Part 1:
1) Which of the following is NOT a financial asset?
A) a bond issued by Google
B) Wells Fargo Bank
C) a home mortgage loan
D) a certificate of deposit
2) Which of the following is NOT a key financial service provided by the financial system?
A) risk sharing
B) profitability
C) liquidity
D) information
3) Economists define liquidity as
A) the difference between the return on the asset and the return on a long-term U.S. Treasury bond.
B) the fraction the asset makes up of an investor's portfolio.
C) the ease with which an asset can be exchanged for money.
D) the difference between the total demand for an asset and the total supply of the asset.
4) If a bank grants you a mortgage, the mortgage is
A) an asset to you as well as an asset to the bank.
B) an asset to you, but a liability to the bank.
C) a liability to you, but an asset to the bank.
D) a liability to you as well as a liability to the bank.
5) Funds flow from lenders to borrowers
A) indirectly through financial markets.
B) directly through financial intermediaries.
C) indirectly through financial intermediaries.
D) primarily through government agencies.
6) A "primary market" is a market
A) for government securities.
B) in which newly issued claims are sold to buyers by borrowers.
C) in which newly issued claims are sold by savers to borrowers.
D) for debt by large or "primary" corporations.
7) Monetary policy refers to the government's
A) decisions on how much money to spend.
B) decisions on how much money to collect in taxes.
C) plans for retiring the national debt.
D) management of the money supply and interest rates to achieve macroeconomic objectives.
8) The purpose of diversification is to
A) increase the liquidity of a financial portfolio.
B) reduce the brokerage fees involved in managing a financial portfolio.
C) reduce risk.
D) reduce tax liability.
9) The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known as:
A) underwriting
B) securitization
C) proprietary trading
D) microlending
Part 2:
1) An important reason why economies at an early stage of development tend to operate inefficiently is
A) they tend to be dominated by the agricultural sector, where productivity is usually low.
B) they tend to have authoritarian governments that stifle innovation.
C) they tend to be plagued by superstitious beliefs that stifle innovation.
D) the high transactions costs associated with barter.
2) A system of barter has substantial transactions costs because
A) taxes under such a system are generally a large fraction of the value of output.
B) traders must spend considerable time searching for trading partners.
C) the uncertainties of trade result in high legal fees being incurred to draw up binding contracts.
D) the uncertainties of trade result in high insurance premiums.
3) Commodity money can best be described as
A) money used to purchase agricultural products
B) a good used as money that also has value independent of its use as money
C) standardized goods like gold that trade in a financial market
D) the form of money used in a barter system
4) Money as a medium of exchange refers only to
A) currency.
B) gold coins.
C) anything that is generally accepted as payment for goods and services.
D) checks at commercial banks.
5) Why do individuals hold money when it does not provide the services that, say, a house does?
A) Money is the most liquid asset.
B) Money is the only form in which wealth may be held.
C) Money increases in value faster than other assets.
D) Money is useful in avoiding taxes on certain transactions.
6) If prices increase rapidly
A) money's usefulness as a store of value is diminished.
B) money increases in value.
C) deflation is likely.
D) prices will decline to their normal level.
7) Which of the following statements is true about M2?
A) Its total value is smaller than that of M1.
B) Apart from those assets also included in M1, it includes no assets that offer check-writing features.
C) Its total value is about five times as large as M1.
D) It includes large-denomination time deposits.
8) Which of the following is included in M1, but not in M2?
A) currency
B) checking account deposits
C) travelers checks
D) Everything in M1 is in M2.
9) Suppose the GDP price deflator was 112.7 in 2013 and 116.0 in 2014. Therefore, the inflation rate in 2014 would be
A) 2.8%.
B) 2.9%.
C) 3.3%.
D) 16%
10) A hyperinflation occurs when
A) inflation persists for more than two years.
B) inflation persists for more than five years.
C) the inflation rate exceeds 50% per year.
D) the inflation rate exceeds 50% per month
11) The velocity of money can best be described as
A) how quickly prices are increasing.
B) how quickly output is increasing.
C) the number of times each dollar in the money supply is used to buy goods and services included in GDP.
D) the growth rate of the money supply.
12) Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money?
A) 0.143
B) 7
C) 12
D) 28
13) According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%?
A) 0.5%
B) 1.25%
C) 4.5%
D) 5%
Part 3:
1) Which of the following will lead to a higher interest rate on a loan?
A) lower inflation
B) lower opportunity cost
C) increased perceived risk of default
D) reduced likelihood of borrower not paying the loan
2) At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years?
A) $5,000
B) $7,473
C) $10,000
D) $13,382
3) The price of a financial asset equals the
A) future value of all payments
B) sum of all payments
C) present value of all future payments
D) difference between the future value and present value of all payments
4) A debt instrument represents
A) an ownership claim by the purchaser on the issuer.
B) a promise by a borrower to repay principal plus interest to a lender.
C) an attempt by a borrower in default to restore his or her credit.
D) a nontaxable asset, owned primarily by large corporations.
5) A discount bond involves
A) interest payments from the borrower to the lender periodically during the life of the loan.
B) payment by the borrower to the lender of the face value of the loan at maturity.
C) no payment of principal by the borrower to the lender.
D) payment of interest by the borrower to the lender every six months during the life of the loan.
6) Suppose a coupon bond with a par value of $1000 is currently priced at $950 and has a coupon of $40. Which of the following is true?
A) current yield > coupon rate
B) current yield < coupon rate
C) coupon rate has risen
D) coupon rate has declined
7) Which of the following is NOT fixed on a coupon bond?
A) coupon
B) coupon rate
C) market price
D) par value
8) Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity. The yield to maturity on this bond would be
A) 2.6%.
B) 7.41%.
C) 8%.
D) 10%.
9) On a coupon bond, the yield to maturity
A) always equals the coupon rate.
B) equates the present value of all the bond's payments to its price today.
C) increases when the market price of the bond increases.
D) equals the coupon payment divided by the current price of the bond.
10) What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1000, a yield to maturity of 10%, and a maturity of three years?
A) $211.38
B) $898.84
C) $962.70
D) $1255.0
11) What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44?
A) 5.56%
B) 8.50%
C) 9.00%
D) Not enough information has been provided to determine the answer.
13) A bond's price and its yield to maturity are inversely related because
A) discounting future payments at a higher rate reduces the present value of the payments.
B) discounting future payments at a higher rate increases the present value of the payments.
C) an increase in the yield to maturity will lower a bond's coupon rate and hence its price.
D) a fall in a bond's price will lower its par value and hence its yield to maturity.