Final_Key_Fall_2009 - Department of Economics Professor...

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Unformatted text preview: Department of Economics Professor O’Brien Lehigh University Fail 2009 Eco 29 Final A I. Choose the best answer. Answers that might possibly be right under unusual} circumstances are not the correct choice. 2. In order that everyone has the same amount of information available to answer the questions, we won’t be able to respond to requests for clarification or elaboration. 3. Write your answer on the answer sheet. Choose the best answer. (0.5 pts each) 1. If George uses $10,000 fiom his checking account to buy a certificate of deposit, a. M1 will fall and M2 will rise. b. MZ will fall and M1 will rise. @M1 win fall and M2 will be unafi‘ected. d. neither M1 nor M2 will be afi‘ected. 2. If a security pays $105 next year and $1 10. 25 the year after that, What IS its yield to maturity if it : 6115 for $200? 1 5 percent b. 10 percent c. 10.25 percent CI. 12 percent 3 The National Banking Act of 1863 a. separated commercial banking fiom investment banking '0 established Hie Federal Reserve System 6. established the Securities and Exchange Commission. @ established the Office of the Comptroller of the Currency. 4. If the Fed increases the required reserve ratio, the money supply Will fall. ., use. 0. remain unchanged. (1. rise at first, but then fall. 5. The primary assets of a commercial bank are fi 3. bonds 69 loans. 0. deposits. : d. commercial paper. 6. The diflerence between the monetary base and non-borrowed monetary base is a. currency. {9 discount loans. c. checkable deposits. d. reserves. e. zero. 7. If the Fed executes an open-market purchase at the same time that it increases the volume of discount loans, the money supply will rise. ' . fall. c. remain unchanged. ' d. there is not enough information given to determine whether a., b.,‘ or c. will occur. i 8. What does the money multiplier multiply? a. Deposits _ b. A change in discount loans c. A change in total reserves in the banking system d. A change in the required reserve ratio @ The monetary base 9. Which of the following is fixed on a coupon bond? at. . The current yield , 7 ' ® The par value c. ,Ihemarket price... d. The yield to maturity 10. According to an article in the Wall Street Journal: “The rate on three-month Treasurys was :— 0.020% late Friday, after some short-term bills maturing early next year fell into negative territory during the day. ” Ifthe yield on a Treasury bill is negative, then we know that a. its price is greater. than its face value. . its face value is greater than its price. c. its yield must be greater than the yield on a 30-year Treasury bond. d; its coupon rate must be greater than its current yield. - 11. It'you take out a car loan from a bank, the loan is . t a liability to you and an asset to the bank. ' ’a liability to the bank and an asset to you. c. a liability to both you and the bank. d. an asset to both you and the bank. 12. 'A bank lending depositors’ money to a local business and apension fund investing contributions in shares of a company are similar financial activities in that a- both involve the use of financial markets. ® both involve funds being channeled from savers to borrowers through financial intermediaries. e. hoth involve a reduction in the overall level of liquidity in the financial system. d. both involve in an increase in the overali level of risk in the financial system. 13. Suppose Acme Widget issues a discount bond with a face value of$10,000 payable in one year with an interest rate of 5%. How much will Acme receive for the bond? 3. $9,500 $9,524 6. $15,000 d. $10,500 14. On a coupon bond, the yield to maturity a. always equals the coupon rate. 7 . ® equates the present value of all the bond’s payments to its price today. 0. increases when the market price of the bond increases. (1. equals the coupon payment divided by the current price of the bond. 15. if, while you are holding a coupon bond, its market price falls, you can be sure that a. the coupon payment you are receiving must have been reduced. . b. the interest rate' on other similar bonds must have fallen. the interest rate on other similar bonds must have risen. ' '""."'d the par Value ofthebond must-have--deel—ined—.~ - - - -- -- u ~ ~ ~ ‘ 16. If investors are willing to pay more than the par value for a bond, you can be sure that a. the tax rate on the bond must he very low. ' the coupon rate on the bond must be higher than on other similar bonds. c. the coupon rate on the bond must be lower than on other similar bonds. (1. the par value for the bond must he very low. 17. The majority ofU.S. currency is held by a. US. nonfinancial corporations. b. U.S. households. 0. US financial institutions. people, businesses, and governments outside of the United States. 18. Currently, the value of monetarybase is about a. $2 billion ‘0. $200 billion $2 trillion . $200 trillion 19. Suppose that you are a manager for Deli Computer and that you learn before the information becomes public that your company is about to merge with Hewiett-Packard (H-P). The merger is expected to greatly increase Dell’s profitabiiity. Ifyou decide to invest in Dell’s stock, a. you can expect to earn an average rate of return because the price of Dell’s stock will have increased to offset the higher profits. 6)) you have broken the law by engaging in insider trading. 0. you can expect to earn a below average return because the computer industry is highly competitive and computer makers earn a low rate ofprofit. d. the price you buy Dell’s stock at will have already adjusted to reflect expected changes in Dell’s profitability. 20. Suppose that a coupon bond is listed in The Wall Street Journal as having a coupon rate of 8.25% , and an asked price of 120:19. Its current yield is ' 6.84%. b. 6.86%. c. 8.50%. d. 8.52%; 21. Aitlrroiigh the FDIC was cre-‘t‘d t‘ L revent bank failure, its existence encourages banks to a. buy too much stock. b. hoid too much capital. c. open too many branches. .take too much risk. 22. Factors that decrease the demand for bonds include a. an increase in the volatility of stock prices. ‘0. a decrease in the expected return on stocks. c. a decrease in the inflation rate. Q) decrease in the riskiness .of stocks. 23. Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury bonds when ,ineome tax rates are lowered. I . income tax rates are raised. c. municipal bonds become more widely traded. _d. corporate bonds become riskier. 24. According to the expectations theory of the term structure of interest rates a when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. in when the yield curve is downward sloping, short—term interest rates are expected to remain relatively stable 1n the future . c. investors have strong preferences for short-term bonds relative to long~tenn bonds, which explains why yield curves typically slope upward. @yield curves should be equally likely to slope downward as to slope upward. 25. The segmented markets theory can explain 9 why yield curves usually slope upward. o. why interest rates on bonds of different maturities tend to move together. 0. why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. d. why yield curves provide good forecasts of business cycles. 26. Under the Bretton Woods System, the organization assigned the task of making loans to countries ,7 , thet were expenencrng balance of payments difficulties was known as the a. World Bank. b. International Development Association. @lnternational Monetary Fund. .Federal Reserve System. 27.. Tobin’s q theory suggest that monetary policy may affect investment spending through its impact 11 Q; stock prices. . interest rates. c. bond prices. d. cash flow. 28. Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply a. raises stock prices, lowering the cost of new capital relative to firnis’ market value, thus increasing investment spending @raises firms’ net worth, decreasing adverse selection and moral hazard problems, thus increasing banks” willingness to lend to finance investment spending c. raises the level of bank reserves, deposits, and bank loans, thereby raising spending by those individuals who do not have access to credit markets. d. lowers the value of the dollar, increasing net exports and aggregate demand. 29. Tom buys a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on US. Treasury bonds is lower than Torn expected. Torn will have a. lost money on his long position. (19 gained money on his long position. 0. lost money on his short position d. gained money on his short position. 7 30. If a bank’s return on equity remains constant, but the ratio of the bank’s assets to the bank’s capital increases a. the bank’s return on assets must have increased. the bank’s return on assets must have'decreased. c. the bank’s assets and capital must have increased by the same percentage. d. the bank must be unprofitable. 31. Which of the following is a reason why the simple deposit multiplier is always a larger number than the money multiplier? ' . The simple deposit multiplier assumes excess reserves are zero. _ b. The simple deposit multiplier applies to M1 and the money multiplier applies to M2. c- The simple deposit multiplier assumes that the required reserve ratio is zero. d. The money multiplier assumes that the required reserve ratio is zero. 32. Who is required to join the Federal Reserve System? a. All state banks b. All investment banks _{__c..)Allnational.hanks . H .. . . _ . _ __ d. All ban_ks that want to take on. discount loans fiom the Federal Reserve 33. Ifa security has a price that is higher than the “no—arbitrage price,” then - _ Q.) its yield will be lower than the yields on other securities with the same characteristics. ' b. its yield will be higher than the yields on other securities with the same characteristics. c. its current yield will be greater than its coupon rate. d. its coupon rate will be greater than its yield to maturity. 34. A’ “gilt-edged bond” has limited default risk, but may have substantial interest-rate risk. -. has limited interest-rate risk, but may have substantial default risk. c. will typically haves. coupon rate that is lower than the coupon rate on a Treasury bond with the E same maturity. d. coupons that are taxable by state and local governments, but not by the federal government. - 35 . Ifthe ex ante real interest rate is lower than the ex post real interest rate, then we know that a a. the actual inflation rate must have been higher than the expected inflation rate. I the expected inflation rate must have been higher than the actual inflation rate. 7 E c. the economy must have entered a recession. . 7 ' ' d. the tax rate on capital gains must have been reduced. -36I-——H-‘--the-domestiemterestrrateis"higher—thanthe—t‘oreiguinterest-rate.- .. - -- .. -- -- - l a. the interest parity condition has been violated. . i . b. the foreign inflation rate must be above the domestic inflation rate. : CE.) there is a positive expected appreciation of the foreign currency. . (1. there is a positive expected appreciation of the domestic currency. 37. Ifthe required reserve ratio is 10 percent, currency in circulation is $200 million, check'able deposits are $1 billion, and reserves equal $150 million, then the money multiplier equals a. 0.86. 38. What is the price of a coupon bond that has annual coupon payments of $90, a par value of $1,000, a yield to maturity of 10%, and a maturity of two years? $820.38 I). $982.64 c; $1,000.00 d. $1,180.00 39. A person takes out a car loan at a bank but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending? 'a'. Adverse selection U Moral hazard 0. Interest rate risk d. llliquidity . 40- if the expected path of Interest rates on one-year bends over the next five years is 2%, 4%, 3%, 2%, 1%, the expectations theory predicts that the bond with the lowest interest rate today IS the one with a maturity of. a one year. c. three years. (1. five years. 41. lfthe prices of financial assets follow a random walk, then a. they should be easy to forecast, provided market participants have rational expectations b. they should be easy to forecast, provided market participants have adaptive expectations. @ the change 1n price from one trading period to the next is not predictable. d. major traders in the market must not be making use of all available information about the assets. 42 First National Bank currently holds $10 million in vault cash. This vault cash is a a liability of the bank and is counted as reserves 0 @an asset of the bank and 15 counted as reserves. c. a liability of the bank and is not counted as reserves d. an asset of the bank and 15 not counted as reserves. 43. TRAPS refers to (Q the electronic system that links the Federal Reserve’ 3 trading desk with private securities dealers. b. U. S Treasury securities that are bought and sold by the Federal Reserve' in ”conducting open Inarket operations. c. discount loans taken out by banks that are not eligible for primary credit. (1. the difference between the discount rate and the federal funds rate. 44. if the M1 money multiplier is 3 and the Fed engages in an Open market sale of $3 billion, then Ml _ will a. increase by $1 billion. b. decrease by $1 billion. c. increase by $9 billion. @decrease by $9 billion. 45. If the ratio of currency in circulation to deposits declines, we would expect the money supply to a. fall. ' [E rise. c. remain unchanged. (1. rise at first, but then fall. 46. All other factors held constant, a. an investment with more risk should offer a lower return and sell for a higher price. b. an investment with less risk should sell for a lower price and offer a higher return. an investment with more risk should sell for a lower price and offer a higher retain. , . an investment with less risk should sell for a lower price and offer a lower'retum. , 47. Suppose you invest $2,000 with the expectation of receiving the following (including interest and principal) in one year s time: $2, 500 with a probability of one—fourth, $2000 with a probability of one— half, and $1, 750 with a probability of one fourth What is your expected return? a. 12. 5% i b. 25% c. 6.25% @ 3.13% 48. Why did Congess pass the Glass—Steagall Act? a. Because Congress believed that interstate banking was risky b. Because Congress wanted to lower interest rates on mortgage loans ((9 Because Congress wanted to reduce the risk of bank failures d. Because Congress wanted to give the Fed the authority to make discount loans 49. A reverse repurchase agreement a. will be counted in a bank” s Tier 1 capital, but not in its Tier 2 capital. b. will be counted in a bank” 3 Tier 2 capital, but not 1n its Tier 1 capital. c is included in M2. is also referred to as a matched sale-purchase agreement. 10 50. The Fisher hypothesis holds that a. in the long run the nominal interest rate equals the real interest rate. b. the yield to maturity equals the real interest rate. 6. the nominal interest rate equals the coupon rate if the bond is held to maturity. the nominal interest rate rises or falls point-for-point with expected inflation. 51. Holding all other factors that affect the demand and supply for bonds constant, an increase in the expected inflation rate will shift the ' a. demand curve to the right and the supply curve to the left. (9 demand curve to the left and the supply curve to the right. - c. both the demand curve and the supply curve to the right. (1'. both the demand curve and the supply curve to the left. ‘ 52. In the futures market for oil, we are most likely to see _ oil companies selling fiJtures contracts and companies that use oil buying futures contracts. . oil companies buying filtures contracts and companies that uSe oi] selling futures contracts. .oil companiesand companies thatuse oilbothbuying filtrnesnontracts- .. .. “.11.... «-2... .. .3 A :n :- +-.,..._'1L4L.-.AT:..... . u. .-..+.. uu uUi‘flpfiuiGS aflu Cumfiafiics than. L135 U11 UGLu 35111115 fiailufis GufiuaCtS. m. p 53. Compared with the beginning of the semester, the discount rate is currently a. higher. 54. Which of the following statements is correct? a. Financial intermediaries are the most important source of external funds to firms because they offer . lower interest rates than are available in financial markets. b. The Securities and Exchange Commission no longer requires public companies to publish their income statements or balance sheets. @ The stock market is a less important source of external funds to firms than is the bond market because of moral hazard problems with equity contracts. (1. “Debt contracts” is another name for equities. 55. What is a debenture? a. A mortgage on a home or business property @A corporate bond not backed by specific collateral c. A corporate bond containing one or more restrictive covenants d. A bond that may converted into shares of stock at a fixed rate 56. When a bank borrows reserves overnight from other banks it does so a. through the Federal Reserve’s discount window. (3. in the federal funds market. 0. in the Treasury’s repo market. d. in SEC’s bank reserve clearing house. 11 57. Reserve requirements are changed a. more frequently than the discount rate is changed but less frequently than open market operations are conducted. b. more fiequently than the discount rate is changed and more frequently than open market operations are conducted. 0. more'frequently than open market operations are conducted, but less frequently than the discount rate is changed. @ less frequently diam open market operations are conducted and less frequently than the-discount rate is changed. ' 58. In terms of the AD-AS mode}, the new classical approach indicates that an expected decrease in the money supply will not afi'ect output because a. neither the AD nor the AS curves will be afiected. b. the AD curve will shift to the left, but the AS curve will not shift. c. the AS curve witl shift to the right, but the AD curve will be unaffected. the AD curve will shift to the left, and the AS curve Will-shift to the right by the same amount. 59.--‘--W-hat is-the total rate ofrreturn on‘a bond With a-coupon-rate of—6.25%——that was purchased-for $906 , and sold one year later for $999? a. 6-25% b. 16.25% , . 16.94% . 96.25% 60. Which of the following is M a financial intermediary? a. ‘ First Union Bank 1). Vanguard Mutual Fund c. General Accident Fire insurance ® The New York Stock Exchange 61. The weakness of the Fed’s actions during the banking crisis of the early 19303 resulted in a. a change in the law; which restricted its ability to make discount loans. @ the introductionrof a federal system of deposit insurance. c. the establishment of the savings-and—loan industry. d. the elimination of reserve requirements on demand depOSits. 62. Historically, commercial banks have dominated the short-tenn-credit market by I (a) specializing in reducing information costs. b. being willing to pay whatever rate is necessary to attract deposits. 0. maintaining only short-term relationships with borrowers- d. _ issuing commercial paper.. . 63. SpecuiatOrs are primarily interested in C? betting on anticipated changes in prices. . reducing their exposure to the risk ofptice fluctuations. c. increasing market liquidity. _ d. reducing the spread between the bid and ask prices on bonds. 64. For many years, Milton Friedman argued that a. the money supply should be kept constant. ® the money supply should grow at a constant rate. 0. the interest rate should be kept constant. (1. the level of real GDP should be kept constant. 65. First National Bank of Duckburg has a positive gap. If interest rates fall, then FNBD will 3. exp...
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