Consider the following four investors. Rank each according to who has the most to gain
from investing in 30-year tax-exempt municipal bonds. Each investor has $1000 in a
savings account that he/she plans to use to buy bonds. Explain briefly why you ranked
the investors this way.
(a) A 20-year old college student who earns low income through working over summers
and breaks. The student plans to graduate next year.
(b) The CEO of a large company who is currently in the highest tax bracket.
(c) A middle-income household saving up to move into a larger home.
(d) A 60-year old nurse who plans to retire at age 62. He uses a tax-exempt pension
fund for all of his savings.
Answer:
How many prices would a trader of a particular good need to know in a barter economy
with 5 goods?
A. 5
B. 10
C. 20
D. 50
Answer:
Between 1970 and 2000, the Fed:
A. published their targets for money growth and often hit these targets.
B. never published targets or actual amounts for money growth.
C. published targets for money growth and rarely hit them.
D. published actual money growth but not targets.
Answer:
If market participants believe next year’s corn crop is likely to be unusually large:
A. the current spot market price of corn is likely to be below the futures price of corn.
B. the current spot market price of corn is likely to be above the futures price of corn.
C. it would be impossible to find someone to take the short position in a futures
contract.
D. it will be impossible to find someone to take the long position in a futures contract.
Answer:
There is a strong consensus among economists that monetary policy is more effective
when it is formed:
A. by an individual rather than a committee.
B. in secrecy without the reasoning behind it being revealed for many years.
C. to keep financial markets guessing.
D. independently of political pressure.
Answer:
The government’s providing of deposit insurance and functioning as the lender of last
resort has significantly:
A. decreased the incentive for bank managers to take on risk.
B. increased the amount of regulation of banks required, but has had no effect on
bank’s incentive to take on risk.
C. increased the incentive for banks to take on risk, but has had no effect on the amount
of regulation of banks required.
D. increased the amount of regulation of banks required and increased the incentive for
banks to take on risk.
Answer:
The opportunity cost of holding money is:
A. the nominal interest rate.
B. the real interest rate.
C. the nominal interest rate less the cost of converting a bond to cash.
D. the rate of inflation.
Answer:
The problem for a central bank setting a zero inflation policy would be:
A. the risk of high employment.
B. it is impossible to have zero inflation.
C. firms would have to cut the nominal wage to reduce the real wage.
D. economic growth would also have to be zero.
Answer:
The demand for money varies:
A. directly with the liquidity of other financial assets.
B. inversely with the liquidity of other financial assets.
C. not all with the liquidity of other assets since money is liquid.
D. inversely with wealth.
Answer:
In comparing money to a U.S. Treasury bond held by an individual, we can say:
A. both are legal tender.
B. both are units of account.
C. only the bond is legal tender since it is an obligation of the U.S. government.
D. both are stores of value.
Answer:
Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that
showed that:
A. over the long run, stocks have been less risky than bonds.
B. over the long run, bonds have been less risky than stocks.
C. over the long run, bonds frequently outperform stocks.
D. investors should only own stocks for short periods of time to maximize returns.
Answer:
A stock currently does not pay an annual dividend. An investor expects this policy to
remain in force. She believes, however, the stock of this company will sell for $110.00
per share four years from now. If she has an interest (discount) rate of 7% (0.07), the
dividend discount model predicts the current price of this stock should be:
A. you cannot apply the model to this example since it requires a dividend be offered.
B. $82.00
C. $83.92
D. $86.35
Answer:
A company currently pays an annual dividend of $6.50 per share. It expects the growth
rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5%
(0.05) what does the dividend-discount model predict the current price of the stock
should be?
A. It doesn’t, you need an expected future price to use the model
B. $257.50
C. $130.00
D. $266.50
Answer:
Moody’s, Value Line, and Dun and Bradstreet are examples of companies that:
A. provide information free to investors but charge the companies for the ratings
provided on the company.
B. provide information free to investors but recoup expenses through advertising done
by the companies being rated.
C. charge investors who subscribe to the services for the information.
D. duplicate information that is available to investors at no cost.
Answer:
The reserve requirement does not meet all of the criteria of a good monetary policy
tool, because it:
A. is not controllable.
B. is not observable.
C. cannot be quickly changed.
D. it has a predictable impact on the economy.
Answer: