financing

Asset quality

Management

Liquidity

60. A federal bank charter is issued by the

Comptroller of the Currency.

Securities and Exchange Commission.

U.S. Treasury.

Federal Reserve.

none of the above

61. Bank regulations typically:

involve a tradeoff between the safety of the banking system and the efficiency of bank operations.

impose restrictions on the types of assets in which banks can invest.

set requirements for the minimum amount of capital that banks must hold.

all of the above

62. When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.

a. True

b. False

63. Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers.

a. True

b. False

64. A bank can increase its capital ratio by:

buying back shares of its stock from shareholders.

selling assets.

increasing its dividend to encourage more investors to purchase its stock.

increasing its off-balance sheet activities.

65. The Basel III framework proposes:

lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis.

relying on the rating agencies to assess the risk of bank assets.

increased capital requirements and liquidity requirements for banks.

using the gap ratio to set the capital ratio.

66. During the credit crisis, all of the following occurred except:

some securities firms were allowed to become bank holding companies.

the Federal Reserve rescued American International Group, an insurance company.

the Treasury injected funds into financial institutions.

the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

67. The Volcker rule, named for a former Fed chair:

is intended to increase the powers of the Fed.

states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system.

sets limits on banks’ proprietary trading.

requires all banks to undergo annual stress tests.

68. The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010:

ended the system of risk-based insurance premiums.

set requirements for the Deposit Insurance Fund’s reserves.

raised the limit for insured deposits to $750,000 per depositor.

allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

Chapter 19—Bank Management

1. Which of the following statements is incorrect?

Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests.

Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.

To prevent agency problems, some banks provide stock as compensation to managers.

The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders.

2. When cash outflows temporarily exceed cash inflows, banks are most likely to experience

higher dividend payments.

illiquidity.

a negative duration on its assets.

an excess of capital.

3. Banks can resolve cash deficiencies by

creating additional liabilities.

selling assets.

buying back common stock.

increasing dividend payouts.

A or B

4. As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability.

higher; higher

lower; lower

higher; lower

lower; higher

5. Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand.

a. True

b. False

6. If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with ____ rates if it desires to maximize its expected returns. It could reduce its exposure to interest rate risk by setting ____ rates on its loans.

fixed; fixed

variable; fixed

variable; variable

fixed; variable

7. During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.

increase; more rate-sensitive than

decrease; more rate-sensitive than

increase; equally rate-sensitive as

decrease; equally rate-sensitive as

8. If a bank expected interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets.

decrease; sensitive

decrease; insensitive

increase; insensitive

none of the above

9. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's net interest margin is ____ percent.

4.0

3.6

6.7

5.0

10. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap is $____.

−300 million

300 million

−500 million

500 million

11. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap ratio is ____ percent.

37.5

50.0

100.0

40.0

12. The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

gap measurement.

duration measurement.

duration ratio.

gap ratio.

13. A gap ratio of less than one suggests that

rate-sensitive assets exceed rate-sensitive liabilities.

an increase in interest rates would increase the bank's net interest margin.

rate-sensitive liabilities exceed rate-sensitive assets.

a decrease in interest rates would decrease the bank's net interest margin.

B and D

14. Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.

a. True

b. False

15. The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

lower than

higher than

the same as

A or B, depending on the size of the coupon payment

16. In general, the duration of zero-coupon securities with short maturities is ____ than the duration of zero-coupon securities with long maturities.

higher than

lower than

equal to

A or B, depending on the issuer of the securities

17. Other things equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

shorter; longer

shorter; shorter

longer; shorter

longer; longer

18. For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____.

exceeds; zero

exceeds; negative

exceeds; positive

is less than; negative

19. Other things being equal assets with ____ maturities and ____ frequent coupon payments have shorter durations.

shorter; more

shorter; less

longer; more

longer; less

20. If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

default risk would decrease.

default risk would increase.

liquidity risk would increase.

liquidity risk would decrease.

B and C

21. Which of the following is not a likely method used by a bank to reduce interest rate risk?

maturity matching

using fixed-rate loans

using interest rate futures contracts

using interest rate caps

22. Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations.

a. True

b. False

23. The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.

sale; increases

sale; reduces

purchase; reduces

both A and C are correct

24. Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk?

one whose assets and liabilities are equally interest-rate sensitive

one whose assets are more interest-rate sensitive than its liabilities

one whose liabilities are more interest-rate sensitive than its assets

one whose gap ratio is equal to 1.0

25. Banks increase their risk by increasing their capital as a percentage of assets.

a. True

b. False

26. Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.

increase; increase

reduce; reduce

increase; reduce

reduce; increase

27. Banks tend to focus their loans in one industry so that they can specialize on one industry and reduce the credit risk of their loan portfolio.

a. True

b. False

28. Most loan sales enable the bank originating the loan to continue servicing the loan.

a. True

b. False

29. ROE is defined as

30. The greater the ____, the greater the amount of assets per dollar's worth of equity.

leverage measure

ratio of equity to debt

capital ratio

proportion of loans to securities in the asset portfolio

31. A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

10 percent

.2 percent

2 percent

20 percent

none of the above

32. A bank has the following asset and liability portfolios. What is the gap?

Rate-sensitive

Amount

Rate-sensitive

Amount

assets

(in millions)

liabilities

(in millions)

Floating-rate

loans

$4,000

NOW accounts

$1,750

Floating-rate

mortgages

1,000

MMDAs

4,500

Short-term

Treasury securities

1,500

Short-term CDs

1,000

$6,500

$7,250

$750 million

−$750 million

1.12

.896

none of the above

33. A bank has the following asset and liability portfolios. What is the gap ratio?

Rate-sensitive

Amount

Rate-sensitive

Amount

assets

(in millions)

liabilities

(in millions)

Floating-rate

loans

$4,000

NOW accounts

$1,750

Floating-rate

mortgages

1,000

MMDAs

4,500

Short-term

Treasury securities

1,500

Short-term CDs

1,000

$6,500

$7,250

$750 million

−$750 million

1.12

.896

none of the above

34. If Bank A has a negative gap and Bank B has a positive gap. Which of the following is true?

Bank A is more favorably affected by rising interest rates.

Bank B is more favorably affected by falling interest rates.

Bank A is adversely affected by falling interest rates.

none of the above

35. Which of the following is a measure for banks to assess their exposure to interest rate risk?

capital ratio

leverage measure

duration measurement

gap ratio

C and D

36. If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses.

reduces the potential adverse effect; reduces the potential favorable effect

increases the potential adverse effect; increases the potential favorable effect

decreases the potential adverse effect; increases the potential favorable effect

increases the potential adverse effect; decreases the potential favorable effect

37. Which of the following loan portfolios are best diversified against default risk?

consumer loans to farmers and commercial loans to farm equipment dealers in a local area

commercial loans to the same industry

commercial loans to various retail stores in the same city

consumer and commercial loans to different industries in different cities

38. Banks can increase their liquidity position by restructuring their asset portfolio to contain less ____ and more ____.

excess reserves; Treasury bills

Treasury bonds; corporate bonds

loans; Treasury bills

none of the above

39. Banks would reduce their liquidity position by restructuring their asset portfolio to contain less ____ and more ____.

Treasury securities; excess reserves

loans; Treasury securities

corporate bonds; Treasury securities

none of the above

40. Banks can reduce their default risk by restructuring their asset portfolio to contain less ____ and more ____.

Treasury bonds; corporate bonds

Treasury bonds; municipal bonds

Treasury bonds; commercial loans

none of the above

41. Banks can increase their potential interest revenues by restructuring their asset portfolio to contain less ____ and more ____.

Treasury bonds; commercial loans

Treasury bonds; excess reserves

consumer loans; Treasury bills

none of the above

42. If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid).

traditional demand deposits; commercial loans

traditional demand deposits; consumer loans

NOW accounts; consumer loans

NOW accounts; commercial loans

43. A bank that holds a greater percentage of traditional demand deposits and loans will likely incur ____ non-interest expenses and have a ____ net interest margin than other banks of the same size (assuming that its loan losses are no higher than those at other banks).

greater; higher

greater; lower

less; higher

less; lower

44. A bank's net interest margin is commonly defined as

interest revenues minus interest expenses.

(interest revenues minus interest expenses)/total assets.

(interest revenues minus interest expenses)/total liabilities.

(interest revenues minus interest expenses)/capital.

45. A common method for banks to reduce their default risk is to

specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.

specialize in loans of companies whose earnings patterns are quite similar over time.

A and B

none of the above

46. International diversification of loans can best reduce the bank's overall default risk if

the countries where loans are given are clustered together in a single continent.

the countries where loans are given have economic cycles that do not move together over time.

A and B

none of the above

47. A bank's net interest margin will likely decline if it has a large amount of

rate-sensitive assets and no rate-sensitive liabilities.

rate-sensitive liabilities and no rate-sensitive assets.

loans to technology firms.

real estate loans.

48. Banks can reduce their required capital levels by

increasing their loans.

reducing their loans.

increasing their dividends.

obtaining more deposits.

49. Terp Bank obtains a relatively large portion of its funds from conventional demand deposits as it creates many branches with many employees to attract demand deposits. Its interest expenses should be relatively ____, while its noninterest expenses should be relatively ____.

high; low

low; high

high; high

low; low

none of the above

50. Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is

$1 million.

−$1 million.

−5 percent.

5 percent.

51. ____ is not a method used to assess interest rate risk.

Efficiency analysis

Gap analysis

Duration analysis

Regression analysis

52. Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates.

−$1 million; increase

−$1 million; decrease

$1 million; increase

$1 million; decrease

none of the above

53. Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Leskar's gap ratio is ____.

1.5

0.67

$1 million

none of the above

54. ____ is (are) least likely to be used as a method of reducing interest rate risk.

Maturity matching

Using floating-rate loans

Stock options

Using interest rate swaps

Using interest rate caps

55. Ringo Bank has a profit after taxes of $3.0 million, total assets of $300 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is ____ percent.

1.0

10.0

3.0

none of the above

56. For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is

zero.

positive.

negative.

B or C

57. Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin?

the A$ appreciates against the pound

the A$ is stable against the pound

the A$ depreciates against the pound

the British interest rates increase

C and D

58. The performance of a bank that continually concentrates in short-term deposits in euros and adjustable-rate dollar loans with equal rate-sensitivity is

unaffected if European interest rates increase and U.S. rates decrease.

unaffected if U.S. interest rates increase and European interest rates decrease.

adversely affected if European interest rates increase and U.S. rates decrease.

adversely affected if U.S. interest rates increase and European rates decrease.

A and B

59. If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the

currency mix of assets is similar to that of liabilities.

overall rate-sensitivity of assets and liabilities are similar.

rate sensitivity of assets and liabilities is matched for each currency.

A and B

60. The risk of a loss due to closing out a transaction is referred to as ____ risk.

credit

settlement

interest rate

exchange rate

none of the above

61. The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.

a. True

b. False

62. Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market.

a. True

b. False

63. A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.

a. True

b. False

64. For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.

a. True

b. False

65. Floating-rate loans completely eliminate interest rate risk.

a. True

b. False

66. A bank can usually simultaneously maximize its return on assets and minimize credit risk.

a. True

b. False

67. If the currency mix of a bank's assets is similar to that of its liabilities and the overall rate sensitivity of its assets and liabilities is similar, interest rate risk is completely nonexistent.

a. True

b. False

68. Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank's net interest margin is

$1 million.

−1 million.

5 percent.

−5 percent.

69. ____ is not a method used to assess interest rate risk.

Gap analysis

Ratio analysis

Duration analysis

Regression analysis

All of the above are methods to assess interest rate risk.

70. ____ is (are) least likely to be used as a method of reducing interest rate risk.

Maturity matching

Floating-rate loans

Stock options

Interest rate swaps

Interest rate caps

71. Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

210

none of the above

72. Parsons Bank reported $3 million in interest revenues and $1 million in interest expenses. Parsons has $20 million in assets and $8 million in liabilities. Parsons net interest margin is ____ percent.

−10

none of the above

73. If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

decrease; sensitive

increase; insensitive

increase; sensitive

answers A and B are correct

none of the above

74. During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets.

decreasing; decrease

increasing; increase

decreasing; increase

increasing; decrease

answers C and D are correct

75. If interest rates ____, banks with ____ duration gaps will be ____ affected.

rise; positive; positively

rise; positive; adversely

decrease; positive; adversely

decrease; negative; positively

none of the above

76. In a regression of a bank's stock return on an interest rate proxy and market returns, a ____ coefficient for the interest rate variable suggests that bank performance is ____ affected by ____ interest rates.

positive; adversely; rising

positive; favorably; declining

negative; adversely; rising

negative; favorably; rising

none of the above

77. If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.

negative; smaller

positive; larger

negative; larger

none of the above

78. In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

more; fixed; variable

more; variable; fixed

less; fixed; variable

less; fixed; fixed

none of the above

79. Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio.

lower; increase

lower; decrease

higher; increase

higher; decrease

none of the above

80. The risk of a loss due to closing out a transaction is referred to as ____ risk.

settlement

credit

interest rate

exchange rate

none of the above

81. An effective way to align bank managers’ interests with shareholders’ goal of higher returns is to compensate the managers with fixed salaries without a bonus.

a. True

b. False

82. Which of the following is not a function of a bank’s board of directors?

overseeing acquisitions

determining a compensation system for the bank’s executives

overseeing policies for changing the bank’s capital structure

pursuing a proxy contest to change the bank’s dividend policy

83. As part of its liquidity management, a bank might:

purchase interest rate swaps.

issue commercial paper.

purchase long-term Treasury securities.

A and C

84. A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

interest rate cap

interest rate futures contract

interest rate swap

maximum rate contract

85. Which of the following is a method that a bank can use to reduce its credit risk?

diversifying its loans across industries

focusing on credit card loans

focusing on consumer loans

selling its holdings of Treasury securities

#FIN 350 Week 9 Quiz – Strayer

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