ECON 2035 Exam 2
Suppose a European Union report indicates that the scope of banking and financial crisis in the EU is far wider than was previously thought. All else being equal, the immediate effect of the release of this report would be to cause the demand for U.S. dollar-denominated assets to ______ and the euro is _______ against the dollar. a) decrease; depreciate b) increase; depreciate c) increase; appreciate d) decrease; appreciate
b) increase; depreciate
When the yield curve is downward-sloping: a) long-term yields are higher than short-term yields b) short-term yields are higher than long-term yields c) the bond market is anticipating the U.S. Treasury may default on its obligations d) the inflation rate is expected to rise
b) short-term yields are higher than long-term yields
When there is asymmetric information in financial markets, who tends to have the less information? a) borrower b) both sides have the same information c) lender d) equally likely to be the borrower or the lender
c) lender
If two banks have an ROA of 10%, the bank with _______ will have a lower ROE. a) lower profits b) less capital c) lower bank leverage d) fewer liabilities
c) lower bank leverage
The existance of rating agencies has: a) raised returns on both corporate bonds and Treasury securities b) left returns on corporate bonds largely unaffected c) lowered returns on corporate bonds d) raised returns on corporate bonds
c) lowered returns on corporate bonds
The theory of purchasing power parity assumes that: a) movements in nominal exchange rates are the result of movements in real exchange rates b) nominal exchange rates are not affected by movements in relative price levels c) real exchange rates are fixed d) inflation rates are roughly the same in most countries
c) real exchange rates are fixed
All of the following are possible consquences of noise traders EXCEPT: a) herd behavior contributing to speculative bubbles b) asset prices differeing from fundamental values c) reduced volatility of asset prices d) increased volatility in the financial market
c) reduced volatility of asset prices
Banks can manage their credit risk by: a) borrowing money in the federal fund market b) keeping cash on hand to pay short term liabilities c) screening the credit scores of loan applicants d) charging high interest rates on loans
c) screening the credit scores of loan applicants
If the price level in Japan increases more rapidly than the price level in Britain, we would expect: a) Japanese productivity to have increased more rapidly than British productivity b) interest rates in Japan to be lower than interest rates in Britain c) the Japanese yen to depreciate against the British pound d) the British pound to depreciate against the Japanese yen
c) the Japanese yen to depreciate against the British pound
The rate of return of a stock held for one-year equals a) the change in the price of the stock b) the dividend yield minus the rate of capital gain c) the dividend yield plus the rate of capital gain d) the rate of capital gain
c) the dividend yield plus the rate of capital gain
On a bank's balance sheet, assets are: a) those items owed by the bank to depositors and others b) the sources of acquired funds c) the uses of acquired funds d) the definition equal to the bank's liabilities
c) the uses of acquired funds
If investors expect that the future value of the U.S. dollar will decline relative to the value of the yen, all else being equal, this would cause all of the following EXCEPT: a) the demand for the U.S dollar to decrease today b) the supply of the U.S dollar to increase today c) the yen to depreciate against the U.S. dollar today d) the U.S. dollar to depreciate against the yen today
c) the yen to depreciate against the U.S. dollar today
If a British automobile sells for £20,000 and the British pound is worth $1.50, then the dollar price of the automobile is: a) $1.60 b) $12,500 c) $20,000 d) $30,000
d) $30,000
According to the Expectations theory of the term structure a) when the yield curve is upward sloping, short-term interest rates are expected to rise in the future. b) when the yield curve is downward sloping, short-term interest rates are expected to decline in the future. c) buyers of bonds prefer short-term to long-term bonds. d) all of the above. e) only (a) and (b) of the above.
e) only (a) and (b) of the above.
Suppose the federal incom tax rate increases. Everything else held constant, how will each of the following change: Demand for Munis: Nominal interest rate on Munis: Demand for US Treasury Bonds: Nominal interest rate on US Treasury bonds:
Demand for Munis: increase Nominal interest rate on Munis: decrease Demand for US Treasury Bonds: decrease Nominal interest rate on US Treasury bonds: increase
For state residents, interest on most bonds issued by their state government is: a) exempt from state and federal income taxes b) exempt from state, but not federal, income taxes c) exempt from federal, but not from state, income taxes d) subject to both state and federal income taxes
a) exempt from state and federal income taxes
Venture capital firms attempt to overcome the principal-agent problem by: a) holding large equity stakes in the firms they invest in b) avoiding investing in common stock c) charging high interest rates on loans d) investing only in industries with high profit rates
a) holding large equity stakes in the firms they invest in
All else being equal, an increase in the foreign demand for US goods causes the demand for dollars to _______ and the dollar will ________ relative to foreign currencies. a) increase; appreciate b) increase; depreciate c) decrease; appreciate d) decrease; depreciate
a) increase; appreciate
Suppose the expected future value of exchange rate between dollar and euro increases. Everything else held constant, what happens to each of the following items TODAY? a) Demand for dollars b) Supply of dollars c) Nominal exchange rate
a) increases b) decreases c) appreciates
When the yield curve is upward sloping: a) long-term yields are higher than short-term yields b) the bond market is anticipating the U.S. Treasury may default on its obligations c) investors expect short term rates to fall d) short-term yields are higher than long-term yields
a) long-term yields are higher than short-term yields
For the most part, countries with ________ of financial development have _________ of real GDP per capita. a) low levels; low levels b) low levels; high levels c) high levels; low levels d) there is no discernable relationship between the level of financial development in a country and that country's level of real GDP per capita
a) low levels; low levels
Suppose Apple announces that its earnings for the fourth quarter of 2016 rose to $2 billion. As a result of this announcement the price of Apple's stock does not change. The best explanation of this is: a) market participants expected Apple's earnings to be $2 billion b) market participants expected Apple's earnings to be less than $2 billion c) market participants have adaptive expectations d) market participants were expecting Apple's earnings to be greater than $2 billion
a) market participants expected Apple's earnings to be $2 billion
Suppose Apple announces that its revenues for the third quarter of 2019 were $53.8 billion. As a result of this announcement, the price of Apple's stock declines. The best explanation of this is: a) market participants expected Apple's revenues to be greater than $53.8 billion for the third quarter b) the stock market is not an effective market c) market participants have adaptive expectations d) market participants expected Apple's revenues to be less than $53.8 billion for the third quarter
a) market participants expected Apple's revenues to be greater than $53.8 billion for the third quarter
The purpose of collateral and restrictive convenants is to reduce ________ in debt contracts a) moral hazard b) loan amounts c) transactions costs d) adverse selection
a) moral hazard
Bond rating agencies are able to make a profit because: a) of the existance of adverse selection problems b) of the existance of moral hazard problems c) of symmetric information in financial markets d) most investors are irrational
a) of the existance of adverse selection problems
The Gordon Growth model suggests that an increase in the expected rate of dividend growth will cause the market price of a stock to: a) rise. b) fall. c) remain unchanged. d) change in an unpredictable manner.
a) rise.
Which of the following theories of the term structure cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together? a) segmented markets theory b) expectations theory c) liquidity premium theory d) both (a) and (b) of the above e) both (a) and (c) of the above
a) segmented markets theory
According to the liquidity premium theory, what does a flat yield curve indicate? a) short-term interest rates are expected to fall b) short-term interest rates are expected to rise c) long-term interest rates are expected to fall d) short-term interest rates are expected to remain stable
a) short-term interest rates are expected to fall
Bank capital is equal to: a) the difference between the value of the bank's assets and the value of its liabilities b) the value of the capital originally invested in the bank by its owners c) the value of the buildings and other physical assets the bank owns d) the value of everything the bank owns
a) the difference between the value of the bank's assets and the value of its liabilities
The supply curve for bonds would be shifted to the right by: a) a decrease in government borrowing b) a decrease in the corporate tax on profits c) a decrease in tax subsidies for investment d) a decrease in expected profitability
b) a decrease in the corporate tax on profits
Suppose the Japanese government runs huge budget deficits, and investors believe that the government may default on its bonds. Everything else held constant, the nominal exchange rate will________. a) depreciate b) appreciate c) Remain the same
b) appreciate
Falling stock prices ________ the funds that firms can raise, which ________ their spending on physical capital. a) increases; decreases b) decreases; decreases c) decreases; increases d) increases; increases
b) decreases; decreases
When it takes fewer euros to purchase a dollar, the dollar is said to have: a) appreciated b) depreciated c) it depends on whether one is considering cross rates or exchange rates d) it depends on whether one is using direct or indirect quotations
b) depreciated
The sensitivity of bank capital to market interest rates is measured by: a) leverage ratio b) duration analysis c) gap analysis d) capital analysis
b) duration analysis
An increase in the equity premium associated with stocks will cause the current price of stocks to: a) rise. b) fall. c) remain unchanged. d) change in an unpredictable manner.
b) fall.
The Gordon Growth model suggests that an increase in the required rate of return on equity will cause the market price of a stock to: a) rise. b) fall. c) remain unchanged. d) change in an unpredictable manner.
b) fall.
All else being equal, an increase in the U.S. demand for foreign goods causes the supply of dollars to _______ and the dollar will _______ relative to foreign currencies. a) increase; appreciate b) increase; depreciate c) decrease; appreciate d) decrease; depreciate
b) increase; depreciate
A Big Mac costs $4.00 in the United States and 3 euros in Portugal. The purchasing power parity theory would predict that the exchange rate in the long run is: a) $1 = 0.75 euros b) $1 = 1.33 euros c) $1 = 12 euros d) 1 euro = $0.75
a) $1 = 0.75 euros
1. Suppose the yield on a one-year bond is currently 1%. Assume that the expected yield on a one-year bond over the next two years are, respectively: 2% and 3%. Additionally, the term premium on the one, two, and three-years bonds are, respectively: 0.00%, 0.10%, and 0.20%. Answer each of the following: a) What is the interest rate today on a two-year bond? b) What is the interest rate today on a three-year bond? c) How would the yield curve look like?
a) 1.6% b) 2.2% c) upward sloping
Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporatebond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of: a) 6.5% b) 7.0% c) 9.5% d) 10.0%
a) 6.5%
Which of the following is an example of a moral hazard? a) a company uses the proceeds of a new stock sale to build an unecessarily luxurious new headquarters b) a terminal cancer patient buys life insurance c) a family with a home ten feet from a large river buys flood insurance d) a company in serious financial trouble offers to pay you 30% on a loan
a) a company uses the proceeds of a new stock sale to build an unecessarily luxurious new headquarters
Which of the following will cause the money demand curve to shift to the right? a) an increase in the price level b) an increase in the nominal interest rate c) a decrease in the supply of money d) a decrease in real GDP
a) an increase in the price level
Moral hazard problems arise when: a) borrowers have an incentive to act in ways that do not reflect the lender's interests b) a downturn in economic activity makes repaying loans difficult for borrowers c) lenders have difficulty in distinguishing between good and lemon firms d) borrowers default on loans
a) borrowers have an incentive to act in ways that do not reflect the lender's interests
Moral hazard problems arise when: a) borrowers have an incentive to act in ways that do not reflect the lender's interests b) lenders have difficulty in distinguishing between goods and lemon firms c) borrowers default on loans d) a downturn in economic activity makes repaying loans difficult for borrowers
a) borrowers have an incentive to act in ways that do not reflect the lender's interests
Which of the following is true regarding transactions cost and information costs? a) both create profit opportunities for those who can reduce these costs b) both benefit savers at the expense of borrowers c) both benefit borrowers at the expense of savers d) transactions cost hurt savers while information costs hurt borrowers
a) both create profit opportunities for those who can reduce these costs
If investors are becoming more confident that investments in Indonesia are at a decreased risk of default, these investors would be inclined to __________ Indonesian rupiah, _________ the value of the Indonesian rupiah relative to other currencies. a) buy; raising b) buy; lowering c) sell; raising d) sell; lowering
a) buy; raising
In 2016, as investors became more concerned with the default risk of bonds issued by the governments of Greece and Portugal relative to the default risk on bonds issued by the governments of Germany, France, and the Netherlands, the price of bonds issued by Greece and Portugal would have most likely _________ and the yield on these bonds would have most likely_________. a) decreased; increased b) increased; decreased c) increased; increased d) decreased; decreased
a) decreased; increased
Suppose Moody's unexpectedly announced that it had cut the bond ratings of Australia's four largest banks. All else being equal, this announcement would immediately cause the Australian dollar to ________ against the New Zealand dollar. a) depreciate b) remain constant c) either appreciate, depreciate, or remain constant d) appreciate
a) depreciate
If the exchange rate between the yen and the dollar changes from ¥90 = $1 to ¥100 = $1, a) has the yen appreciated or depreciated against the dollar? b) has the dollar appreciated or depreciated against the yen?
a) depreciate b) appreciate
If market participants have rational expectations, than the best forecast of the price of a stock is the in the next period is: a) equal to the price of the stock in the current period b) equal to an average of the prices of the stock in previous periods c) dependent upon all information available in the current period, including, but not limited to, the price of the stock in the current period d) dependent on information available in the previous period
a) equal to the price of the stock in the current period
In the context of the evaluation of the efficient market hypothesis, pricing anomolies refer to: a) the existence of trading strategies that appear to have offered above-normal returns b) the spread between the price at which a broker will purchase stock from an investor and the price at which the broker will sell stock to an investor c) the gap between actual and expected prices d) the difficulty in practicing of computing stock prices on the basis of expectations of future dividends
a) the existence of trading strategies that appear to have offered above-normal returns
An exception to the law of one price occurs if: a) the good is not tradeable b) exchange rates are flexible, rather than fixed c) interest rates differ across countries d) demand for the good is stronger in some countries than in others
a) the good is not tradeable
Suppose that Congress passes an investment tax credit. The likely result will be: a) the supply curve for bonds will shift to the right b) the demand curve for bonds will shift to the left c) the demand curve for bonds will shift to the right d) the equilibrium interest rate will fall
a) the supply curve for bonds will shift to the right
If market participants rely only on past stock prices to forecast future stock prices: a) they have adaptive expectations b) they will be better able to forecast future price decreases than future price increases c) they will have rational expectations d) they will be better able to forecast future price increases than future price decreases
a) they have adaptive expectations
When market participants have rational expectations: a) they use all information available to them b) they are less likely to make accurate forecasts than if they have adaptive expectations c) they only slowly adjust their expectations to new which could affect prices or returns d) they are able to forecast interest rates more accurately than inflation rates
a) they use all information available to them
The theory of efficient markets suggests that the best predictor of the future value of a stock is: a) today's stock price. b) provided by financial analysts. c) provided by financial newspapers. d) None of the above is correct.
a) today's stock price.
Suppose all assets and liabilities can be split into two categories: fixed-rate and variable-rate. Bank profits will decline following an increase in interest rates if the value of its: a) variable-rate assets is lower than the value of its variable-rate liabilities b) variable-rate assets is greater than the value of its variable-rate liabilities c) fixed-rate liabilities is greater than the value of its variable -rate liabilities d) fixed-rate assets is less than the value of its fixed-rate liabilities
a) variable-rate assets is lower than the value of its variable-rate liabilities
If the German interest rate is 4% and the US interest rate is 5%, according to the interest rate parity condition, what is the expected change in the value of the dollar in terms of the euro? a) -9% b) -1% c) 1% d) 9%
b) -1%
If a bank has $1 million in deposits and $200,000 in total reserves, with $100,000 in excess reserves, the reserve requirement ratio must be: a) 30% b) 10% c) 5% d) 20%
b) 10%
If the interest rate on a U.S one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S investors to hold Mexican pesos? a) -3% b) 3% c) 4% d) 7%
b) 3%
Which of the following is NOT considered a cash item by banks? a) vault cash b) U.S Treasury bills c) deposits at other banks d) deposits at the Federal Reserve
b) U.S Treasury bills
Mean reversion refers to the tendency for: a) the long-run mean return on stocks to equal the long-run mean return on bonds b) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future c) futures prices to revert to the prices of the underlying securities d) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future
b) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future
If the prices of financial assets follow a random walk, then: a) they should be easy to forecast, provided market participants have rational expectations b) the change in price from one trading period to the next its not predictable c) major traders in the market must not be making use of all of the available information about the assets d) they should be easy to forecast, provided market participants have adaptive expectations
b) the change in price from one trading period to the next its not predictable
A key point made by the Gordon growth model is that the: a) past trends in a stock's behavior indicate future price trends b) value of a stock depends on investor's expectations about the future profitability of a firm c) risk has little effect on a stock's value d) dividends have little to do with a stock's value
b) value of a stock depends on investor's expectations about the future profitability of a firm
Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today? a) $3.30 b) $23 c) $30 d) $33
c) $30
If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for: a) 0.025 pesos b) 4 pesos c) 40 pesos d) 400 pesos
c) 40 pesos
Which of the following is the highest bond rating assigned by Moody's Investors Service? a) Baa b) B c) Aaa d) A
c) Aaa
Which of the following is an example of adverse selection? a) a homeowner with a large fire insurance policy allowing the wiring in her house to deteriorate b) your brother-in-law borrows $20,000 from you to open a pizza parlour, but spends it gambling at the racetrack instead c) a man with a bad heart condition buys a large life insurance policy d) a woman with a large life insurance policy takes up sky diving
c) a man with a bad heart condition buys a large life insurance policy
A change in the dollar value of the British pound from $1.60 to $1.50 represents: a) an appreciation of the pound relative to the dollar b) an increase in the pound price of British goods c) an appreciation of the dollar relative to the pound d) an increase in the dollar price of British goods
c) an appreciation of the dollar relative to the pound
Why do higher interest rates increase adverse selection problems in the loan market? a) higher interest rates reduce information problems in the loan market b) higher interest rates reduce the gains from economies of scale c) as interest rates rise, the creditworthiness of the average loan applicant declines d) at higher interest rates fewer investment projects are profitable
c) as interest rates rise, the creditworthiness of the average loan applicant declines
If interest rates are raised in the US, European investors will be indicated to ________ US financial assets, ________ the value of the US dollar relative to other currencies. a) sell; lowering b) sell; raising c) buy; raising d) buy; lowering
c) buy; raising
To help offset the cost from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to: a) improve b) be unchanged c) deteriorate d) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased
c) deteriorate
According to the Gordon growth model, which of the following can cause the value of a stock to decline? a) higher expected growth rate of dividends b) decreased required return on equity c) increased systematic risk d) increase in the current dividend
c) increased systematic risk
Adverse selection and moral hazard are examples of: a) financial market efficiency b) symmetric information c) information costs d) transaction costs
c) information costs
According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level: a) its currency should depreciate relative to the other country's currency b) its currency's real exchange rate relative to the other country's currency should rise c) its currency should appreciate relative to the other country's currrency d) its nominal interest rate should rise relative to the other country's nominal interest rate
c) its currency should appreciate relative to the other country's currrency
If the Japanese yen appreciates against the U.S. dollar: a) U.S consumers gain by a decrease in the dollar price of Japanese exports to the United States b) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan c) Japanese businesses gain by a decrease in the dollar price of exports to the United States d) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan
d) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan
Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to: a) adverse selection b) transaction costs c) moral hazard d) all of the above
d) all of the above
The required return on equity for an individual stock includes which of the following? a) systemic risk b) risk-free interest rate c) idiosyncratic risk d) all of the above
d) all of the above
Which of the following is a type of risk faced by commercial banks? a) credit risk b) liquidity risk c) interest-rate risk d) all of the above
d) all of the above
According to the liquidity premium theory of the term structure a) when short-term interest rates are expected to rise in the future, the yield curve will be steeply upward sloping. b) when short-term interest rates are expected to remain unchanged in the future, the yield curve is likely to be slightly upward sloping. c) when short-term interest rates are expected to decline moderately in the future, the yield curve is likely to be flat. d) all of the above.
d) all of the above.
According to the segmented markets theory of the term structure a) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. b) bonds of one maturity are not substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities do not move together over time. c) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope upward. d) all of the above. e) none of the above.
d) all of the above.
The United States has a dual banking system in the sense that: a) the public may deposit money in either commercial banks or savings-and-loan associations b) banks offer both demand deposits and time deposits to save c) banks both take in deposits and make loans d) banks are chartered by the federal government and by state governments
d) banks are chartered by the federal government and by state governments
Suppose that the Federal Reserve announces contractionary monetary policy while, at the same time, the Bank of England announces a more expansionary monetary policy. All else being equal, this would cause the UK pound to _________ against the U.S. dollar. a) either appreciate, depreciate, or remain constant b) appreciate c) remain constant d) depreciate
d) depreciate
Which group of investors vote for a corporation's board of directors? a) both holders of common and preferred stock b) holders of preferred stock c) bond holders d) holders of common stock
d) holders of common stock
A firm's agents are its: a) customers b) marketing department c) shareholders d) management
d) management
Which of the following is NOT a bank liability? a) borrowings from the Federal Reserve b) CDs c) checking deposits d) mortgage loans
d) mortgage loans
When market participants have rational expectations, the deviation of the expected price from the actual future price is: a) predictable under certain circumstances but not under others b) zero c) predictable, provided all relevant information is made use of d) not predictable
d) not predictable
The McFadden Act of 1927: a) established the Federal Reserve System b) separated commercial banking from investment banking c) put a tax on the issuance of bank notes by state banks d) prohibited national banks from operating branches outside their home states
d) prohibited national banks from operating branches outside their home states
Restrictive convenants: a) generally require that firms use debt finance rather than equity finance b) generally require that firms use equity finance rather than debt finance c) were outlawed under the Civil Rights Act of 1964 d) put restrictions on the use of borrowed funds
d) put restrictions on the use of borrowed funds
According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that a) short-term interest rates are expected to rise in the future. b) short-term interest rates are expected to remain unchanged in the future. c) short-term interest rates are expected to decline moderately in the future. d) short-term interest rates are expected to decline sharply in the future.
d) short-term interest rates are expected to decline sharply in the future.
In the bond market, the seller is considered to be: a) the lender or the borrower depending upon the use to which the funds are put b) the lender or the borrower depending upon whether interest rates are rising or falling c) the lender d) the borrower
d) the borrower
Which of the following would cause the nominal exchange rate to appreciate? a) the real exchange rate depreciates b) the domestic inflation rate increases c) the government budget deficit decreases d) the domestic inflation rate decreases
d) the domestic inflation rate decreases
Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of: a) the problems with using rational expectations in finance markets b) the adverse selection problem in financial markets c) the difficulty lenders have in distinguishing good from lemon firms d) the moral hazard problem in financial markets
d) the moral hazard problem in financial markets
According to the efficient markets hypothesis, the difference between today's price for a share of stock and tomorrow's price is: a) zero b) predictable given currently available information c) equal to today's price minus yesterday's price d) unforecastable
d) unforecastable