LSU ECON 2035 FINAL EXAM QUESTIONS WITH
CORRECT ANSWERS
4% - ANSWER Suppose you have a fixed-rate mortgage with a nominal interest
rate of 6% and the expected annual inflation rate over the life of the mortgage is
2%. What is the expected real interest rate?
savers to hold many assets - ANSWER the financial system provides risk sharing
by allowing:
a lawsuit because the corporation produced a faulty product - ANSWER Which is
the best example of idiosyncratic risk?
an unsustainable increase in the price of a class of assets - ANSWER Which of
the following best describes a "bubble"?
risk neutral - ANSWER an investor who bases the decision to buy an asset solely
on the expected return of an asset is considered to be
the coupon divided by the market price of the bond - ANSWER the current yield
is equal to
increases in expected inflation - ANSWER which of the following is NOT a reason
that interest rates remained low following the financial crisis?
anything that is generally accepted as payment for goods and services or in the
settlement of debts - ANSWER Money can BEST be described as
management of the money supply and interest rates to achieve macroeconomic
objectives - ANSWER monetary policy refers to the government's
they interest rate on other similar bonds must have risen - ANSWER If, while you
are holding a coupon bond, its market price falls, it is most likely that
savings account deposits - ANSWER Which of the following is NOT included in
M1?
increase; right - ANSWER Higher government deficits _______ the supply of
bonds and shift the supply curve to the _____
,stock exchange - ANSWER Which of the following is NOT a financial
intermediary?
more interest paid over the life of the loan - ANSWER Which of the following is a
consequence of extending the payback period of a student loan from 10 to 30
years?
decreases - ANSWER an increase in the time to the promised future payment
______________ the present value of the payment
liability to Intel and an asset to you - ANSWER If you buy a bond issued by Intel,
the bond is a(an)
present value of all future payments - ANSWER The price of a financial asset
equals the
increased default risk - ANSWER which of the following will result in a decrease
in the price of an existing corporate bond?
the number of times each dollar in the money supply is used to buy goods and
services included in GDP - ANSWER The velocity of money can best be
described as
our society's willingness to use dollar bills issued by the Federal Reserve as
money - ANSWER What determines the acceptability of dollar bills as a medium
of exchange?
an increase in the price level - ANSWER Which of the following will cause the
money demand curve to shift to the right?
financial assets but not financial securities - ANSWER ordinary loans cannot be
resold after they have been granted by a bank or another lender. Therefore,
these loans are
low; high - ANSWER When nominal interest rates on financial assets are low, the
opportunity cost of holding money is _____________, so the quantity of money
demanded by households and firms will be ____________.
inflation - ANSWER Research has shown that nations with highly independent
central banks tend to have low
either the quantity of money and /or the velocity of money must also increase -
ANSWER According to the equation of exchange, if nominal GDP increases then
money market mutual fund - ANSWER Which of the following assets is the most
liquid?
,bond prices rise and interest rates fall - ANSWER as wealth increases in the
economy, we would expect to observe ____________
the yield to maturity must be less than the coupon rate - ANSWER If the current
price of a bond is greater than its face value :
only agricultural goods may be traded - ANSWER Which of the following is NOT a
significant cost that a barter system imposes on an economy?
the interest rate will fall - ANSWER If there is an excess demand for bonds at a
given price of bonds, then
short-term yields are higher than long-term yields - ANSWER When the yield
curve is downward-sloping
agencies charge firms for their services rather than investors, they have an
incentive to give high ratings to gain business - ANSWER Some claim that
ratings agencies have a conflict of interest since
borrowers know more than lenders - ANSWER Problems of asymmetric
information usually occur in financial markets because
lower demand for US products and layoffs of US workers - ANSWER A
substantial appreciation of the US dollar will likely result in, all else equal
stocks with high returns today to experience low returns in the future and for
stocks with low returns today to experience high returns in the future - ANSWER
Mean reversion refers to the tendency for
gathering information about the default risk of borrowers - ANSWER Banks deal
with problems of adverse selection by
increases; decreases - ANSWER Rising stock prices _______ household wealth,
which _________ consumption spending
slope upward - ANSWER under the expectations theory, if market participants
expect that future short-term rates will be higher than current short-term rates,
the yield curve will
investors require a larger term premium for a bond with a longer time to maturity
- ANSWER According to the liquidity premium theory, the yield curve normally
has a positive slope because
moral hazard - ANSWER the purpose of restrictive covenants reduce
______________ in debt contracts
, equals its expected price plus a random error term - ANSWER In an efficient
market with rational exceptions, the actual price of an asset
the Japanese yen to depreciate against the British pound - ANSWER If inflation
in Japan is higher than inflation in Britain, we would expect
the good is not tradable - ANSWER An exception to the law of one price occurs if
a man with a bad heart condition buys a large life insurance policy - ANSWER
Which of the following is an example of adverse selection?
sell; lowering - ANSWER If investors are becoming concerned that investments
in Argentina are at increased risk of default, these investors would be inclined to
_______________ Argentine pesos, ____________________ the value of the Argentine
peso relative to other currencies
the after-tax yield on municipal bonds is greater - ANSWER Many savers are
willing to accept a lower interest rate on municipal bonds than on comparable
instruments
during a recession - ANSWER The risk premium of corporate bonds typically
increases
increase; appreciate - ANSWER All else being equal, an increase in the foreign
demand for US goods causes the demand for dollars to __________________ and
the dollar will __________________ relative to foreign currencies
holders of common stock - ANSWER Which group of investors vote for a
corporation's board of directors?
reduces the value of a stock - ANSWER According to the Gordon growth model,
an increase in the required return on equity
borrowers have an incentive to act in ways that do not reflect the lender's
interests - ANSWER Moral hazard problems arise when
are considered default-risk-free instruments - ANSWER US Treasury securities:
the price on an asset is above its fundamental value - ANSWER a bubble occurs
when
the market's view of future short-term interest rates - ANSWER Unlike the
segmented markets theory, the expectations theory attributes the slope of the
yield curve to
CORRECT ANSWERS
4% - ANSWER Suppose you have a fixed-rate mortgage with a nominal interest
rate of 6% and the expected annual inflation rate over the life of the mortgage is
2%. What is the expected real interest rate?
savers to hold many assets - ANSWER the financial system provides risk sharing
by allowing:
a lawsuit because the corporation produced a faulty product - ANSWER Which is
the best example of idiosyncratic risk?
an unsustainable increase in the price of a class of assets - ANSWER Which of
the following best describes a "bubble"?
risk neutral - ANSWER an investor who bases the decision to buy an asset solely
on the expected return of an asset is considered to be
the coupon divided by the market price of the bond - ANSWER the current yield
is equal to
increases in expected inflation - ANSWER which of the following is NOT a reason
that interest rates remained low following the financial crisis?
anything that is generally accepted as payment for goods and services or in the
settlement of debts - ANSWER Money can BEST be described as
management of the money supply and interest rates to achieve macroeconomic
objectives - ANSWER monetary policy refers to the government's
they interest rate on other similar bonds must have risen - ANSWER If, while you
are holding a coupon bond, its market price falls, it is most likely that
savings account deposits - ANSWER Which of the following is NOT included in
M1?
increase; right - ANSWER Higher government deficits _______ the supply of
bonds and shift the supply curve to the _____
,stock exchange - ANSWER Which of the following is NOT a financial
intermediary?
more interest paid over the life of the loan - ANSWER Which of the following is a
consequence of extending the payback period of a student loan from 10 to 30
years?
decreases - ANSWER an increase in the time to the promised future payment
______________ the present value of the payment
liability to Intel and an asset to you - ANSWER If you buy a bond issued by Intel,
the bond is a(an)
present value of all future payments - ANSWER The price of a financial asset
equals the
increased default risk - ANSWER which of the following will result in a decrease
in the price of an existing corporate bond?
the number of times each dollar in the money supply is used to buy goods and
services included in GDP - ANSWER The velocity of money can best be
described as
our society's willingness to use dollar bills issued by the Federal Reserve as
money - ANSWER What determines the acceptability of dollar bills as a medium
of exchange?
an increase in the price level - ANSWER Which of the following will cause the
money demand curve to shift to the right?
financial assets but not financial securities - ANSWER ordinary loans cannot be
resold after they have been granted by a bank or another lender. Therefore,
these loans are
low; high - ANSWER When nominal interest rates on financial assets are low, the
opportunity cost of holding money is _____________, so the quantity of money
demanded by households and firms will be ____________.
inflation - ANSWER Research has shown that nations with highly independent
central banks tend to have low
either the quantity of money and /or the velocity of money must also increase -
ANSWER According to the equation of exchange, if nominal GDP increases then
money market mutual fund - ANSWER Which of the following assets is the most
liquid?
,bond prices rise and interest rates fall - ANSWER as wealth increases in the
economy, we would expect to observe ____________
the yield to maturity must be less than the coupon rate - ANSWER If the current
price of a bond is greater than its face value :
only agricultural goods may be traded - ANSWER Which of the following is NOT a
significant cost that a barter system imposes on an economy?
the interest rate will fall - ANSWER If there is an excess demand for bonds at a
given price of bonds, then
short-term yields are higher than long-term yields - ANSWER When the yield
curve is downward-sloping
agencies charge firms for their services rather than investors, they have an
incentive to give high ratings to gain business - ANSWER Some claim that
ratings agencies have a conflict of interest since
borrowers know more than lenders - ANSWER Problems of asymmetric
information usually occur in financial markets because
lower demand for US products and layoffs of US workers - ANSWER A
substantial appreciation of the US dollar will likely result in, all else equal
stocks with high returns today to experience low returns in the future and for
stocks with low returns today to experience high returns in the future - ANSWER
Mean reversion refers to the tendency for
gathering information about the default risk of borrowers - ANSWER Banks deal
with problems of adverse selection by
increases; decreases - ANSWER Rising stock prices _______ household wealth,
which _________ consumption spending
slope upward - ANSWER under the expectations theory, if market participants
expect that future short-term rates will be higher than current short-term rates,
the yield curve will
investors require a larger term premium for a bond with a longer time to maturity
- ANSWER According to the liquidity premium theory, the yield curve normally
has a positive slope because
moral hazard - ANSWER the purpose of restrictive covenants reduce
______________ in debt contracts
, equals its expected price plus a random error term - ANSWER In an efficient
market with rational exceptions, the actual price of an asset
the Japanese yen to depreciate against the British pound - ANSWER If inflation
in Japan is higher than inflation in Britain, we would expect
the good is not tradable - ANSWER An exception to the law of one price occurs if
a man with a bad heart condition buys a large life insurance policy - ANSWER
Which of the following is an example of adverse selection?
sell; lowering - ANSWER If investors are becoming concerned that investments
in Argentina are at increased risk of default, these investors would be inclined to
_______________ Argentine pesos, ____________________ the value of the Argentine
peso relative to other currencies
the after-tax yield on municipal bonds is greater - ANSWER Many savers are
willing to accept a lower interest rate on municipal bonds than on comparable
instruments
during a recession - ANSWER The risk premium of corporate bonds typically
increases
increase; appreciate - ANSWER All else being equal, an increase in the foreign
demand for US goods causes the demand for dollars to __________________ and
the dollar will __________________ relative to foreign currencies
holders of common stock - ANSWER Which group of investors vote for a
corporation's board of directors?
reduces the value of a stock - ANSWER According to the Gordon growth model,
an increase in the required return on equity
borrowers have an incentive to act in ways that do not reflect the lender's
interests - ANSWER Moral hazard problems arise when
are considered default-risk-free instruments - ANSWER US Treasury securities:
the price on an asset is above its fundamental value - ANSWER a bubble occurs
when
the market's view of future short-term interest rates - ANSWER Unlike the
segmented markets theory, the expectations theory attributes the slope of the
yield curve to
