Fin 6320, Spring 2002

Fin 6320, Spring 2002 - Test 3. Peter Lewin.

Please read the following carefully:

Multiple Choice -50 questions. Please use a half page scantron (882-ES) with a pencil. Hand in only the scantron (you may keep this question paper).

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.

Solution and grade distribution at end

_____________________________________________________________________________

1. An unexpected rise in GDP growth should send bond prices ____ and stock prices ______.

a. up, up

b. up, down

c. down, up

d. down, down

2. An unexpected drop in the growth rate of the CPI should send bond prices ______ and stock prices _________.

a. up, up

b. up, down

c. down, up

d. down, down

3. The velocity of M2 is equal to

a. M3 minus M1

b. GDP divided by M2

c. GDP multiplied by M2

d. the velocity of M1

4. Prior to the 1970s, the demand for money (M1) was

a. relatively stable

b. unpredictable

c. constant

d. unmeasurable

5. A Monetarist-oriented econometric model is likely to emphasize that monetary policy affects economic activity

a. directly through changes in government spending

b. directly through changes in the money supply

c. indirectly through changes in velocity

d. indirectly through changes in money demand

6. A Keynesian econometric model is likely to emphasize that monetary policy affects economic activity through changes in

a. the money supply

b. reserve requirements

c. interest rates

d. currency holding by the public

7. Keynesian models involve considerable efforts to explain the determinants of

a. the money supply

b. aggregate supply

c. liquidity preference

d. the demand deposit multiplier

8. A President who favors the use of government spending and taxes as tools to offset instability in the economy is likely to have advisers who are oriented toward

a. Keynesian economics

b. Monetarist economics

c. rational expectations

d. the policies advocated by Milton Friedman

9. Monetarists and Austrians argue that an exogenous increase in investment spending is likely to be offset by a decrease in

a. the money supply

b. interest rates

c. government spending

d. consumption

10. The President of the United States appoints the

a. directors of the Federal Reserve regional banks

b. presidents of the Federal Reserve regional banks

c. Federal Advisory Council

d. members of the Board of Governors of the Federal Reserve

11. Members of the Board of Governors serve

a. fourteen year terms

b. four-year terms

c. at the discretion of the Federal Reserve Chairman

d. at the discretion of the President of the United States

12. Assume that the M1 multiplier is 3 and the Federal Reserve sells $100 million worth of government securities. Bank reserves will

a. rise by $100 million

b. fall by $100 million

c. fall by $300 million

d. fall by $33.33 million

13. The money market rate observed most closely by the Open Market Account Manager is the

a. Treasury bill rate

b. commercial paper rate

c. discount rate

d. federal funds rate

14. Monetarists believe that the Phillips curve is ___________ in the long run

a. vertical

b. horizontal

c. downward sloping

d. very flat

15. Which of the following is emphasized in the Austrian theory of the cycle

a. prices

b. the structure of real capital

c. the structure of interest rates

d. aggregate demand

16. Which of the following elements of Keynesian theory emphasized the role of psycology and expectations

a. Investment

b. liquidity preference

c. the money supply

d. a and b of the above

17. Which of the following was most important in enhancing the importance of Monetarism

a. stagflation

b. Milton Friedman's persuasive powers

c. low inflation and high unemployment

d. high inflation and low unemployment

18. Which of the following was awarded the Noble prize in economics in 1974 for work done in the 1930's

a. Milton Friedman

b. Robert Lucas

c. John Maynard Keynes

d. Friedrich Hayek

19. According to pure Keynesianism, the slope of the aggregate supply curve is

a. vertical

b. horizontal

c. upward sloping

d. downward sloping

20. According to the Classical Economists, the slope of the aggregate supply curve is

a. vertical

b. horizontal

c. upward sloping

d. downward sloping

21. The origins of modern Monetarism lie in the work of the

a. Classical economists

b. Keynesians

c. Malthusians

d. Mercantilists

22. Which of the following statements is inconsistent with Say's Law?

a. The economy has flexible wages and prices

b. The economy will produce at the full employment level of output.

c. The economy has an environment of "laissez faire."

d. The economy's level of saving depends solely on the level of income.

23. In the Classical Theory, saving and investment determine

a. the price level

b. unemployment

c. the money supply

d. interest rates

24. According to the Austrian Theory of the cycle an increase in Consumption

a. comes at the expense of a decrease in Investment

b. causes a multiplied increase in income

c. causes a multiplied increase in investment

d. b and c of the above

25. Money neutrality implies that changes in the money supply have an impact on

a. the unemployment rate

b. interest rates

c. the price level

d. real GDP

26. If money is a means of payment it must also be

a. a unit of account

b. a store of value

c. a medium of exchange

d. issued by the government

e. b and c of the above

27. An asset that can be quickly turned into the medium of exchange with minimal loss is said to possess a high degree of

a. accountability

b. liquidity

c. divisibility

d. velocity

28. In the flow of funds indirect finance occurs when

a. funds flow from saver-lenders to borrower-spenders through financial intermediaries

b. funds flow from saver-lenders to borrower-spenders through financial markets

c. funds flow to saver-lenders from borrower-spenders through financial intermediaries

d. funds flow to saver-lenders from borrower-spenders through financial markets

29. An example of direct finance would be

a. a person purchases a certificate of deposit from a bank

b. a person buys a life insurance policy

c. a person buys 100 shares of stock

d. a bank makes a loan to a customer

30. The yield to maturity on a zero-coupon bond with a one-year maturity, a face value of $1,000, and a purchase price of $900 is equal to

a. 10 percent

b. 11 percent

c. 9 percent

d. 5 percent

31. A rise in interest rates will cause short-term bond prices to

a. fall less than long-term bond prices

b. fall more than long-term bond prices

c. rise less than long-term bond prices

d. rise more than long-term bond prices

32. If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be

a. 1 percent

b. 5 percent

c. 7 percent

d. 12 percent

33. The yield curve depicts the relationship between

a. interest rates and risk

b. yield and risk

c. yield and interest rates

d. yield and maturity

34. If one-year securities are yielding 5 percent but the market anticipates rates for one-year securities will rise to 7 percent, then according to the expectations theory, current two-year securities should be yielding

a. 12 percent

b. 7 percent

c. 6 percent

d. 5 percent

35. Using the pure expectations theory of term structure, a negatively sloped yield curve indicates that investors expect

a. falling short term interest rates

b. rising short term interest rates

c. falling long term interest rates

d. rising long term interest rates

36. If the following securities are of equal maturity, which will have the lowest yield at a given point in time?

a. a consumer loan

b. a municipal bond rated Aaa

c. an Aaa-rated corporate bond

d. a Baa-rated corporate bond

37. In a world of certainty, the interest rate reflects

a. the degree of risk

b. differing time patterns of individuals' consumption preferences

c. economic growth

d. qualifications of borrowers

38. Evidence that most investors are risk averse is that they

a. buy a diversified portfolio

b. buy different bonds with the same yield and maturity

c. put most of their funds in one company's stock

d. like to gamble

39. Which of the following is defined as a standardized agreement to buy or sell a particular asset or commodity at a future date at a currently agreed upon price?

a. an option contract

b. a futures contract

c. a derivative asset

d. a financial contract

40. Investors who anticipate a future securities purchase can reduce the risk of price fluctuations by taking

a. a mark-to-market position on futures contracts

b. an arbitrage position on futures contracts

c. a long position on futures contracts

d. a short position on futures contracts

41. The value of the put option rises when the underlying asset

a. experiences price increases

b. experiences price declines

c. experiences reduced volatility

d. has a relatively short maturity

42. The best general answer to the question "What determines exchange rates?" is

a. supply and demand

b. the International Monetary Fund

c. interest rates

d. differences in money growth rates

43. Importing a good gives rise to a _________ foreign exchange and a _________ the currency of the importing country in the foreign exchange market.

a. demand for, demand for

b. demand for, supply of

c. supply of, demand for

d. supply of, supply of

44. Asymmetric information problems are worse the _______ the borrowing firm, since there is ________ publicly available information about those firms.

a. larger, more

b. larger, less

c. smaller, more

d. smaller, less

45. In privately held firms the manager-stockholder conflict is

a. worse than in the larger firm

b. the same as it is in the larger firm

c. less severe than in the larger firm

d. there is no manager-stockholder conflict because the manager is the owner

46. Considerable day-to-day volatility in major exchange rates is caused by

a. shifts in tastes or preferences for domestic versus foreign goods

b. international capital mobility

c. sudden changes in productivity in one nation versus others

d. highly variable inflation rates in some industrialized countries

47. Under current financial law banks are prohibited from holding ________ in their portfolio of assets.

a. commercial paper

b. local government securities

c. farm mortgages

d. corporate stock

48. ______________ makes it easy for any small saver to diversify her portfolio

a. Direct finance

b. Traded securities

c. Regulation Q

d. Financial intermediaries

49. Adverse selection is a problem

a. unique to direct finance

b. unique to indirect finance

c. arising before a transaction is consummated

d. arising after a transaction is consummated

50. The "dual" nature of our banking system got its start in the

a. 1820s

b. 1860s

c. 1910s

d. 1930s

If your total score is grater than or equal to: your grade is

82	A
73	B
Else	C

Solution

1	c
2	a
3	b
4	a
5	b
6	c
7	c
8	a
9	d
10	d
11	a
12	b
13	d
14	a
15	b
16	d
17	a
18	d
19	b
20	a
21	a
22	d
23	d
24	a
25	c
26	e
27	b
28	a
29	c
30	b
31	a
32	b
33	d
34	c
35	a
36	b
37	b
38	a
39	b
40	c
41	b
42	a
43	b
44	d
45	d
46	b
47	d
48	d
49	c
50	b

1	c
2	a
3	b
4	a
5	b
6	c
7	c
8	a
9	d
10	d
11	a
12	b
13	d
14	a
15	b
16	d
17	a
18	d
19	b
20	a
21	a
22	d
23	d
24	a
25	c
26	e
27	b
28	a
29	c
30	b
31	a
32	b
33	d
34	c
35	a
36	b
37	b
38	a
39	b
40	c
41	b
42	a
43	b
44	d
45	d
46	b
47	d
48	d
49	c
50	b

1	c
2	a
3	b
4	a
5	b
6	c
7	c
8	a
9	d
10	d
11	a
12	b
13	d
14	a
15	b
16	d
17	a
18	d
19	b
20	a
21	a
22	d
23	d
24	a
25	c
26	e
27	b
28	a
29	c
30	b
31	a
32	b
33	d
34	c
35	a
36	b
37	b
38	a
39	b
40	c
41	b
42	a
43	b
44	d
45	d
46	b
47	d
48	d
49	c
50	b

1	c
2	a
3	b
4	a
5	b
6	c
7	c
8	a
9	d
10	d
11	a
12	b
13	d
14	a
15	b
16	d
17	a
18	d
19	b
20	a
21	a
22	d
23	d
24	a
25	c
26	e
27	b
28	a
29	c
30	b
31	a
32	b
33	d
34	c
35	a
36	b
37	b
38	a
39	b
40	c
41	b
42	a
43	b
44	d
45	d
46	b
47	d
48	d
49	c
50	b