Practice Mid-Semester Exam
1) Financial markets have the basic function of
A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
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D) providing a risk-free repository of spending power.
E) allowing derivatives securities to be traded.
2) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. E) A mutual fund purchases shares in the Stock Exchange.
3) Well functioning financial markets benefit ________ by allowing them to time their purchases more efficiently.
A) consumers B) lenders
C) creditors D) cashiers E) borrowers
4) Which of the following are short-term financial instruments?
A) a repurchase agreement
B) a share of Corporation stock
C) a Treasury note with a maturity of four years D) a residential mortgage
E) a mortgage backed security
5) Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called
A) moral selection.
B) risk sharing.
C) asymmetric information. D) adverse hazard.
E) free-riding.
6) An example of how GNP accounts for services provided by foreign-owned capital (and GDP does not) is
A) earnings of a Spanish factory with British owners counts only in Spain’s GDP.
B) earnings of a Spanish factory with British owners counts only in Britain’s GNP.
C) earnings of a Spanish factory counts in Spain’s GNP but are part of Britain’s GDP.
D) earnings of a Spanish factory counts in Spain’s GDP but are part of Britain’s GNP.
E) earnings of a Spanish factory counts in Spain’s GNP but not in Britain’s GDP or GNP.
Answer the next two questions on the basis of the following data. All figures are in billions of dollars and all values are aggregated based on the GNP convention.
Investment 18
Net exports 2
Personal income 85 Consumption expenditures 70 Saving 5
Government purchases 20 GNP 116
7) The GDP for the above economy is
A) 108 B) 116 C) 115 D) 107 E) 110
Answer E GDP= C+I+G+(X-M)=70+18+20+2 = 110
8) The net receipts of the economy’s factor income from the rest of the world is closest to
A) 116 B) 110 C) 6 D) -6 E) 5
GNP = GDP + net receipts of factor income from the rest of the world. 116 = 110 + ?
9) Which of the following statement INCORRECTLY describes the information reflected by the figure below?
2016 Quarter 1 GNP and its components of the US
A) Consumption is the largest component of the US GNP in 2016 Quarter 1.
B) The US consumers has consumed foreign goods in 2016 Quarter 1.
C) There is a current account surplus in the balance of payments of the US in 2016 Quarter 1. D) The US citizens have used more outputs than the US economy has produced in 2016 Quarter 1.
E) The US has accumulated foreign debts in 2016 Quarter 1.
Answer: C, The US has a current account deficit in 2016 Quarter 1.
10) The official settlements balance or balance of payments is the sum of
A) the current account balance, and the capital account balance, less the non-reserve portion of the financial account balance.
B) the current account balance and the capital account balance.
C) the current account balance, the capital account balance, the non-reserve portion of the financial account balance, the statistical discrepancy.
D) the current account balance and the non-reserve portion of the financial account balance. E) the current account balance and the interest in all investments.
11) You travel to Paris and pay for a $100 dinner with your credit card. How is this accounted for in the balance of payments?
A) debit current account-service import, credit current account-payment
B) debit current account-service import, credit capital account-transfer payment
C) debit financial account-currency/deposit, credit current account-service import D) debit financial account-currency/deposit, credit capital account-transfer payment E) debit current account-service import, credit financial account-currency/deposit
12) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 62.5 dollars
E) 40 British pounds
Answer: D 50*1.25=62.5
13) If the exchange rate between GBP and USD is 0.8512GBP per USD and the exchange rate between the USD and AUD is 0.7274USD per AUD, the price of British pound in terms of Australia dollar is closest to:
A) 1.6150 B) 1.2597 C) 0.8724 D) 0.7593 E) 0.6192
0.8512*0.7274=0.6192 which is GBP per AUD, then answer should be 1/0.6192=1.6150AUD/GBP
14) A foreign exchange company in provides the following quotes:
AUD2.1381/GBP , USD0.8408/AUD
and USD1.8377/GBP.
Given these quotes, is there any arbitrage opportunity? If yes, how do you make arbitrage profit?
A. Yes, Borrow AUD, Sell AUD for USD, Sell USD for AUD, repay AUD
B. Yes, Borrow AUD, Sell AUD for GBP, Sell GBP for AUD, repay AUD
C. Yes, Borrow AUD, Sell AUD for GBP, Sell GBP for USD, Sell USD for AUD, repay AUD
D. Yes, Borrow AUD, Sell AUD for USD, Sell USD for GBP, Sell GBP for AUD, repay AUD
E. No, there is no arbitrage opportunity
From the first 2 quotes: 2.1381*0.8408=USD1.7977/GBP but the actual exchange rate is USD1.8377/GBP. Investors should sell GBP for USD.
The direction of triangular arbitrage:
15) The largest trading of foreign exchange occurs in
A) . B) London. C) Tokyo.
D) Frankfurt. E) Singapore.
16) Suppose that the one-year interest rate is 3.0% in the United States and 5% in Germany, and that the spot exchange rate is $1.60/€ and the expected one-year exchange rate $1.58/€. Which of the following statements is TRUE if the interest rate parity model provides a correct prediction on the changes in the foreign exchange market?
A) Investors would increase the purchase of the EU assets. B) Investors would increase the purchase of the US assets. C) The current demand of the US dollars will increase.
D) The current demand of euros will drop.
E) Investors are indifferent between the US assets and the EU assets. Answer A
Dollar return of the US asset: 3%
Dollar return of the EU asset: 5%+(1.58-1.6)/1.6=3.75%
Investors will increase the purchase of EU assets so the current demand of USD will drop and the demand of EUR will increase
17) Which one of the following statements is the MOST accurate?
A) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
B) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
C) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
D) For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
E) A rise in the interest rate offered by the dollar causes the euro to appreciate. Answer: D
18) Currency includes
A) paper money and coins.
B) paper money, coins, and checks.
C) paper money and checks.
D) paper money, coins, checks, and savings deposits. E) deposits and checks.
19) Kevin purchasing concert tickets with a $100 bill is an example of the ________ function of money.
A) medium of exchange B) unit of account
C) store of value
D) specialization
E) investment
20) If an individual moves money from a money market deposit account to a traveler check account
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.
E) M1 increases and M2 stays the same.
21) Imagine a graph showing the relation between the interest rate and the real quantity of money. If there is initially an
A) excess demand for money, the interest rate will fall, and the supply of money will rise. B) excess supply of money, the interest rate will fall.
C) excess supply of money, the interest rate will rise.
D) excess supply of money, the interest rate will stay unchanged
E) excess supply of money, the demand of money will decline. Answer: B
22) A reduction in a country’s money supply causes
A) its currency to depreciate in the foreign exchange market.
B) its currency to appreciate in the foreign exchange market.
C) does not affect its currency in the foreign market.
D) does affect its currency in the foreign market in an ambiguous manor. E) affects other countries currency in the foreign market.
23) Which one of the following statements is the MOST accurate?
A) A permanent increase in a country’s money supply causes a proportional long-run depreciation of its currency against foreign currencies.
B) A temporary increase in a country’s money supply causes a proportional long-run depreciation of its currency against foreign currencies.
C) A permanent increase in a country’s money supply causes a proportional long-run appreciation of its currency against foreign currencies.
D) A permanent increase in a country’s money supply causes a proportional short-run depreciation of its currency against foreign currencies.
E) A permanent increase in a country’s money supply causes a proportional short-run appreciation of its currency against foreign currencies.
24) A change in the money supply creates demand and cost pressures that lead to future increases in the price level from which main sources?
I. Excess demand for output and labor
II. Inflationary expectations
III. Raw materials prices A) I
C) II and III
D) I and II
E) I, II, and III Answer: E
25) The following chart shows the dynamics in the US money market and the foreign exchange market for the USD and EUR. Suppose the US central bank increases money supply temporarily, how will the price level, the interest rate and the exchange rate ($/€) react in the short-run?
A) Price level will stay unchanged, interest rate will increase and exchange rate ($/€) will depreciate.
B) Price level will stay unchanged, interest rate will decrease and exchange rate ($/€) will appreciate.
C) Price level will stay unchanged, interest rate will decrease and exchange rate ($/€) will depreciate.
D) Price level will increase, interest rate will increase and exchange rate ($/€) will depreciate. E) Price level will increase, interest rate will stays unchanged and exchange rate ($/€) will overshoot.
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