midterm1-f08_green - KEY

midterm1-f08_green - KEY - Midterm 1 ; Version B (Green)...

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1 Midterm 1 ; Version B (Green) Name___________________________________ EC370 - Fall 2008 (50 pts) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Write your answers in CAPITAL LETTERS in the space provided. 1) Suppose the yield to maturity of a 5 year US Treasury Note is 5.3% and the yield to maturity on 5 year US Treasury Inflation Protected Security is 4.2%. From this information, you can conclude that 1) _______ A) The real rate of interest is 5.3% B) Average expected inflation over the next 5 years is 1.1% per year. C) The credit rating of the bonds is different. D) Average expected inflation over the next 5 years is negative 1.1% per year. 2) When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. 2) _______ A) decreases; decreases B) increases; increases C) increases; decreases D) decreases; increases 3) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. 3) _______ A) supply; left B) demand; left C) demand; right D) supply; right 4) In the figure above, the price of bonds would fall from P 2 to P 1 if 4) _______ A) there is a business cycle recession. B) there is a business cycle expansion. C) inflation is expected to increase in the future. D) inflation is expected to decrease in the future. 5) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the 5) _______ A) aggregate price level. B) inflation rate. C) exchange rate. D) interest rate.
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2 6) Everything else constant, a stronger dollar will mean that 6) _______ A) French cheese becomes more expensive. B) Japanese cars become more expensive. C) vacationing in England becomes less expensive. D) vacationing in England becomes more expensive. 7) Suppose you buy a stock which increases in price by 5% on the first day you own it. On the second day, the stock price decreases by 5%. After the second day, the stock price 7) _______ A) Is equal to your original purchase price. B) Is greater than your original purchase price. C) Is lower than your original purchase price. D) May be more or less than your original purchase price, depending on whether the stock costs less than $1 when you buy it. 8) You can borrow $8000 to finance a new business venture. This new venture will generate annual earnings of $1201. The maximum interest rate that you would pay on the borrowed funds and still increase your income is 8) _______ A) 12.5%. B) 15%. C) 17.5%. D) 20%. 9) Which of the following can be described as involving direct finance? 9) _______ A) People buy shares in a mutual fund. B)
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midterm1-f08_green - KEY - Midterm 1 ; Version B (Green)...

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