A stock has a current annual dividend of $6.00 per year and it is expected to grow by
3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a
share. If the interest rate is 5% (0.05), then equation 7 in the chapter predicts the stock’s
current price should be:
A. $94.90
B. $93.12
C. $101.30
D. $94.30
Answer:
When a business purchases a $25,000 computer system by writing a check, the
business’s balance sheet will:
A. show an increase in assets and liabilities of $25,000.
B. only show an increase in assets of $25,000.
C. only show an increase in liabilities of $25,000.
D. still show the same total amount of assets as before the purchase.
Answer:
Consider the following ratio: the average annual inflation rate/the average annual
money growth rate. A country with a ratio less than one would have:
A. an average inflation rate greater than the average rate of money growth.
B. an average inflation rate less than the average rate of money growth.
C. to have a high unemployment rate.
D. an economy suffering from a recession.
Answer:
Suppose that in a barter economy Tom bakes bread and Hans produces chocolates. Tom
wants chocolates but Hans doesn’t like bread, so Hans is unwilling to trade with Tom.
Tom’s problem is an example of which problem associated with a barter system?
A. Too much specialization
B. Not enough prices
C. The law of diminishing returns
D. The double coincidence of wants problem
Answer:
Eurodollars are:
A. the currency of the European Economic Union.
B. euro-denominated deposits in U.S. Banks.
C. dollar-denominated deposits in banks outside the United States.
D. dollars that are specially printed for use abroad to minimize counterfeiting.
Answer:
Successful monetary policy relies most on:
A. having an ample supply of highly qualified people.
B. luck.
C. the institutional environment.
D. knowledgeable citizens who know how to react to the policy.
Answer:
The future value of $200 that is left in account earning 6.5% interest for three years is
best expressed by which of the following?
A. $200(1.065) × 3
B. $200(1.065)/3
C. $200(1.065)n
D. $200(1.065)3
Answer:
The measure for the actual rate of inflation used in the Taylor rule is the:
A. Personal Consumption Expenditure Index.
B. GDP deflator.
C. Consumer Price Index.
D. Producer Price Index.
Answer:
The dynamic aggregate demand curve illustrates that the relationship between inflation
and real output is:
A. direct.
B. inverse.
C. independent.
D. undefined.
Answer:
The internal rate of return of an investment is:
A. the same as return on investment.
B. zero when the present value of an investment equals its cost.
C. the interest rate that equates the present value of an investment with its cost.
D. equal to the market rate of interest when an investment is made.
Answer:
For several years before the crisis of 2007-2009, people in U.S. business and
government called for China to move away from its fixed-exchange rate regime
because:
A. its pegged value was far below purchasing power parity estimates.
B. its pegged value was far above purchasing power parity estimates.
C. it was adding to China’s current account deficit.
D. it was exporting its inflation to the United States.
Answer:
Which of the following statements is true?
A. Call options can be sold prior to expiration but put options cannot.
B. Put options can be sold prior to expiration but call options cannot.
C. No option can be sold prior to expiration.
D. Both American and European options can be sold prior to expiration.
Answer:
Control of money growth to stabilize inflation only works if velocity were constant. In
practice, changes in velocity:
A. can safely be ignored in countries with relatively low inflation rates.
B. are important when inflation is low.
C. must be taken into account no matter what the inflation rate.
D. can always safely be ignored.
Answer:
Higher savings usually requires higher interest rates because:
A. everyone prefers to save more instead of consuming.
B. saving requires sacrifice and people must be compensated for this sacrifice.
C. higher savings means we expect interest rates to decrease.
D. of the rule of 72.
Answer:
Briefly discuss the relationship between present value and each of the following:
a) future value
b) time
c) interest rate
Answer:
For central bankers to alter the real interest rate by changing the nominal interest rate,
which of the following must be true?
A. The rate of inflation has to remain constant.
B. Inflation expectations are quite stable.
C. The expected rate of inflation has to change.
D. The change in the expected rate of inflation must equal the change in the nominal
interest rate.
Answer:
Let if be the interest rate being paid on a foreign bond, and let i be the interest rate being
paid for a domestic bond; let P be the price of the domestic bond and let Pf be the price
of the foreign bond. If exchanges rates are fixed and the bonds are equal in terms of
risk:
A. if = i.
B. P = Pf times units of domestic currency/unit of foreign currency.
C. the expected return from the foreign bond = the expected return from the domestic
bond.
D. all of the answers given are correct.
Answer:
During the 1990s, the country of Chile required foreigners wishing to invest in the
country to make a one-year, zero-interest deposit in the Chilean central bank equal to at
least 20 percent of the investment. This is an example of:
A. a capital outflow control.
B. a capital inflow control.
C. an exchange rate mechanism.
D. a currency board.
Answer:
If the bonds of two different countries are identical, their expected returns will:
A. be equal if capital flows freely internationally.
B. always be equal.
C. be equal only if the exchange rate between the two countries is fixed.
D. be equal only if the inflation rate is the same in each country.
Answer:
Mutual funds have:
A. been created for very wealthy individuals with a lot of money to invest.
B. increased the risks associated with constructing a portfolio.
C. reduced the costs associated with gathering information on stocks and bonds.
D. increased the transactions costs associated with participating in financial markets.
Answer:
All other factors equal, as nominal interest rates increase, checking account balances
should:
A. increase.
B. decrease.
C. remain constant.
D. be converted to cash.
Answer:
One reason a country would be better off fixing its exchange rate is if:
A. it has a strong reputation for controlling inflation on its own.
B. it lacks ample foreign exchange reserves.
C. it is well-integrated with the economy of the country to whose currency its currency
is fixed.
D. its own macroeconomic characteristics are inversely correlated with the
macroeconomic characteristics of the country to whose currency its currency is fixed.
Answer:
One of the unique problems that banks face is:
A. they hold liquid assets to meet illiquid liabilities.
B. they hold illiquid assets to meet liquid liabilities.
C. they hold liquid assets to meet liquid liabilities.
D. both their assets and their liabilities are illiquid.
Answer:
Under the Bretton Woods System each participating country had to:
A. be willing to exchange their own currency for gold.
B. hold ample reserves of currency of each of the participating countries.
C. stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate.
D. adopt capital controls.
Answer:
In today’s world, the goal of financial stability means:
A. no institution should fail.
B. competition should be eliminated.
C. preventing large-scale financial catastrophes.
D. creating one mega regulatory agency.
Answer:
If the economy’s current level of output is below its potential level of output, the
short-run aggregate supply curve:
A. will shift right.
B. will shift left.
C. will be vertical.
D. does not matter; only the long-run aggregate supply curve matters in this situation.
Answer:
Most individuals save at banks rather than lend directly because:
A. the bank creates information asymmetry.
B. moral hazard exists only when individuals make loans directly to borrowers, it does
not occur when banks issue loans.
C. banks can reduce the cost of information asymmetry.
D. information asymmetry is a problem for individuals but not for banks.
Answer:
Which of the following is responsible for invoking the Fed’s emergency powers?
A. FOMC
B. Board of Governors
C. Fed Chairman
D. a majority of the Federal Reserve Bank presidents
Answer:
Equilibrium in the money market would be expressed by which of the following?
A. Ms = (1/V)Y
B. Ms = Md
C. Ms = (1/V)P
D. Md = (1/V)P
Answer:
A firm that has a well-earned reputation for providing high quality:
A. has found a way to address the free-rider problem.
B. has found a way to address the moral hazard problem.
C. has found a way to address the problem of adverse selection.
D. will not survive in a market if low quality is provided at a lower price.
Answer:
Which of the following is not a financial instrument?
A. A share of Microsoft stock
B. A U.S. Treasury Bond
C. An electric bill
D. A life insurance policy
Answer:
The assumption that prices and wages are flexible implies that the:
A. short-run aggregate supply curve is irrelevant.
B. short-run aggregate supply curve shifts slowly in response to deviations of current
output from potential output.
C. long-run aggregate supply curve is irrelevant.
D. long-run aggregate supply curve could not shift.
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Answer:
Explain how money solves the problem of the “double coincidence of wants.”
Answer:
Answer: