FIN 6320
Spring 04 - Test 3.
Please read
the following carefully:
Multiple Choice - 50 questions. Please
use a half page scantron (882-E or 882-ES) with a pencil.
This is a
closed book exam. Cheating will result
in a zero (among other possible sanctions).
Among the
possibilities given in each question select the best alternative.
Grade
Distribution and Solution at end.
____________________________________________________________________________
1. Which of the following is a necessary condition
for something to be money?
a.
it
is a medium of exchange
b.
it
is a unit of account
c.
it
is guaranteed by the government
d.
it
is recognized by the courts as legal tender
2. Which of the following is a sufficient
condition for something to be money?
a.
it
is a medium of exchange
b.
it
is a store of value
c.
it
is a unit of account
d.
it
is guaranteed by the government
e.
it
is recognized by the courts as legal tender
3. Which of the following is true of money?
a.
it
is a social institution
b.
its
existence facilitates exchange
c.
its
existence facilitates production
d.
it
must be a store of value
e.
all
of the above
4. Barter
a.
requires
a double-coincidence of wants.
b.
is
less efficient than money.
c.
is
the trading of goods for goods.
d.
All
of the above are correct.
5. Paper money
a.
has a
high intrinsic value.
b.
is
used in a barter economy.
c.
is
valuable because it is generally accepted in trade.
d.
is
valuable only because of the legal tender requirement.
6. When
a.
unit
of account.
b.
means
of payment.
c.
store
of value.
d.
medium
of exchange.
7. Which of the following is not included in
M1?
a.
currency
b.
demand
deposits
c.
savings
deposits
d.
travelers'
checks
8. Which of the following does the Fed definitely
not do?
a.
control
the supply of money
b.
control
the value of money
c.
make
loans to individuals
d.
regulate
the banking system
9. When the Federal Reserve conducts open
market transactions, it
a.
issues
Federal Reserve notes.
b.
buys
or sells government bonds from the public.
c.
lowers
the discount rate.
d.
increases
its lending to member banks.
10.
During
recessions, banks typically choose to hold more excess reserves relative to
their deposits. This action
a.
increases
the money multiplier and increases the money supply.
b.
decreases
the money multiplier and decreases the money supply.
c.
does
not change the money multiplier, but increases the money supply.
d.
does
not change the money multiplier, but decreases the money supply.
11.
Al
claims that $200 collecting 4 percent interest for 2 years has the same future
value as $200 collecting 8 percent interest for 1 year. Bill says that waiting
one year for $200 when the interest rate is 8 percent has the same present
value as waiting 2 years for $200 when the interest rate is 4 percent.
a.
Both
Al and Bill are correct.
b.
Both
Al and Bill are incorrect.
c.
Only
Al is correct.
d.
Only
Bill is correct.
12.
a.
both
Alice and Beth are correct.
b.
both
Alice and Beth are incorrect.
c.
only
d.
Only
Beth is correct
13. Which of the following is true of borrowers?
a.
they are less
numerous than lenders
b.
they are
typically larger than lenders
c.
they typically
have a longer time horizon than lenders
d.
they are
typically less risk averse than lenders
e.
all of the above
14. Which of the following is a financial intermediary?
a.
A commodity
exchange
b.
a credit union
c.
a stock market
d.
a used car dealer
e.
a bond dealer
15.
Bankers
have an advantage in developing a relationship with their business borrowers
because
a.
banks
have access to higher quality credit reports
b.
loans
to small businesses are usually less than 5 years thus allowing borrowers to
return more frequently for evaluation
c.
banks
are better at getting owners to pledge collateral than are other lenders
d.
banks
provide a menu of services which allows them to learn about a company
16.
A
home owner who is convinced that interest rates will rise in the future should
finance a home purchase with
a.
fixed-rate
mortgage
b.
government
guaranteed mortgage
c.
variable-rate
mortgage
d.
securitized
mortgage
17.
Asymmetric
information is a particular problem for _______ firms or firms with _________
relationship with a particular lending institution.
a.
large,
a longstanding
b.
small,
a longstanding
c.
small,
only a recent
d.
large,
only a recent
18.
In
the view of the Classical economists, rising aggregate demand leads to
a.
lower
unemployment
b.
higher
unemployment
c.
inflation
d.
deflation
19. If the demand for loanable funds decreases and the
supply of loanable funds increases, interest rates will (other things constant)
a.
rise
b.
fall
c.
remain the same
d.
without more
information it is impossible to tell
20. If the demand for loanable funds decreases and the
supply of loanable funds increases, the quantity of funds lent and borrowed will
(other things constant)
a.
rise
b.
fall
c.
remain the same
d.
without more
information it is impossible to tell
21. Consider the following equation.
In order to calculate the rate of return of this
investment you would have to do which of the following?
a. assume that r = r1 =
r2 = … = rn
b. assume the left side and the right
side of the equation are equal
c. solve for r
d. each of the above
22. Which of the following is true?
a.
if the duration
of an investment is greater, its elasticity of present value must be greater
b.
if the term to
maturity of an investment is greater, its elasticity of present value must be
greater
c.
both of the above
d.
none of the above
23. Which of the following hypotheses does the pure expectations
theory of the term structure of interest rates suggest is actually tested by
data on historical interest rates?
a.
the long rate is
an average of current and future expected short term rates
b.
expectations of
future short term rates are, in general, incorrect to some degree
c.
both of the above
d.
none of the above
24. An decrease in the marginal income tax rate may be
expected to
a.
decrease the
demand for tax exempt bonds moreso for high income than low income investors
b.
increase the
demand for tax exempt bonds moreso for low income than high income investors
c.
have no effect on
the demand for any bonds
d.
increase the
demand for stocks
e.
a and d of the
above
25. Which of the following is true?
a.
a call option can
protect one against the risk of an asset price rising
b.
a put option can
protect one against the risk of an asset price rising
c.
futures are less
risky than options
d.
options are less
expensive than futures
26. Which of the following economies is banking-oriented
in its approach to corporate governance?
a.
b.
c.
d.
e.
b and d of the
above
27. Which of the following institutions rely on
large-scale and risk-pooling to make profits?
a.
insurance
companies
b.
defined benefit
pension funds
c.
commercial banks
d.
all of the above
28. In reality, it is impossible to ensure that premiums
are “fair” because
a.
true
probabilities are unknown and are continually changing
b.
moral hazard
inflates claims
c.
both of the above
d.
none of the above
29. Which of the following type of regulation has existed
in the
a.
restrictions on
branch banking
b.
prohibition of
bank ownership of corporate stock
c.
ceilings on stock
prices
d.
all of the above
e.
a and b of the
above
30. Which of the following regulations resulted in
financial innovation to avoid interest rate ceilings?
a.
Regulation R
b.
Regulation Q
c.
The McFadden Act
d.
the Glass Stegall
Act
e.
b and c of the
above
31. In the Keynesian system the central idea
is that excess savings may not flow into increased real investment and that,
therefore, employment and production may decline. What did the classical
economists believe would prevent this from happening?
a.
an
increase in savings would decrease interest rates and that this would stimulate
the necessary investment.
b.
entrepreneurs
would always invest enough no matter what the rate of interest
c.
when
inventories build up this constitutes real investment so there is no problem
d.
all
of the above
e.
a
and b of the above
32. The trade off between inflation and
unemployment is most closely associated with which of the following theoretical
constructs?
a.
the
equation of exchange
b.
the
c.
the
d.
the
Phillips curve
e.
the
Keynesian cross
33. Which of the following was not a member
of the Classical school of economics?
a.
Adam
Smith
b.
David
Hume
c.
David
Ricardo
d.
John
Stuart Mill
e.
Carl
Menger
34. In a pure Keynesian model where monetary
increases came about through government spending which of the following
assertions can most defensibly be made?
a.
employment
will rise proportionately with the money supply
b.
GDP
will rise proportionately with the money supply
c.
prices
will rise proportionately with the money supply
d.
b
and c of the above
e.
all
of the above
35. Milton Friedman is associated with which
of the following propositions?
a.
it
is impossible to permanently control the rate of interest
b.
it
is impossible to permanently reduce the rate of unemployment
c.
monetary
policy should do only what is possible and desirable
d.
all
of the above
e.
a
and b of the above
36. According to the Austrian theory of the
business cycle, a credit induced boom (economic expansion)
a.
cannot
be sustained
b.
will
result in a distortion of the productive structure of the economy
c.
will
require a lengthy and painful readjustment
d.
all
of the above
e.
b
and c of the above
37. Monetarism has most in common with which
of the following?
a.
Keynesianism
b.
Classical
Economics
c.
Supply
Side Economics
d.
Life
Cycle Economics
38. Which of the following Austrian
economists was Keynes’s most effective contemporary critic?
a.
Arthur
Pigou
b.
Carl
Menger
c.
Friedrich
Wieser
d.
Friedrich
Hayek
e.
Ludwig
Mises
39. The Keynesian system rests on a
fundamental distinction between
a.
short
and long term interest rates
b.
autonomous
expenditure and induced expenditure
c.
supply
and demand
d.
good
and evil
e.
life
and death
40. Theoretical and historical considerations
suggests that competition between moneys
a.
would
lead to chaos
b.
is an
effective barrier to the emergence of inflation
c.
would
result in uncontrollable inflation
d.
a
and c of the above
e.
none
of the above
41. The Federal Open Market Committee is
composed of ___________ voting members
a.
19
b.
12
c.
7
d.
5
e.
13
42. Which of the following is the most
powerful policy making body of the Fed?
a.
the
Federal Open Market Committee
b.
the
Federal Advisory Council
c.
the
trading desk at the NY Fed
d.
the
FDIC
43. An decrease in the currency-deposit ratio
will
a.
increase
the M1 money multiplier
b.
decrease
the M1 money multiplier
c.
leave
the M1 money multiplier unchanged
d.
it
is impossible to tell
44. If the required reserve ratio is 0.1,
banks on average hold 5% of their demand deposits in the form of excess
reserves and the public holds 5% of demand deposits in the form of currency
then an increase in high powered money of $100 million will lead to a maximum
increase of ________ million in the supply of money, M1.
a.
$1,000
b.
$1,100
c.
$500
d.
$100
e.
$50
45. Which of the following does the Fed have
most control over?
a.
the
money supply M1
b.
the
level of long term interest rates
c.
the
level of bank reserves
d.
b
and c of the above
e.
none
of the above
46. Consider the following table.
|
Step |
Increase in D ($millions) |
|
#1 |
600 |
|
#2 |
480 |
|
#3 |
384 |
|
… |
… |
|
n |
0 |
|
Total |
DD |
What is DD?
a.
$6,000
b. 0
c.
$3,000
d. $300
e.
$6
47. A large outflow of foreign exchange as a
result of a decrease in the demand by foreigners for capital investments in the
a.
result
in a balance of trade surplus (or a decrease in the balance of trade deficit)
b.
result
in a balance of trade deficit (or an increase in the balance of trade deficit)
c.
have
no effect on the balance of trade
d.
result
in an appreciation of the
48. Which of the following is implied by a
credible commitment to peg one’s currency to a foreign currency?
a.
loss
of domestic monetary policy control
b.
enhanced
domestic monetary control
c.
an
automatically balanced balance of trade
d.
guaranteed
avoidance of inflation
e.
guaranteed
experience of inflation
49. Which of the following is implied by a
decision to allow one’s currency to float freely in the foreign exchange
market?
a.
loss
of domestic monetary policy control
b.
enhanced
domestic monetary control
c.
an
automatically balanced balance of trade
d.
guaranteed
avoidance of inflation
e.
guaranteed
experience of inflation
50.
What would Lewin
say? (“free banking” means no central bank – private banks issue their own
money)
a.
free banking is
dangerous
b.
free banking would
lead to uncontrollable inflation
c.
free banking is
the only real guarantee against the emergence of inflation
d.
free banking
would bring us a perfect world
If your total score is grater than or equal to: your grade is
|
84 |
A |
|
73 |
B |
|
Else |
C |
Solution:
1.
a
2.
a
3.
e
4.
d
5.
c
6.
a
7.
c
8.
c
9.
b
10. b
11. b (Al) FV: $200(1+4%)2
= $200(1 + 8% + 1.6%) > $200(1 + 8%)
; (Bill) PV: $200/(1 + 8%) > $200/(1 + 8% + 1.6%)
12. c (Alice) PV: $700/(1 +
6%) > $700/(1 + 6% + 0.9%); (Beth) FV: $700(1 + 6%) < 700(1 + 6% + 0.9%)
13. e
14. b
15. d
16. a
17. c
18. c
19. b
20. d
21. d
22. a
23. b
24. a
25. a
26. e
27. d
28. a or c
29. e
30. b
31. a
32. d
33. e
34. b
35. d
36. d
37. b
38. d
39. b
40. b
41. c
42. a
43. a
44. c
45. c
46. c
47. a
48.
a
49.
b
50.
c