Macro Module 7: Financial Markets and International Capital Flow

D - mutual fund

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a: A - commercial bank B - credit union C - stock exchange D - mutual fund

B - imports exceed exports

A trade deficit occurs when: A - exports exceed imports B - imports exceed exports C - tariffs exceed quotas D - quotas exceed tariffs

C - positive net capital outflows

An economy with a trade surplus must also have: A - a trade deficit B - a budget surplus C - positive net capital outflows D - positive net capital inflows

D - providing information and risk-sharing services

Decentralized market-based financial systems improve the allocation of saving by: A - ensuring capital gains exceed dividend payments B - eliminating the need for commercial banks or other financial intermediaries C - matching net capital inflows to net capital outflows D - providing information and risk-sharing services

C - a decline in national saving caused largely by rapidly rising government budget deficits

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to: A - an inability of U.S. companies to compete in the international market B - a decline in private saving that resulted from an upsurge in consumption C - a decline in national saving caused largely by rapidly rising government budget deficits D - a worldwide recession that made it difficult for American companies to sell their products abroad

C - bond market

Each of the following is an example of a financial intermediary EXCEPT a: A - commercial bank B - credit union C - bond market D - savings and loan association

D - both savers and borrowers

Financial intermediaries, such as commercial banks, provide benefits to: A - savers only B - borrowers only C - the government only D - both savers and borrowers

B - $10,000; 4 percent; 4 years

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is __________, the coupon rate is __________, and the term of this bond is __________. A - $400; 40 percent; 4 years B - $10,000; 4 percent; 4 years C - $10,000; $400; 4 percent D - $10,400; 4 percent; 4 years

C - increase; decrease; increase Higher domestic real interest rates make investors domestic and foreign more likely to invest in the domestic economy compared to foreign economies. This reduces capital outflows and increases net capital inflows.

Holding constant risk and the real returns available abroad, higher domestic real interest rates __________ capital inflows, __________ capital outflows, and __________ net capital inflows. A - increase; increase; increase B - increase; increase; decrease C - increase; decrease; increase D - decrease; decrease; decrease

D - trade surplus, outflows

If domestic saving is greater than domestic investment, then a country will have a __________ and positive net capital __________. A - trade deficit; outflows B - trade deficit; inflows C - trade surplus; inflows D - trade surplus; outflows

B - trade deficit; inflows If domestic savings is less than domestic investment then capital inflows are positive. This follows from the equation S + KI = I. Since KI is positive, NX must be negative (there must be a trade deficit), as is shown by the equation NX + KI = 0.

If domestic saving is less than domestic investment, then a country will have a __________ and positive net capital __________. A - trade deficit; outflows B - trade deficit; inflows C - trade balance; inflows D - trade surplus; outflows

A - net capital inflows of $300 billion This follows from the accounting identity NX + KI = 0. Here, NX is net exports of -$300 billion and KI, net capital inflows, must be $300 billion.

If the United States has $300 billion trade deficit, then there must be: A - net capital inflows of $300 billion B - net capital inflows of $-300 billion C - no capital inflows or capital outflows D - net capital outflows of $300 billion

D - decrease; increase

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will __________ capital inflows and __________ the equilibrium domestic real interest rate. A - increase; increase B - increase; decrease C - decrease; decrease D - decrease; increase

B - increases; decreases A decrease in capital inflows increases the domestic real interest rate. This, in turn, decreases domestic investment.

In an open economy, a decrease in capital inflows __________ the equilibrium domestic real interest rate and __________ the quantity of domestic investment. A - increases; increases B - increases; decreases C - decreases; decreases D - decreases; increases

D - decrease; increase

In an open economy, a decrease in the government's budget deficit will __________ the domestic real interest rate and __________ the level of capital investment in the country, holding other factors constant. A - increase; increase B - increase; decrease C - decrease; decrease D - decrease; increase

D - a decentralized, market-oriented financial system

In the United States saving is allocated to its most productive use by: A - the Federal Reserve B - the Federal, state, and local governments C - regulations and laws designed to improve productivity D - a decentralized, market-oriented financial system

D - purchases or sales of real and financial assets across international borders

International capital flows are: A - purchases of foreign goods or services B - sales of domestic goods or services to foreigners C - exports plus imports D - purchases or sales of real and financial assets across international borders

B - 7 percent

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be: A - 8.5 percent B - 7 percent C - 5 percent D - 1.9 percent

C - $10,095

Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if the prevailing interest rate is 5%? A - $9524 B - $10,000 C - $10,095 D - $10,600

D - interest and dividend payments owed to foreign investors

The benefits of net capital inflows to a country include all of the following except: A - a larger pool of total savings B - a higher rate of investment in new capital C - a potentially higher growth rate D - interest and dividend payments owed to foreign investors

C - interest rate promised when a bond is issued

The coupon rate is the: A - amount originally lent B - regular payment of interest to a bondholder C - interest rate promised when a bond is issued D - maximum interest rate that can be paid on a bond

C - longer; greater

The coupon rate on newly issued bonds is usually higher for bonds with __________ terms and __________ risk that the borrower will go bankrupt. A - shorter; greater B - shorter; smaller C - longer; greater D - longer; smaller

C - interest rates decrease

The current price of a stock increases when: A - expected future dividends decrease B - the expected future price of the stock decreases C - interest rates decrease D - the perceived riskiness of the stock increases

C - intermediaries

The financial system consists of financial __________, such as commercial banks, and financial markets, such as the stock market. A - corporations B - allocations C - intermediaries D - brokers

C - risk premium

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the: A - real interest rate B - nominal interest rate C - risk premium D - discount rate

B - principle of comparative advantage

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the: A - cost-benefit principle B - principle of comparative advantage C - scarcity principle D - principle of increasing opportunity cost

A - domestic investment in new capital goods Since S − NX = I, and NX + KI = 0, then S + KI = I.

The sum of national saving and capital inflows from abroad must equal: A - domestic investment in new capital goods B - capital outflows C - aggregate demand D - the trade deficit

B - earn a return on their savings and to facilitate making payments

Two reasons savers keep deposits at banks are to: A - secure mortgages and to purchase stocks B - earn a return on their savings and to facilitate making payments C - lower interest rates and to increase the money supply D - equalize loan supply and demand to earn interest

A - increase

When Federal Reserve actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bonds: A - increase B - decrease C - remain unchanged D - decrease only if the coupon rate is less than 5%

D - capital inflow

When a Peruvian buys a U.S. government bond, from the perspective of US, this is a(n): A - import B - export C - capital outflow D - capital inflow

D - are unchanged; is unchanged The oil purchase by the U.S. company is an import to the U.S. On the other hand, the purchase by the Saudi Arabian firm of U.S. transportation services is an export for the U.S. These cancel out and there is no change in net exports or capital inflows.

When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from the sale to buy transportation services from the U.S., U.S. net exports __________ and the capital inflow to the United States __________. A - are positive; is negative B - are negative; is positive C - are negative; is negative D - are unchanged; is unchanged

C - capital outflow

When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n): A - import B - export C - capital outflow D - capital inflow

B - decreases

When the interest rate on newly issued bonds increases, the price of existing bonds: A - increases B - decreases C - increases only if the coupon rate is below the new rate D - may either increase or decrease

C - 8.0 percent

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium? A - 1.5 percent B - 6.5 percent C - 8.0 percent D - 13.0 percent

D - 10 percent

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require? A - 3.6 percent B - 6.2 percent C - 6.4 percent D - 10 percent

A - increase

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will: A - increase B - decrease C - equal the old risk premium plus the new risk premium D - equal the new risk premium plus the rate of return on safe assets

B - decrease

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will __________, holding other factors constant. A - increase B - decrease C - not change D - either increase or decrease

A - increase

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will __________, holding other factors constant. A - increase B - decrease C - not change D - either increase or decrease