Quiz #4 Practice Problems - Financial Markets and Economic Fluctuations | ECON 423, Quizzes of Financial Market

Download Quiz #4 Practice Problems - Financial Markets and Economic Fluctuations | ECON 423 and more Quizzes Financial Market in PDF only on Docsity! 1 Econ 423: Questions from Previous Versions of Quiz 4 [Fall 2000-present] 1. The negative slope of the Aggregate Demand curve is not attributable to the fact that higher domestic price levels in the United States: (a) reduce the purchasing power of people with fixed nominal incomes. (b) induce American investors to buy more lower-priced foreign machinery and equipment. (c) tend to drive up interest rates and reduce economic investment. (d) reduce trips to the United States by foreign tourists. (e) reward Americans for saving higher proportions of their incomes. 2. Wars, plagues, epidemics, and tsunamis and other weather related phenomena are categorized as: (a) normative checks on population according to Malthusian theory. (b) explanations for Kondratieff long waves in economic activity. (c) external shocks that affect economic activity and trigger business cycles. (d) reasons that capitalism will self-destruct according to Marxists. (e) major determinants of fluctuations in aggregate demand. 3. The concept of “bounded rationality” most directly explains why: (a) brilliant logicians find some chess problems perplexing. (b) many prosperous voters support oleaginous politicians who favor boosting welfare payments to impoverished people. (c) so many investors lose money in financial markets. (d) procrastinating students often submit wretched term papers after pulling emergency “all-nighters.” (e) so many nicotine addicts keep smoking despite knowing that the discounted present value of the net benefits of smoking are negative. 4. The sales manager in the classic movie Glengarry Glen Ross announced a new motivational plan: “As you all know, first prize is a Cadillac Eldorado. … Second prize is a set of steak knives. Third prize is you're fired." These incentives are a variant of a: (a) prospect model. (b) Dutch oven. (c) prisoners’ dilemma. (d) tournament game. 5. Standard economic theory assumes people to be self interested, rational, risk averse, forward- looking and time consistent. Echoing the earlier work of Maurice Allais, cognitive psychologists Amos Tversky and Daniel Kaheman confirmed that most people are risk averse when considering possible gains, but found that people considering potential losses tend to be risk lovers, which is roughly synonymous with being: (a) financially timid. (b) loss averse. (c) underconfident. (d) obsessive-compulsive. (e) irrational. 6. A macroeconomic reason for the federal government to collect taxes from you is to: (a) keep you from spending it. (b) base taxes on a benefit principle. (c) provide monetary base for the FED’s conduct of expansionary open market operations. (d) avoid deflationary policies. (e) base taxation on an ability-to-pay principle. 7. John Kenneth Galbraith’s theory of the cyclicality of the bezzle is most clearly illustrated by: (a) the cliché that “the devil finds work for idle hands.” (b) a recent case in which European governments paid mercenaries to patrol waters off the Somali coast to protect commercial ships from pirates. (c) a case in which a Mafia-run casino hires relatively few thugs to identify card-counters when casino profits are high, but hires a lot more thugs to identify and brutally thrash card-counters when casino profits drop. (d) rampant drug smuggling across the US- Mexico border [particularly into New Mexico] as a result of federal agents cooperating with smugglers in exchange for bribes.. (e) situations in which, when students do well on their state level exams, teachers more actively seek to catch cheaters [the scores being so high, and the teachers wanting to be conscientious], whereas, when students do poorly, teachers do not seek to catch cheaters [when scores are low, the teachers fear losing their jobs]. 2 8. According to classical macroeconomists, Aggregate Demand primarily determines: (a) levels of national output and income. (b) total production in the economy. (c) Aggregate Supply at full employment. (d) the price level. 9. A logical reason not to immediately reveal the maximum amount you might willingly pay for an item on an E-Bay auction would be that: (a) E-Bay would more efficiently discourage strategic behavior if it relied on a Dutch auction system. (b) other bidders might infer a higher value for the item from your high bid than they otherwise would, and then bid competitively against you. (c) optimal strategy when bidding on an item is consistent “low-ball” bids to drive down E-Bay sellers’ expectations. (d) you may want to bid on a lot of merchandise with the intent of becoming a full-time E-Bay trader. (e) aggregate consumer surplus tends to be largest if you collude with other potential buyers. 10. Market capitalism generates business cycles in part because of a process of “creative destruction” according to a theory developed by: (a) Adam Smith. (b) John Maynard Keynes. (c) Reverend Thomas Robert Malthus. (d) William Stanley Jevons. (e) Joseph Schumpeter. 11. Fear that severe inflation will erupt is likely to cause most people to: (a) buy more durables sooner, which may cause inflation to be a self-fulfilling prophecy. (b) pay off the mortgages on their homes more quickly. (c) take a second job so that their income will keep pace with prices. (d) save more because inflation will shrink purchasing power in the future, and they will need more money to maintain a constant standard of living. (e) buy fewer imported goods and more domestically-produced goods. 12. Increases in government spending on schools, roads, and other forms of infrastructure tend to: (a) shift the Aggregate Expenditures curve in a “Keynesian-cross” model to the right. (b) reduce aggregate output demanded along an Aggregate Demand curve. (c) shift the Aggregate Demand curve to the left. (d) increase aggregate output demanded along an Aggregate Demand curve. (e) shift the Aggregate Demand curve to the right. 13. Terrorist attacks on 9/11/2001 that devastated the World Trade Center in New York and severely damaged the Pentagon tended to: (a) reduce both Aggregate Demand and Aggregate Supply. (b) increase Aggregate Demand and reduce Aggregate Supply. (c) reduce Aggregate Demand and increase Aggregate Supply. (d) increase both Aggregate Demand and Aggregate Supply. 14. Neoclassical macroeconomic theory concludes that the price level is roughly proportional to: (a) the sum of consumption, investment, government spending, and net exports. (b) the level of government spending. (c) Aggregate Demand, which is determined by the money supply in the long run. (d) Aggregate Supply, which is determined by technology and the availability of resources. (e) the production possibilities frontier. 15. Which pair of terms is LEAST compatible? (a) supply-side policies and Keynesian economics. (b) Psychological theories of business cycles and the “herd mentality.” (c) Laissez faire government policies and classical economics. (d) Keynesian theory and the Great Depression. 16. Suppose a 7 million ton meteor splashed into the Caribbean, loosing a devastating tsunami from Florida to Texas. The resulting leftward shift of the Aggregate Supply curve is most plausibly classified as being a consequence of: (a) creative destruction. (b) a triple-witching turning point in the business cycle. (c) a mistaken perception of nuclear war between the United States and Mexico. (d) an external shock. (e) worldwide post traumatic stress disorder. 5 33. Adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets arise from the fundamental problem of: (a) non-collateralized risk. B) free- riding. (c) asymmetric information. D) costly state verification. 34. Efficient market theories yield the result that (a) efficient investors are especially astute in judging how most other investors will react to changing conditions. (b) most investors accurately attempt to out-guess other investors in predicting the consequences of economic events. (c) risk and maturity structures are irrelevant in estimating the proper rates of return for specific investments. (d) present values equal prices, and rates of return, adjusted for risk, are consistent with market interest rates. 35. Vertical distance ab in this figure represents a: (a) cyclical budget deficit. (b) structural budget deficit. (c) fiscal drag ratio. (d) cyclical budget surplus. (e) structural budget surplus. 36. The tax rate structure implicit in these functions generates a macroeconomic problem known as: (a) unbalanced budgets. (b) fiscal drag. (c) excess burden. (d) the Laffer paradox. (e) cyclical instability. 37. The amount by which government revenues would be exceeded by government outlays if the economy was at a full employment level of output is known as the: (a) cyclical budget deficit. (b) tax rate-revenue trade-off. (c) structural deficit (or, if negative, the structural budget surplus.) (d) Laffer curve. (e) current account deficit. 38. How the rates of return required by financial investors differ across alternative assets depends least on: (a) default risk. (b) liquidity. (c) interest rate risk. (d) differences in maturity. (e) exchange rate risk. (f) the income tax treatment of the bond’s interest payments. (g) inflation risk. (h) fiscal risk. 39. Adverse selection is a result of (a) economies of scale in financial transactions. (b) moral hazard. (c) asymmetric information. (d) the Fisher effect. (e) creative response 40. The bubble theory of speculative markets is least compatible with the notion that: (a) investors bid up quickly to levels well above their true value to simply get in on the action. (b) investor behavior is often driven by irrational factors. (c) great losses will occur when prices revert back to prior levels. (d) present values calculations based on expected dividends dominate stock pricing. (e) investors focus primarily on their views of the expectations of other investors. 41. An example of a tool to reduce the adverse selection savers experience in financial markets would be: (a) laws requiring standard accounting practices and the provision of a prospectus before new stock can be sold. (b) making all potential lenders take a polygraph test before making a loan. (c) forcing lenders to show their three most recent annual reports before making a loan. (d) requiring that an employee of the lending organization be appointed to a corporate board before a bank buys commercial paper. 42. All else constant, decreases in Aggregate Demand tend to cause increases in: (a) employment. (b) nominal interest rates. (c) GDP and National Income. (d) unemployment rates. (e) rates of inflation. 6 43. In The Great Crash [1951], John Kenneth Galbraith hypothesized that both corporate fraud (bezzle) and pressure for deregulation of business tend to grow most rapidly during a period of: (a) creative response. (b) overall economic downturn. (c) other highly publicized scandals. (d) lack of severity. (e) economic prosperity. 44. If labor force participation rates and unemployment rates in the US economy had moved to the same levels in 2006 as were experienced during the prosperity of 1998-2000: (a) our balance of payments deficit would have been eliminated automatically. (b) the federal budget would probably still have run a record deficit for 2006 because of lower tax rates and increased government spending. (c) corporate taxes would have replaced personal income taxes as the major source of federal revenue. (d) the price of gasoline would probably be significantly lower than it is right now. 45. Diversification will be most economically efficient in reducing a stockholder’s portfolio risk if (a) firms merge into huge vertically integrated corporations. (b) the firms in the portfolio respond to business cycles in very similar ways. (c) firms merge into huge horizontally integrated corporations. (d) the covariances of firms’ net returns on economic investment tend to be highly negative. 46. A shift in the American economy from point b to point a could result from: (a) foreign boycotts against U.S. exports caused by eruptions of anti- American sentiment. (b) trees beginning to sprout dollar bills. (c) aggressive reductions in U.S. income tax rates. (d) increases in the rate of population growth. (d) technological advances. 47. Incumbent presidents are most likely to lose reelection bids if, during their term of office, there is a shift from: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0. (e) point c to pint b. 48. If a deep recession occurs when there is a huge surplus in the structural budget [also known as the full-employment budget], this may indicate that: (a) fiscal drag is a problem. (b) tax rates are too low. (c) G exceeds T at full employment. (d) inflation has been cured by the invisible hand. (e) the Laffer curve hypothesis is totally invalid. 49. If market prices for all financial investments perfectly reflect optimal forecasts of future events, the efficiency of markets is termed: (a) perfectly rational. (b) weak. (c) omniscient. (d) strong. (e) semi-strong. (f) unfathomable. (g) really lucky. 50. Consider the argument that scarcity is the basic economic problem, and that wise macroeconomic policy should therefore emphasize Aggregate Supply, not Aggregate Demand. This idea would be most strongly advocated by modern followers of the teachings of: (a) conservative economic theory (b) neoclassical macroeconomic theory. (c) Karl Marx. (d) liberal economic theory. (e) John Maynard Keynes. 51. Early classical economists such as Adam Smith, Thomas Malthus, and David Ricardo theorized that business cycles are caused by changes in: (a) population in response to resource availability. (b) capitalists’ ability to exploit labor. (c) socio-psychological mass movements. (d) unexpected business inventories. 7 52. The idea that capitalism is dynamically unstable because the quest for profit stimulates economic concentration and the immiseration of workers is a part of: (a) classical macroeconomics. (b) Keynesian theory. (c) monetary velocity cycles. (d) Marxist theory. 53. One major difference between neoclassical macroeconomics and Keynesian theory centers on: (a) the flexibility of outputs in a capitalist system. (b) whether scarcity is alleviated by price gouging when shortages are rampant. (c) the flexibility of wages, prices, and interest rates. (d) how an increase in the money supply will affect the price level in the long run. (e) whether equilibrium exists when C+I+G+(X-M) = C+S+T. 54. According to Joseph Schumpeter, major innovations spark economic activity by generating: (a) huge profits for capitalists. (b) mimicry of successful entrepreneurs, plus related inventions and new industries. (c) long waves. (d) business optimism. (e) destructive creationism. 55. Owners of corporate stock realize pure economic profit only to the extent that the rates of return to the shareholders exceed the: (a) interest rate that would have been generated by other investments with similar liquidity, risk, and tax treatments. (b) immediate gratification available by not delaying consumption. (c) funds saved by taking advantage of tax loopholes. (d) discount rate offered by exchange rate depreciation. (e) rate of arbitrage available in real estate investments. 56. When yield curves are steeply upward-sloping, (a) long-term interest rates are above short- term interest rates. (b) short-term interest rates are above long-term interest rates. (c) short- term interest rates are about the same as long-term interest rates. (d) medium-term interest rates are above both short-term and long-term interest rates. (e) medium-term interest rates are below both short-term and long-term interest rates. 57. According to neoclassical macroeconomists, Aggregate Demand primarily determines: (a) levels of national output and income. (b) total production in the economy. (c) Aggregate Supply at full employment. (d) the price level. 58. If the optimal forecast of the return on a security exceeds the equilibrium return, then. (a) the market is efficient. (b) an unexploited profit opportunity exists. (c) the market is in equilibrium. (d) its price exceeds its present value. 59. Interest rates on municipal bonds tend to be significantly lower than for other bonds with comparable default risks and maturity structures primarily because: (a) interest from municipal bonds is largely exempt from federal income taxes. (b) municipal bonds are relatively more liquid because volume in the “muni” market is very heavy. (c) the Federal Municipal Security Administration [FMSA] ensures these loans. (d) investors who value the funded municipal projects tend to subsidize these bonds heavily. (e) regulators tend to structure portfolio guidelines that provide financial institutions with significant incentives to purchase municipal bonds. 60. The neutrality of money is most consistent with the idea that: (a) how things are measured matters only trivially in the long run. (b) investors quickly learn to anticipate FED policies. (c) Aggregate Supply tends to grow faster than Aggregate Demand. (d) fiscal policy is more effective in the short run than monetary policy. (e) growth of the money supply affects real output more in the long run than in the short run. 10 82. How federal taxation affects financial markets and the economy as a whole is least central to the concept of: (a) fiscal drag. (b) the excess capacity theorem. (c) structural budget deficits or surpluses. (d) cyclical budget deficits. (e) Laffer curves. 83. In Keynes' liquidity preference model, individuals are assumed to hold their wealth in two forms: (a) real assets and financial assets. (b) stocks and bonds. (c) money and bonds. (d) money and gold. 84. A structural budget deficit for given federal tax and spending policies is based on projections about how revenues and spending would be related if: (a) financial markets operated efficiently. (b) Laffer curves were stable. (c) national output were at a full employment level. (d) Phillips curves were stable. (e) automatic stabilizers were not operational. 85. The real rate of interest equals the: (a) difference between payments by borrowers and the receipts of depositors. (b) nominal interest rate plus the rate of inflation. (c) annual percentage of purchasing power paid for the use of money. (d) rate paid on riskless government securities. 86. The factor most likely responsible for this decline in the interest rate is (a) a decline in the price level. (b) a decline in income. (c) an increase in the money supply. (d) a decline in the expected inflation rate. 87. This decline in the interest rate would be evidence that: (a) in the short run, the liquidity effect of a change in the money supply is more powerful than the Fisher effect. (b) the real interest rate is not a monetary phenomenon, per the neoclassical perspective of macroeconomics. (c) an increase in the money supply reduces the real rate of interest. (d) a decline in the expected inflation rate results in increases in the nominal money supply. 88. If the present value of $444 to be paid at the end of one year is $400, the one year discount factor is roughly: (a) 0.901. (b) 1.11. (c) 0.11. (d) None of the above. 89. Equilibrium interest rates tend to be negatively related to: (a) the time remaining until an asset matures. (b) default, exchange rate, and interest rate riskiness of an asset. (c) liquidity. (d) savers’ discount rates when considering their time preferences. (e) the expected rate of inflation. 90. The term structure of interest rates is (a) the relationship among interest rates of different bonds with the same maturity. (b) the structure of how interest rates move over time. (c) the relationship among the terms to maturity of different bonds. (d) the relationship among interest rates on bonds with different maturities. 91. Surpluses in the federal budget tend to: (a) increase the supply of bonds. (b) reduce current- account surpluses in the U.S balance of international trade. (c) increase the demand for loanable funds. (d) increase the rates of both unemployment and inflation. (e) reduce real interest rates. 11 92. Yield curves are usually: (a) gently upward-sloping. (b) gently downward-sloping. (c) flat. (d) bowl shaped. (e) mound shaped. 93. The Fed should lower the rate of money growth if it wants to permanently lower interest rates if: (a) people’s internal discount rates are high. (b) there is slow adjustment of expected inflation. (c) the liquidity effect is smaller than the expected inflation effect. (d) the liquidity effect is larger than all other effects combined. 94. Irving Fisher explained why interest rates _____as the expected rate of inflation _____ (a) rise; increases. (b) rise; stabilizes. (c) rise; decreases. (d) fall; increases. (e) fall; stabilizes. 95. Jill has $100 now and the annual market interest rate is 10%. Jill can invest $50 today and receive $60 next year. Suppose she consumes $50 this year and invests in the project. The maximum amount Jill can consume next year is: (a) $55. (b) $60. (c) $50. (d) None of the above. 96. At a 12% discount rate, the present value of the cash flow [ Year 1 = $100,000 | Year 2 = $150,000 | Year 3 = $200,00] is: $100,000 $150,000 $200,000. (a) $351,221. (b) $450,000. (c) $493,440. (d) None of the above. Economics instructors are hereby granted provisional permission to use or alter items in this Test Bank for educational purposes only. 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