Sample Questions for Exam 2 - Financial Markets and Economic Fluctuations | ECON 423, Exams of Financial Market

Download Sample Questions for Exam 2 - Financial Markets and Economic Fluctuations | ECON 423 and more Exams Financial Market in PDF only on Docsity! Econ 423: Questions from Previous Versions of Exam 2 1. Neither the Federal Reserve System nor any other federal, state, or local government agency has direct legal control of the: (a) discount rate. (b) reserve requirement ratio. (c) federal funds rate. (d) margin requirement. (e) usury ceiling that limits the amounts that lenders can charge to borrowers. 2. No one can perfectly perform all the mental gymnastics needed to process information so that all their decisions are mathematically optimal, so most people rely heavily on mental shortcuts that cognitive psychologists and behavioral economists call: (a) rational ignorance. (b) compromises. (c) windage. (d) heuristics. (e) conciliations. 3. A bank's total required reserves [RR] are equal to: (a) those set by the Senate Banking Committee. (b) actual reserves plus excess reserves. (c) one divided by the reserve requirements ratio. (d) demand deposits [DD] times the reserve requirements ratio [rr]. 4. Some theorists believe that both financial investment and investments in real economic capital are quite volatile primarily because they are determined by the herd-like “animal spirits” of investors, and not by objective analysis about the relative expected profitability of alternative investments. This idea is known as the: (a) exuberant expectations theory. (b) creative destruction approach. (c) Keynesian beauty contest. (d) entrepreneurial cycle approach. (e) bipolar market timing model. (f) classical “random walk” model. 5. The Fed’s Board of Governors does not have the absolute legal authority to: (a) set a uniform discount rate that member banks face in all 12 District Banks. (b) establish, within limits, reserve requirements. (c) set margin requirements. (d) conduct open market operations. (e) announce target rates for the federal funds market. 6. Relative to purchases of bonds without call provisions, a saver who buys a debenture that has a call provision faces: (a) interest rate risk that entails disadvantages regardless of whether interest rates rise or fall. (b) significant increases in default risk (c) later choices about whether or not to convert the bonds into common stock. (d) increased tax liabilities if interest rates rise. 7. If U.S. balance of payments deficits indicate disequilibrium, the markets for currencies of countries experiencing balance of payments surpluses are characterized by: (a) shortages. (b) surpluses. (c) excessive scarcity. (d) overproduction. 8. The first notable economist to consistently advocate zero inflation as the only appropriate target for central bankers is/was: (a) Ben Bernanke. (b) Milton Friedman (c) Alan Greenspan. (d) Knut Wicksell. (e) President Woodrow Wilson, who was an economics professor and then President of Princeton University before his election in 1912. [The Federal Reserve Act was passed in his first year in office.] 9. The motive for holding money first described by John Maynard Keynes that now underpins the emphasis on liquidity in parts of modern portfolio theory is the: (a) transactions motive. (b) precautionary motive. (c) speculative motive. (d) liability motive. (e) uncertainty motive. 10. Money market instruments do not include: (a) eurodollar accounts. (b) commercial paper and repos. (c) Treasury bonds and standard certificates of deposit. (d) banker’s acceptances and loans through the federal funds market. (e) Treasury bills. 1 11. When asked their preferences between state [1] annual income of $80,000 while all their friends and acquaintances average $90,000 annually, or state [2] annual income of $75,000 while their friends and acquaintances average $65,000 annually, the vast majority of people choose state [2]. Such choices are most consistent with the predictions of: (a) psychologists. (b) classical economists. (c) revisionist historians. (d) behavioral economists. (e) political scientists. (f) Keynesian theory. 12. Financial intermediaries realize greater returns when investors churn. The term “churning” refers to: (a) a buy-and-hold strategy. (b) selling all the stocks in an investor’s portfolio. (c) creating a new portfolio. (d) rapidly buying and selling assets in a portfolio. (e) selling a stock when the price is at its highest point. 13. A college graduate who recently entered the workforce and expects to have increased income in the near future by moving up the ranks rapidly would be least likely to finance a newly-bought home with a/an: (a) shared-appreciation mortgage [SAM]. (b) reverse annuity mortgage [RAM]. (c) graduated-payment mortgage. (d) adjustable rate mortgage [ARM]. (e) equity participation mortgage. (f) conventional 30-year mortgage. (g) balloon mortgage. 14. All else equal, the interest rates or rates of return required to induce investors to buy tend to be higher when the security: (a) is a debenture with a convertibility option, instead of a debenture without the convertibility clause. (b) is more liquid. (c) is treated preferentially for purposes of taxation [ex: municipal bonds]. (d) is a revenue bond instead of a secured bond. (e) has a shorter duration. (f) is traded more deeply and widely. (g) entails less risk. (h) contains a call provision, as opposed to one without a call provision. (i) is traded in the money market instead of the bond market. 15. If the Federal Reserve System buys more bonds than it sells, the money supply grows because of increases in: (a) our national debt and the indebtedness of the U.S. Treasury. (b) total bank reserves. (c) the actual money multiplier. (d) the proportion of stock-and-bond portfolios that financial investors can legally finance with credit. (e) the potential money multiplier. 16. The efficient markets hypothesis relies most heavily on concepts encapsulated in the quote: (a) I am the master of my fate; I am the captain of my soul. [Invictus, William Ernest Henley]. (b) “For if the sun breed maggots in a dead dog, being a good kissing carrion … Have you a daughter?” [Hamlet, William Shakespeare]. (c) “No, they did not bury me, though there is a period of time I remember with a shuddering wonder, as of a passage through some inconceivable world that had no hope in it, and no desire.” [Heart of Darkness, Joseph Conrad] (d) “Did she have a precursor? She did, indeed she did.” [Lolita, Vladimir Nabokov]. (e) “O endless information in this universe, you are so great as to overwhelm the lone human mind.” [The Island of Dr. Moreau, H.G. Wells]. (f) “A horse, a horse, my kingdom for a horse!” [Richard III, William Shakespeare]. 17. When Federal Reserve District Banks lower the discount rate, it is untrue that: (a) member banks borrow more from the Fed. (b) the monetary base grows. (c) the actual money multiplier grows. (d) banks reduce their holdings of excess reserves. (e) the money supply grows. (f) leverage on the owners’ equity in commercial banks increases. (g) the potential money multiplier increases. 18. The average investor diversifies most completely and minimizes risk by investing in: (a) blue- chip stocks recommended by a stock broker. (b) indexed mutual funds. (c) junk bonds. (d) Latin American government bonds. (e) corporate debentures. 2 39. Potentially harmful effects to exporters or importers from exchange risk can be mitigated by the establishment of: (a) exchange controls. (b) forward markets. (c) prudent macroeconomic policy. (d) a balanced capital account. (e) reserve currency provisions. 40. A substantial increase in the national income of a country will cause: (a) its exports to increase dramatically. (b) the country's currency to be revalued upward if a pegged system of exchange rates is in effect. (c) a balance-of-payments surplus under a fixed exchange rate system. (d) devaluation of its currency under a flexible exchange rate system. (e) pressure for the depreciation of the exchange rate of its currency. 41. The Federal Reserve tool that, in the long run, operates by altering the values of both the money multiplier and the monetary base is: (a) discounting operations. (b) Regulation T. (c) open market operations. (d) moral suasion. (e) margin requirements. (f) credit controls. (g) reserve requirements ratios. (h) Regulation Q. 42. Expansionary open market operations reduce the: (a) amount of reserves in the banking system. (b) reserve requirement ratio. (c) actual money multiplier. (d) amount of publicly-held national debt. (e) level of Aggregate Demand. 43. The income velocity of money in Irving Fisher’s equation of exchange is calculated as: (a) nominal money stock/nominal GDP. (b) nominal GDP/nominal money stock. (c) real money stock/real GDP. (d) mc2. 44. Inflation would affect an economy's balance of payments by increasing: (a) exports but decreasing imports. (b) imports but decreasing exports. (c) both exports and imports. (d) capital exports and decreasing imports of consumer goods. (e) real interest rates. 45. Commercial paper is unlike other money market instruments in that trading in the transactions in the secondary markets are rare. Major reasons are that individual commercial banks specialize in making short-term loans [commercial paper] to individual corporations because: (a) they are better able to exploit the advantages of insider information, and they gain insight into particular industry dynamics through a “learning-by-doing” process. (b) this facilitates customization of the loan instruments, and it also facilitates dealing with potential abuses of asymmetric information. (c) the “spread” is greater on commercial loans than it is with such capital market instruments as Treasury bills or corporate debentures. (d) individual corporate borrowers are more likely to keep their demand and time deposits in the banks that are willing to lend them short-term funds. 46. A debt contract is more likely to be incentive compatible if (a) the company must follow standard accounting principles. (b) the funds are provided by a venture capital firm. (c) the people who have a controlling interest in the firm have more of their own money in the business. (d) restrictive covenants limit the type of activities that can be undertaken by the borrower. (e) a corporation’s stockholders have significant personal net worth. 47. Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis (a) outperforms the overall market. (b) far outperforms the overall market, suggesting that stockbrokers provide valuable services. (c) does not outperform the overall market. (d) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. 48. The opportunity cost of holding a given amount of currency decreases when: (a) income decreases. (b) interest rates on bonds decrease. (c) the interest rate on checking-account money increases. (d) wealth decreases. (e) the price level declines. 5 49. When investors can not distinguish good and bad firms, and therefore offer an average price which undervalues good stocks while overvaluing poor stocks; even though the firms’ managers and owners know the difference and only sell poor stocks at an overvalued price, there is an application to financial markets of the problem summarized as. (a) moral hazard. (b) the public information problem (c) the free-rider problem. (d) the “lemons” model. (e) stock market risk. 50. The term “creative response” of the financial system refers to adjustments in financial institutions when faced with: (a) emerging profit opportunities. (b) globalization of the world economy. (c) new laws or regulations that change opportunities for profits. (d) changes in the credit-worthiness of borrowers. 51. Huge disparities in compensation that are intended to spur increased diligence on the parts of individuals below the top of the compensation pyramid may be very efficient according to: (a) the inequality effect, as described by researchers in behavioral economics. (b) tournament theory. (c) the game theory matrix known as the loser’s curse. (d) the Pareto paradox. (e) Walras’ law. 52. The term “random walk” is most frequently used to describe a theory of changes in the: (a) direction of the Fed’s policies. (b) savings patterns of households. (c) level of economic investment by corporations. (d) relative prices of stocks. 53. Prior to an IPO, a fledgling corporation would be most likely to try to secure initial funding from: (a) venture capitalists. (b) banks. (c) the issuance of bonds. (d) finance companies. (e) investment bankers. 54. The Fed should lower the rate of money growth if it wants to permanently lower interest rates if: (a) the income velocity of money exceeds the transaction velocity of money. (b) the liquidity [Keynes] effect is smaller than the expected inflation [Fisher] effect. (c) there is slow adjustment of expected inflation (d) the liquidity effect is larger than all other effects combined. (e) people’s internal discount rates are high. 55. The creation of new and more liquid marketable debt instruments that are backed by less liquid and less marketable financial assets is called: (a) securitization. (b) enhanced selection. (b) homogenization. (d) standardization. (e) diversification. 56. The primary function of large diversified brokerage firms in the money market is to: (a) sell money market securities to the Federal Reserve for its open market operations. (b) make a market for money market securities by maintaining an inventory from which to buy or sell. (c) buy money market securities from corporations that need liquidity. (d) buy T-bills from the U.S. Treasury Department. 57. The “house-money” effect is in play if financial investors: (a) sell a stock to cash in on a short- term profit after a stock rises in price. (b) take greater risks after generating higher rates of return than expected. (c) acquire insider information that is likely to increase the value of a stock. (d) receive inherited funds only after a longer wait than expected. 58. Interest rate risk falls most heavily on financial intermediaries and the ultimate lenders [savers] when a real estate buyer has a mortgage contract that: (a) is an unassumable conventional mortgage. (b) is an adjustable rate mortgage [ARM] (c) has a balloon payment in, say, 10 years. (d) entails a reverse annuity mortgage [RAM]. (e) is an assumable conventional mortgage. 59. If you instruct your broker to sell a security if it falls by say, 10% below the price you recently paid for it, you will have placed a: (a) a maximum authorization. (b) a limit order. (c) an execution order. (d) short order. (e) stop-loss order. 6 60. The potential (mp) and actual (ma) money multipliers would be equal only if: (a) the public closed all bank deposits and held only cash. (b) banks held no excess reserves and all currency were deposited in banks. (c) the FED bought all U.S. government debt. (d) all borrowers paid off all their bank loans. (e) banks closed all FED deposits, holding all reserves as vault cash. 61. The percentage of excess reserves banks desire depends most on the difference between the: (a) required reserve ratio and the margin requirement. (b) percentage of government deficit and the rate of inflation. (c) interest rates banks charge, and the interest rate they must pay to borrow reserves. (d) monetary base and the level of open market operations. (e) potential, and actual, money multipliers. 62. The tax deductibility of mortgage interest tends to cause: (a) heavier reliance on debt to finance purchases of family homes. (b) overinvestment in family homes, from the perspective of the overall economy, relative to other forms of economic investment. (c) significant reliance on second mortgages to finance non-home expenditures. (d) tax structures to be slightly relatively less progressive than they otherwise would be. (e) all of the above. 63. Members of the Federal Reserve System’s Board of Governors have 14-year terms of office. This is least reasonably based on the assumption that: (a) financial speculators should not know with precision the Fed intentions for its immediate and short-term policies. (b) the Fed should be relatively independent of the current presidential administration. (c) incumbent politicians want the economy to be especially prosperous during elections. (d) members appointed to the Board of Governors will not narrowly pursue their own self-interests, but instead will try to optimize the welfare of all Americans. (e) monetary policy would be likely to generate “political business cycles” if the Fed were subject to direct political pressures. 64. In the long run, if other countries do not retaliate, raising trade barriers against imports into the home country under a system of flexible exchange rates causes the domestic currency to: (a) devaluate. (b) revaluate. (c) appreciate. (d) depreciate. 65. Of the following sources of funds for operations and expansion for American nonfinancial businesses, the most important during the past thirty years or so has been: (a) internal funding from retained earnings. (b) short-term loans [based on commercial paper] from banks. (c) long term bonds. (d) nonbank loans. (e) sales of common stocks. 66. Municipal bonds not backed by any specific project are: (a) registered bonds. (b) unregistered bonds. (c) revenue bonds. (d) general obligation bonds. 67. The adjustments financial institutions make when faced with changes in laws and regulations that alter profit opportunities are termed: (a) creative response. (b) regulatory distortion. (c) financial securitization. (d) income transformation. (e) creative destruction. 68. A call provision in a corporate bond is less likely to be exercised if the: (a) issuing corporation experiences unexpectedly high net income. (b) rate of inflation decreases. (c) owners of a closely-held corporation decide to sell a huge block of new corporate stock to the general public. (d) prime rate of interest rises. (e) firm “spins-off” one of its major divisions with an initial public offering. 69. An apparent increment to wealth momentarily exists during the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not understand that he has lost. John Kenneth Galbraith labeled this increment as the: (a) bezzle. (b) prosperity mirage. (c) entitlement fantasy. (d) bubble mania. (e) lottery illusion. 7 93. A bank’s percentage rate of return on assets is invariably less than its percentage rate on return on capital (or equity), which is an example of the power of: (a) how government regulation favors regulated industries. (b) financial leverage. (c) how banks reap pure economic profit through financial intermediation. (d) how technological improvements in information processing impose downward pressure on the “spread.” (e) the greater market power of banks when compared to other financial intermediaries. 94. Monthly payments on a conventional mortgage are: (a) decreased steadily as the amount of the principal owed is reduced. (b) initially heavily weighted as interest payments, and then interest payments decline and retirement of the principal accelerates as more and more fixed monthly payments are made. (c) unamortized. (d) higher the longer the term of the mortgage. 95. A firm that temporarily finances a new plant by issuing money market securities: (a) minimizes the short-term riskiness and costs of rolling over its debt. (b) is more likely to profit if interest rates rise while the plant is being constructed. (c) avoids interest rate risk relative to a firm with similar funding requirements that issues long-term bonds. (d) incurs both the cost of reissuing securities and the risk of having to pay higher interest rates on the new debt. 96. The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as (a) securitization. (b) internationalization. (c) arbitrage. (d) program trading. (e) none of the above. 97. The price of grapes in the US is $100 per bushel and the price of the same grapes in Japan is 10,000 yen per bushel. For the law of one price to hold the exchange rate would have to be: (a) 1,000 yen per dollar. (b) 10 yen per dollar. (c) 100 yen per dollar. (d) 500 yen per dollar. 98. In this figure, if current GDP is $6,000 billion [$6 trillion] and full employment GDP is $10 trillion, and autonomous taxes are then cut by $100 billion [from T0 to T1], this would create a cyclical budget: (a) deficit and a structural surplus. (b) deficit and a balanced structural budget. (c) deficit and a structural deficit. (d) surplus and a structural surplus. 99. If the tax structure is T0 and potential GDP = $10 trillion but current GDP = $6 trillion, the current budget: (a) and the cyclical and structural budgets are all running deficits. (b) balances, with the structural budget showing a surplus while the cyclical budget is in deficit. (c) is in surplus and the structural and cyclical budgets are both in deficit. (d) and cyclical budgets are in deficit, but the structural budget is in surplus. (e) and cyclical and structural budgets all balance. 100. When the Fed purchases a security with an agreement that the seller will buy the security back in a short period, usually 1 to 15 days, the transaction is known as: (a) a matched sale-purchase. (b) a repo. (c) a long sell. (d) an intermediation. (e) a short buy. (f) a noncompetitive auction. (g) interest swap. 10 101. Raising margin requirements might represent an attempt by the Federal Reserve System to reduce: (a) federal budget deficits. (b) stock market speculation. (c) bank profitability. (d) income redistribution. 102. The volatility of interest rates increased dramatically in the 1970s and 1980s, creating a perception of increased interest-rate risk and. (a) causing banks to shift their portfolios from an emphasis on loans to a greater emphasis on stocks. (b) increasing the cost of financial innovation. (c) reducing the range of the different types of business and consumer deposits and funding offered by financial intermediaries. (d) increasing the demand for financial innovation. 103. Most U.S. Treasury bills are sold directly to: (a) pension funds. (b) competitive bidders. (c) the Federal Reserve System. (d) noncompetitive bidders. (e) money market mutual funds. 104. A “piggy-back” mortgage is a single transaction that: (a) requires a cosigner before the mortgage loan is authorized. (b) bundles first and second mortgages, with the second mortgage being used to cover a normal down payment. (c) authorizes the lender to factor the mortgage in a securitized pass-through. (d) provides needed retirement income for elderly homeowners who have accumulated significant home equity. (e) combines a conventional mortgage with an adjustable rate mortgage. 105. Bonds backed by the cash flow of a particular income-generating project are: (a) coupon bonds. (b) general obligation bonds. (c) municipal bonds. (d) revenue bonds. (e) corporate debentures. 106. From roughly 1990 through 2004, the primary policy target of the Fed has been: (a) a fixed rate of monetary growth. (b) zero nominal interest. (c) zero inflation. (d) a 2% inflation rate. (e) the federal funds rate. 107. Major advantages of taking out a second mortgage to fund the purchase of a new car instead of borrowing from a finance company include the fact that interest paid to the finance company is not: (a) deductible when you calculate taxable income. (b) subject to “truth-in-lending” laws. (c) as low, primarily because finance companies often pay kickbacks to reward car dealers for channeling business to them. (d) secured by a lien on your home. 108. Consider a proposal to adopt policies to [1] pay off the national debt; [2] consistently set the federal budget to balance at full employment; and [3] expand the money supply by a small fixed percentage each year. This set of policies would be: (a) incompatible with the recommendations of Milton Friedman, among other modern monetarists. (b) most beneficial to financial investors who desire holdings of US Treasury bonds because of their minimal risk. (c) impossible if international trade continues to expand. (d) widely applauded by Keynesian economists. (e) logically inconsistent in the long run. 109. If the FED buys $100,000 worth of U.S. bonds from the Junk Dealers Credit Union, which keeps 20% of demand deposits as reserves, the Credit Union could reasonably be expected to quickly: (a) lend $100,000 privately because this merely exchanges a loan to the government for a private loan, with no immediate change in the credit union's liabilities. (b) contract private loans by $80,000. (c) privately lend an additional $20,000. (d) reduce private loans by $100,000. 110. The Treasury sells some T-bills and bonds in a modified uniform-price auction in which noncompetitive bidders: (a) pay the same price as all competitive winning bidders. (b) pay a price which is the highest bid by a winning competitive bidder. (c) all pay a price which is the average of the prices paid by winning competitive bidders. (d) pay a price equal to the lowest bid by a winning competitive bidder. 11 111. John Kenneth Galbraith’s model predicts an increase in “bezzle” following the financial deregulation that tends to emerge during a period of relative prosperity. This increase in financial fraud can be viewed as an example of: (a) credit rationing. (b) immoral hazard. (c) adaptive expectations. (d) creative response. (e) moral suasion. 112. Central bankers all over the world are increasingly adopting monetary policies to expand the money supply at rates intended to: (a) equal long term economic growth rates regardless of short run economic conditions. (b) stabilize the price level precisely, and prevent any inflation or deflation. (c) deflate the price level sufficiently that the equilibrium riskless nominal interest rate is zero. (d) target inflation at a low percentage rate that significantly reduces the risk of deflation. 113. If you predict that the price of a stock will decrease, you would instruct your broker to put in a: (a) market order. (b) limit order. (c) short sell. (d) margin credit. (e) short order. 114. The United States Department of the Treasury is a unique participant in the money market because it: (a) is never a supplier of funds in the market. (b) always buys more bonds than it sells if the federal budget is in surplus. (c) sells more bonds than it buys only when the federal budget is in deficit. (d) never deals in the market directly, instead using the Fed open market operations as a surrogate. 115. The interest rate banks and other major lenders frequently assert is charged to large credit-worthy corporate borrowers [but from which such borrowers conventionally receive a significant discount] is the: (a) prime rate. (b) commercial paper rate. (c) preferred borrower rate. (d) premier rate. (e) premium rate. 116. The sources of government revenue that decline relatively most rapidly during an economic downturn are: (a) personal income taxes. (b) Social Security taxes. (c) property taxes. (d) sales taxes. (e) corporate income taxes. 117. The bankers acceptances by which banks agree to pay the holder specified amounts of money on specific dates are: (a) money market instruments commonly bought and sold until maturity. (b) effectively loans in forward markets. (c) subject to significant default risk. (d) characterized by relatively high interest rates, much like junk bonds. (e) legally required to be strictly domestic to avoid foreign exchange risk. 118. The Federal Reserve can expand reserves in the banking system by: (a) buying Treasury bonds. (b) raising the discount rate. (c) lowering the reserve requirement ratio. (d) selling government securities. (e) raising the reserve requirement ratio. (f) increasing margin requirements. 119. The bulk of capital market securities are owned by. (a) households, primarily through their pension plans or mutual funds. (b) corporations, primarily through mergers and acquisitions. (c) banks, primarily through purchases of commercial paper. (d) insurance companies, to guard against instability in their long-term liabilities. 120. The theory that goods in one country will be identical in price to the goods in any other country after adjustments for exchange rates, necessary transactions costs, and barriers is known as the: (a) the law of one price. (b) theory of value. (c) efficient exchange rate theory. (d) natural rate theory. (e) free market theory. 121. Unsecured (uncollateralized) bonds backed primarily by the credit worthiness and reputation of a major corporation are: (a) debentures. (b) convertible bonds. (c) investment grade bonds. (d) revenue bonds. (e) preferred bonds. (f) common bonds. (g) junk bonds. (h) fallen angels. 12 143. A basic principle of finance is that the value of any investment is: (a) the present value of all future net cash flows generated by the investment. (b) the undiscounted sum of all future net cash flows generated by the investment. (c) unrelated to the future net cash flows generated by the investment. (d) unrelated to the degree of risk associated with the future net cash flows generated by the investment. 144. According to both efficient markets and Keynesian theories, the markets most likely to adjust quickly in response to supply-side shocks to the economy would be markets for: [a] financial assets. [b] labor. [c] consumer goods. [d] “real” newly-produced economic capital. 145. 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. 146. Levying taxes to cover increases in government outlays is usually: [a] more expansionary than government borrowing. [b] less expansionary than government borrowing or printing money. [c] more expansionary than printing money to cover a deficit. [d] most appropriate during a recession. 147. The enormous federal budget deficits of the 1980s, the early-1990s, and from 2001-2004 have been largely accommodated through: [a]. high inflation rates. [b] large trade deficits. [c] Keynesian policies. [d] low unemployment rates. 148. One major distinction between mortgage markets and the money and capital markets is that the usual borrowers in the money and capital markets are government entities and large businesses, but the usual borrowers in mortgage markets are: (a) small businesses. (b) private individuals. (c) nonprofit entities. (d) government agencies that guarantee mortgages. 149. If persistent, huge federal budget deficits were consistently accommodated by FED purchases of U.S. bonds, Milton Friedman and most other monetarists would predict that, in the long run, there would be: [a] disinflation in relative prices, but higher unemployment. [b] lower interest rates and faster economic growth. [c] better job opportunities and less stagflation. [d] increases in the price level, but not in aggregate output. 150. Another way to state the efficient market condition is that in an efficient market: (a) unexploited profit opportunities will be quickly eliminated very quickly. (b) unexploited profit opportunities will never exist. (c) arbitrage is an extremely noncompetitive process. (d) few financial investors develop expectations rationally. 151. Efficient markets theories are most compatible with: (a) Keynesian beauty contests. (b) the research findings of specialists in behavioral finance. (c) interdependent projections among investors about the profitability of potential investments. (d) precise present value analysis based on the best information available. 152. The function money performs by lowering transactions costs and facilitating specialization is called: [a] store of value. [b] medium of exchange. [c] standard of deferred payment. [d] unit of account. 153. Crowding-out is most likely to be a significant problem when the economy is: [a] in the midst of a deep depression. [b] at full employment but the federal government runs a huge budget deficit. [c] suffering from severe fiscal drag. [d] characterized by a huge structural budget surplus. [e] on the left side of a Laffer curve. 15 154. Ben Bernanke is among many central bankers all over the world who increasingly favor: (a) setting the growth of the money supply at a low fixed percentage rate regardless of short run economic conditions. (b) expanding the money supply at rates that would precisely yield price level stability. (c). pursuing deflationary policies that would reduce nominal interest rates to zero. (d) targeting inflation at a low rate (2% or so) to significantly reduce the risk of deflation. 155. If Treasury bonds are issued to cover a federal deficit, interest rates tend to rise because of an increase in: [a] total demands for loanable funds. [b] private demands for more liquid assets. [c] private investment to meet government contracts. [d] profits of the FED from its bond holdings. 156. According to these Lerner wage-price reaction functions: (a) labor markets adjust to shocks less rapidly than would commodity markets subjected to similar shocks. (b) the Keynesian model of adjustment to declining Aggregate Demand is incorrect. (c) markets are strongly efficient if new information is rapidly converted into equilibrium prices. (d) excess supply yields more rapid price adjustment than does comparable excess demand. (e) commodity markets yield faster quantity adjustments in response to disruptions than do labor markets. 157. This pair of Lerner wage–price reaction functions is consistent with the idea(s) that: (a) wages and prices do not instantaneously adjust to clear markets when demands or supplies change. (b) wages are “stickier” than prices. (c) reduced demands in labor markets yield unemployment in the short run. (d) a short-run Phillips curve may exist. (e) all of the above. 158. If there are five goods in a barter economy, you need to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then the number of relative prices one needs to know in order to efficiently exchange one good for another is: [a] 20 [b] 25 [c] 30 [d] 45 [e] 90. (f) 100. 159. Classical macroeconomic theory is least consistent with the view that money is a: [a] medium of exchange. [b] measure of value. [c] standard unit of account. [d] store of value. [e] standard of deferred payment. 16 160. A foundation for both President Reagan’s and President Bush’s tax cuts is the notion that excessively high tax rates reduce taxed behavior (via, e.g., tax evasion and avoidance, and less investment and production) so much that tax revenue may fall. This idea is expressed as the: (a) Phillips curve. (b) Laffer curve. (c) efficient markets theory. (d) liquidity preference theorem. (e) Fisher effect. 161. 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. 162. 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. 163. From the perspective of the borrower, a disadvantage of a second mortgage compared to credit card debt is that: (a) second mortgages are secured by the borrower’s home. (b) borrowers give up the tax deduction on the primary mortgage. (c) borrowers must pay points to get a second mortgage loan. (d) borrowers will find it more difficult to qualify for a second mortgage loan. 164. The budget equation for the federal government can be summarized as [a] ability-to-pay taxes + benefit taxes = total tax revenue. [b] government purchases = government outlays + transfer payments. [c] G = T + change in national debt + change in monetary base. [d] G-T = [S-I] + [M- X]. [e] C + I + G + [X-M] = GDP. 165. From the figure, which illustrates one possible outcome from an increased rate of money supply growth, one can conclude that the: [a] the liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. [b] the liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. [c] the liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. [d] the liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. 166. Over a “standard” business cycle, merger and acquisition (M&A) activity would probably be most positively related to: (a) John Kenneth Galbraith’s concept of “the bezzle.” (b) declines in the Dow-Jones index. (c) federal government deficits as a percentage of GDP. (d) the rate of technological change. 167. 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. 168. Suppose the nominal interest rate of 4%, the expected inflation rate of 3%, and interest income is taxed at a 25% rate. The expected after-tax real interest rate would be: [a] 3%. [b] 2%. [c] 1%. [d] 0%. 17 191. A graphical device to illustrate asymmetric wage and price adjustments to excess demands or supplies was first developed by: (a) Arthur Cecil Pigou. (b) Abba Lerner. (c) John Maynard Keynes. (d) Sir John Hicks. (e) Milton Friedman. (f) Myron Scholes. 192. In situations where the asymmetric information problem is not severe: (a) the money markets have a distinct cost advantage over banks in providing short-term funds. (b) banks have a distinct cost advantage over the money markets in providing short-term funds. (c) banks have a comparative advantage over the money markets in providing short-term funds. (d) banks have an absolute advantage over the money markets in providing short-term funds. 193. Unlike most money market securities, commercial paper is: (a) not generally traded in a secondary market. (b) usually set with a term to maturity longer than a year. (c) not popular with most money market investors because of the high default risk. (d) more commonly used as a source of funds by European corporations than by American firms. 194. A situation in which the price of an asset differs from its fundamental market value is called (a) an unexploited profit opportunity. (b) a bubble. (c) a correction. (d) a mean reversion. 195. The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will (a) rise before they pay off their debt. (b) fall before they pay off their debt. (c) become more volatile before they pay off their debt. (d) become more stable before they pay off their debt. 196. A mismatch between job requirements and the skills of available workers results in: (a) induced unemployment. (b) structural unemployment. (c) frictional unemployment. (d) cyclical unemployment. (e) underemployment. (f) seasonal unemployment. 197. Finance companies play a unique role in money markets by: (a) giving average consumers indirect access to money markets. (b) combining average consumers’ investments to purchase money market securities on their behalf. (c) borrowing in capital markets to finance purchases of money market securities. (d) assisting the government in its sales of U.S. treasury securities. 198. The primary issuers of capital market securities include (a) the federal and local governments. (b) the federal and local governments, and corporations. (c) the federal and local governments, corporations, and financial institutions. (d) local governments and corporations. 199. The distribution of a firm’s capital between debt and equity is its (a) leverage ratio. (b) liability structure. (c) acid ratio. (d) capital structure. 200. Policies that limit the discretion of managers as a way of protecting bondholders’ interests are called (a) restrictive covenants. (b) debentures. (c) sinking funds. (d) bond indentures. 201. Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called: (a) junk bonds. (b) callable bonds. (c) convertible bonds. (d) debentures. 202. Preferred stockholders hold a claim on assets that has priority over the claims of: (a) both common stockholders and bondholders. (b) neither common stockholders nor bondholders. (c) common stockholders, but after that of bondholders. (d) bondholders but after that of common stockholders. 203. Securities issued by a given corporation and likely to yield the lowest explicit non-zero interest rate at the time of original issue would be: (a) marginal stock. (b) convertible debentures. (c) common stock. (d) treasury stock. (e) convertible preferred stock. (f) treasury bonds. 20 204. According to the efficient markets hypothesis, the main cause of fluctuations in stock prices is changes in (a) tax laws. (b) errors in technical stock analysis. (c) daily trading volume in stock markets. (d) information available to investors. (e) total household wealth in the economy. 205. To say that stock prices follow a "random walk" is to argue that stock prices (a) rise, then fall. (b) rise, then fall in a predictable fashion. (c) tend to follow trends. (d) are, for all practical purposes, unpredictable. 206. Which of the following types of information will most likely enable the exploitation of a profit opportunity? (a) Financial analysts' published recommendations. (b) Technical analysis. (c) Hot tips from a stockbroker. (d) Accidentally acquired insider information. 207. Retired people can live on the equity they have in their homes by using a (a) GEM. (b) GPM. (c) SAM. (d) RAM. 208. Natural rate theory suggests that if policy makers continually aim for a target interest rate below the natural rate, maintaining the target rate would require: (a) high real interest rates and low nominal interest rates. (b) constant or declining rates of inflation. (c) actual inflation to exceed expected inflation continuously. (d) tariff barriers to prevent competition from cheap labor. 209. The Federal Reserve System's Open Market Committee: (a) includes all seven members of the Board of Governors and the President. (b) conducts the most important parts of monetary policy. (c) has complete control over the financial system. (d) is responsible for fiscal policy. 210. The money supply is negatively related to the: (a) potential money multiplier. (b) margin requirement ratio. (c) actual money multiplier. (d) percentages of excess reserves held by banks. 211. The money market is: (a) more efficient than the banking industry in acquiring and digesting potentially adverse information about securities. (b) the major institution mediating the asymmetric information problem between saver-lenders and borrower-spenders. (c) subject to fewer regulations and lower transaction costs than is the banking industry. (d) the major source of both short- and long-term funding for non-profit corporations. (e) most actively used by mutual funds and pension funds that focus on long term financial investments. 212. The process in which people seeking higher interest rates take their money out of financial institutions is called: (a) capital mobility. (b) loophole mining. (c) disintermediation. (d) deposit jumping. (e) fund motility. 213. A clause in a bond indenture requiring the firm to pay off a portion of the bond issue each year is a: (a) call provision. (b) nonrestrictive covenant. (c) sinking fund. (d) shelf registration. 214. To minimize the interest and default risks associated with given expected rates of return, relatively unsophisticated individual investors can most reasonably and easily invest in: (a) common stock. (b) diversified mutual funds. (c) corporate bonds. (d) long term municipal bonds. (e) real estate. 215. FED purchases of government securities on the open market most directly and immediately increase the: (a) discount rate. (b) monetary base. (c) supply of money. (d) market interest rate. (e) unemployment rate. 216. Banker’s acceptances: (a) cannot be sold until they mature. (b) are issued only by large money center banks. (c) carry high interest rates despite very low default risk. (d) are more liquid than Treasury bills or federal funds. 21 217. The major suppliers of funds in the US money market include (a) the U.S. Treasury Department. (b) foreign central banks that transact in Eurodollar instruments. (c) mortgage lenders, during periods when interest rates are very low. (d) the FED, when it is attempting to reduce the money supply. (e) major firms seeking to warehouse surplus funds temporarily. 218. Property pledged to the lender in the event that a borrower fails to repay debt is called: (a) points. (b) collateral. (c) interest. (d) good faith money. (e) parsimony. (f) the trust corpus. 219. Negotiable certificates of deposit: (a) are bearer instruments because their holders receive the principal and the interest earned at maturity. (b) typically have a maturity of from one to four years. (c) are usually denominated in $100,000 increments. (d) are high interest instruments because interest fluctuations and default risk are crucial influences on the rate of return ultimately realized at maturity. 220. Banks usually would prefer to meet deposit outflows by: (a) selling loans instead of selling securities. (b) calling loans instead of selling securities. (c) selling loans instead of borrowing from the Fed. (d) buying securities instead of calling loans. (e) borrowing from the Fed instead of selling loans. 221. A reasonable argument in support of a regulated minimum capital requirement for banks is that a bank that holds too little capital: (a) will be more profitable than other banks. (b) imposes costs on other banks because banks with relatively little capital are more likely to fail. (c) have an unfair competitive advantage over savings and loans. (d) is likely to pay lower interest rates to its depositors. 222. A firm that temporarily finances a new plant by issuing money market securities: (a) minimizes the short-term riskiness and costs of rolling over its debt. (b) is more likely to profit if interest rates rise while the plant is being constructed. (c) avoids interest rate risk relative to a firm with similar funding requirements that issues long-term bonds. (d) incurs both the cost of reissuing securities and the risk of having to pay higher interest rates on the new debt. 223. A mortgage lender’s right to sell property if the underlying loan defaults is protected by (a) a down payment. (b) a lien. (c) private mortgage insurance. (d) borrower qualification (e) amortization. 224. It is untrue of US Treasury inflation-indexed bonds that (a) the principal amount used to compute the interest payment varies with the consumer price index. (b) the interest payment rises when inflation occurs. (c) the interest rate stated on the face of the bonds rises when inflation occurs. (d) at maturity the securities pay the greater of face-value or inflation-adjusted principal. 225. Unlike an amortized mortgage, a balloon mortgage loan typically requires the borrower to pay: (a) interest, but not principal, until the balloon is due. (b) a large down payment to reduce the monthly payment required. (b) a portion of principal each month, but no interest until the balloon is due. (d) equal proportions of interest and principal each month. 226. A venture capital firm typically tries to protect its equity investment from moral hazard by a new firm’s executives through policies of: (a) placing people on the board of directors to better monitor the borrowing firm’s activities. (b) writing contracts that require sale of specific proportions of the new firm’s equity (an IPO) to parties external to both the VC and the entrepreneurs. (c) prohibiting the borrowing firm from replacing its management. (d) having any and all patents, trademarks, and copyrights assigned to the venture capital firm. 22 249. Large-denomination bonds with low default risk and maturity of less than one year are typically traded in (a) money markets. (b) federal funds markets. (c) capital markets. (d) “blue-chip” markets. (e) securitized markets. 250. The evolution of the payments system from barter to precious metals, then to fiat money, then to checks, and increasingly to electronic transfers can best be understood as a consequence of (a) government regulations designed to improve the efficiency of the payments system. (b) competition among firms to make it easier for customers to purchase their products. (c) innovations that reduced the costs of exchanging goods and services. (d) computerization. (e) appropriate central planning. 251. If a US firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk the firm should (a) sell foreign exchange futures short. (b) buy foreign exchange futures long. (c) stay out of the exchange futures market. (d) none of the above. 252. When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in (a) coercive bargaining. B) strategic holding out. (c) credit rationing. D) collusive behavior. 253. High-yield bonds consistently rated below investment grade by the bond-rating agencies are often referred to as (a) municipal bonds. B) Yankee bonds. (c) "fallen angels." D) junk bonds. 254. Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been (a) the creation of the FDIC. (b) rapid economic growth since 1941. (c) the employment of new procedures by the Federal Reserve. (d) flow of more conservative officials into bank management. (e) relative deregulation of the financial sector since 1981. 255. A bank’s “loan loss reserves” are estimates of the amounts of (a) loans from other banks that will need to be repaid during a given period. (b) outflows of funds expected because of disintermediation. (c) contracts that will require renegotiation because of declines in market rates of interest. (d) assets that will prove uncollectible. (e) records that will be lost in the event of catastrophic computer failure. 256. Interstate branch banking was forbidden by the (a). Glass-Steagall Act (b) Riegle-Neal Act. (c) Community Reinvestment Act. (d) Gram-Leach-Bliley Act. (e) McFadden Act. 257. When drivers are more likely to drive more recklessly because they have insurance against collisions, insurers are faced with negative effects from the (a) moral hazard problem. (b) adverse selection problem. (c) assigned risk problem. (d) queuing problem. (e) personal culpability problem. 258. If a baseball manager conceals information about damage to a former all-star's knees before trading him to another team, the team that receives that player loses because of: (a) malfeasance. (b) immoral hazard. (c) perverse selection. (d) adverse selection. 259. Savers who move their funds out of financial institutions and seek higher interest rates elsewhere are practicing (a) capital mobility. (b) loophole mining. (c) disintermediation. (d) deposit jumping. 260. The Fed's ability to discourage banks from making too many trips to the discount window is frequently referred to as (a) "arm twisting." (b) the "red dog" rule. (c) "discount blitzing!" (d) "moral suasion." (e) “red-lining”. 25 261. Before passage of the Gram-Leach-Bliley Act (1999), stringent restrictions in the _______ prohibited commercial banks from acting as investment bankers. (a). Glass-Steagall Act (b) Riegle-Neal Act. (c) Community Reinvestment Act. (d) Competitive Equality in Banking Act. (e) McFadden Act. 262. The ability of the Comptroller of the Currency to charter national banks, in tandem with the ability of states’ banking authorities to charter state banks, created what is known as the (a) Bilateral Banking Commission. (b) dual banking system. (c) creative response solution. (d) Eurodollar market. (e) split banking system. 263. Requirements in some contracts that mortgages be fully paid-off (or refinanced) at the end of, say, 8-10 years, but which permit lower monthly payments in accord with schedules from long term conventional (e.g., 30-year) mortgages, are known as: (a) pay-off escalations. (b) disintermediation clauses. (c) balloon payments. (d) accelerated pay-outs. (e) contraction clauses. 264. The interest rates paid will tend to be lowest on (a) U.S. Treasury bonds. (b) Aaa corporate bonds. (c) IPO securities. (d) high-grade municipal bonds. (e) US Treasury bills. 265. Lenders’ rights and the borrower’s obligations are described in a (a) liability document. (b) bond indenture. (c) Security and Exchange filing. (d) collateral registration. (e) stock certificate. 266. A call provision in a corporate bond is more likely to be exercised if (a) interest rates rise. (b) inflation increases. (c) the firm decides to privatize. (d) interest rates fall. (e) the firm is acquired by a larger firm. 267. Poorer people usually have more difficulty getting loans because they: (a) face consistent policies of price discrimination. (b) typically have little collateral. (c) are inherently less honest. (d) are less likely to benefit from access to financial markets. (e) are characterized by all of the above. 268. The riskiness of a portfolio can be reduced through (a) defenestration. (b) disintermediation. (c) underwriting. (d) diversification. (e) syndication. 269. Transaction costs are reduced when newly-issued stocks or bonds are sold, but competition among financial investors is also significantly lessened, when a corporation secures its financing through a (a) private placement. (b) put-and-call option. (c) initial public offering. (d) financial angel. (e) stock market index fund. 270. The right of a mortgage holder to repossess property when a borrower defaults is guaranteed by (a) liens against the collateral property. (b) repayment clauses. (c) refinancing provisions. (d) foreclosure agreements. (e) None of the above. 271. Persistent deficits in the current account of payments in the U.S. balance, and the accompanying inflows of international financial capital during the 1980s, were at least partially reflective of: (a) the decreasingly successful collusion of OPEC countries in their thwarted attempts to raise oil prices. (b) losses of virtually all U.S. comparative advantages. (c) persistent federal budget deficits. (d) undervaluation of the dollar in international financial markets. 272. If the dollar depreciates against other currencies in international markets, this will: (a) increase the likelihood of a trade deficit for the United States. (b) make American exports more expensive in other currencies. (c) make American imports more expensive in dollars. (d) increase unemployment in the United States. 26 273. The inflation and interest rate risks in mortgage loans are borne by the borrower rather than the lender if a mortgage has a (a) shared appreciation clause. (b) variable interest rate. (c) growing equity clause [GEM]. (d) graduated payment schedule. (e) fixed interest rate. 274. Depreciation of a currency under a system of flexible exchange risk is most like (a) default risk in a corporate bond. (b) devaluation under a fixed exchange rate system. (c) inflation risk. (d) an import quota. (e) a subsidy on exports. 275. Most major American businesses get their external funds primarily from: (a) bank loans. (b) bonds and commercial paper issues. (c) stock issues. (d) retained earnings. (e) savings by foreign households. 276. Which of the following is not one of the eight basic puzzles about financial structure? (a) Large, well-established corporations have superior access to securities markets to finance their activities. (b) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. (c) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. (d) Banks are the most important source of external funds to finance businesses. 277. Not among the major advantages of market-value accounting over historical-cost accounting would be that market-value accounting: (a) improves the ability of regulators to close a bank before its net worth falls to zero. (b) reduces the incidence in the number of banks that "bet- the- bank" by taking excessive risks in hopes of staying in operation. (c) makes it harder for bank officials to hide insolvencies. (d) makes it harder for regulators and politicians to hide insolvencies. (e) requires fewer resources to acquire data and perform calculations. 278. Mishkin attributes financial crises during the past three decades in countries ranging from the U.S and Mexico to Russia, Norway, Sweden, and Finland to: (a) financial liberalization (e.g., deregulation) that occurred in the 1980s. (b) consistent declines in real interest rates. (c) average inflation that accelerated worldwide in the 1980s. (d) sluggish worldwide economic growth. 279. Although market trades in international financial markets are said to involve the buying and selling of currencies, most trades involve the buying and selling of: (a) bank deposits denominated in different currencies. (b) SDRs. (c) gold. (d) ECUs. (e) bundles of currencies that have fixed exchange rates. 280. Pro teams trading superstars to other teams while disguising a player’s drug addiction entails: (a) moral suasion. (b) adverse ignorance. (c) moral hazard. (d) irrational ignorance. (e) adverse selection. 281. A bank failure is less likely to occur when a bank (a) holds less U.S. government securities. (b) suffers large deposit outflows. (c) holds more excess reserves. (d) has more bank capital. 282. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in (a) the interest rates of the two countries. (b) the current account balances of the two countries. (c) the price levels of the two countries. (d) monetary policies of the two countries. 283. Which of the following would cause appreciation of the domestic currency? (a) A higher domestic nominal interest rate due to a higher expected inflation rate. (b) A decline in the domestic real interest rate. (c) Slower growth in the domestic money supply. (d) Relatively slow growth of productivity. 27 307. The theory of purchasing power parity (PPP) suggests that if one country's price level falls relative to another's, its currency should: (a) depreciate in the long run. (b) appreciate in the long run. (c) appreciate in the short run, and then return to its original rate. (d) depreciate in the short run, but then rebound. 308. Economists classify any returns from an investment in excess of the opportunity costs of capital as: (a) proprietary residuals. (b) economic rents. (c) profits from accurate forecasting. (d) an increase in the future opportunity costs of capital. (e) a just reward to entrepreneurship. 309. Risk that is related to the uncertainty about interest rate movements is called (a) default risk. (b) interest-rate risk. (c) the problem of moral hazard. (d) security risk. 310. As the number of unrelated stocks in a portfolio is increased, for the portfolio as a whole: (a) unique risk decreases and approaches zero. (b) market risk decreases. (c) unique risk decreases and becomes equal to market risk. (d) Beta increases exponentially as the number of stocks approaches infinity. 311. Economic profits or economic rents that can be capitalized are least likely to arise from: (a) production cost advantages. (b) proprietary knowledge. (c) being first to market a differentiable new product or to innovate a new production technology. (d) a vigorously competitive market environment. 312. The poorest motive for a merger among the following would be: (a) economies of scale. (b) complementary markets and resources. (c) diversification. (d) unused tax shields. (e) synergies [e.g., economies of scope]. 313. Privatization entails the sale of a: (a) government-owned activity to private investors. (b) private company to the government. (c) publicly traded company to private investors. (d) closely-held corporation to private investors. 314. 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) net present values of expected dividends dominate stock pricing. (e) investors focus primarily on their views of the expectations of other investors. 315. A risk that is unavoidable for a portfolio of long-term U.S. government bonds that might conceivably be avoided by holding some alternative bundle of assets would be: (a) default risk. (b) revolutionary risk. (c) speculative risk. (d) interest rate risk – the possibility that interest rates will vary. (e) market risk. 316. The highest average annual (real) return between 1926 and 2000 would have been derived from a portfolio consisting of a representative sampling of: (a) small firm common stocks [“small caps”]. (b) common stocks listed on the Dow-Jones Industrial Index. (c) municipal government bonds. (d) very short term U.S. Treasury bonds [T-bills]. (e) foreign currencies. 317. Economic profits that are least likely to result in higher prices for stock held by a firm’s owners, or higher prices for the resources that generate them would be economic profits: (a) derived from the exercise of market (monopoly) power. (b) associated with building an organization especially suited to successful technological innovation. (c) flowing from exclusive licenses to import or export goods whose relative production costs differ greatly between countries. (d) arising from the bearing of risk and uncertainty in a purely competitive market. 30 318. If Macron Corporation had returns for the past three years, respectively, of -20%, 10%, 40%, then the standard deviation of Macron’s return would be: (a) 10%. (b) 30%. (c) 60%. (d) -10%. 319. Efficient portfolios of assets are the portfolios that generate the: (a) lowest expected rate of return for a given level of risk. (b) highest expected rate of return for a given level of risk. (c) lowest level of diversification for a given expected rate of return. (d) lowest possible market risk. (e) highest possible unique risk. 320. When a firm increases the proportion of debt-to-equity in its capital structure, the expected: (a) coefficient of leverage increases logarithmically. (b) return to owners of the firm's common stocks increases because of increased risk. (c) internal rates of return [IRRs] on any new projects decline. (d) rates of return on all of the firm's total assets increase. 321. The initial investment in a new suburban mall is expected to be $60 million, and the project is also expected to generate an annual $4 million in after-tax cash flow for five years. At the end of 5 years it can be sold for $80 million. The NPV of the project at a discount rate of 10% would be: (a) $4.85 million. (b) $36 million. (c) $1.3 million. (d) $22.4 million. 322. Investing in gold is most like investing in: (a) a stock that pays dividends regularly. (b) physical capital that replicates itself at a fixed annual rate. (c) a stock that pays no dividends. (d) long- term U.S. government bonds. 323. Likely outcomes if a firm uses the same company cost of capital in its evaluations of all projects would be (a) accepting poor low risk projects but rejecting good high risk projects. (b) accepting poor high risk projects but rejecting good low risk projects. (c) accepting both poor low risk projects and good high risk projects. (d) rejecting both good low risk projects and poor high risk projects. 324. Daimler-Benz's acquisition of Chrysler is an example of a: (a) horizontal, cross-border merger (b) vertical domestic merger. (c) conglomerate international merger. (d) vertical cross-border merger. 325. A portfolio with a market Beta identical to the theoretical value of beta would include: (a) only U.S. treasury bills. (b) only long term US Government bonds. (c) an absolutely representative sampling of stocks drawn solely from S&P's composite index. (d) a representative sampling of only common stocks of small firms. (e) an absolutely representative sampling of all possible investment alternatives. 326. The value of most businesses for the purposes of merger or acquisition depends most heavily upon: (a) equipment, machinery, etc. (b) buildings, real estate, etc. (c) patents, licenses, etc. (d) the skills and loyalty of key career employees. (e) market risk. 327. Services are the focus of both Iowa Inc. (II) and Maine Company (MC). Their historical returns for the past three years are: II: -10%,15%, 25%; MC: 10%, 6%, 32%. The covariance between the returns of II and MC is. (a) 252 (0.0252). (b) 103 (0.01333). (c) 155 (0.01555). (d) 319 (0.0139). 328. The respective Betas of the market portfolio and a portfolio of Treasury bills are: (a) Zero and 1. (b) +0.5 and –0.5. (c) 1.0 and zero. (d) +1.0 and –1.0. 329. A financial manager attempting to assess the values of abandoning or expanding an on-going project of her company might usefully use (a) queuing theory. (b) random portfolio selection. (c) a decision tree. (d) matrix analysis. 31 330. The correlation coefficient between Apostrophe stock and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Therefore, the beta of the stock is: (a) 0.9. (b) 1.0. (c) 1.1. (d) 0.6. 331. From the following options, the least scientifically relevant component of project analysis would be: (a) sensitivity analysis. (b) break-even analysis. (c) Monte Carlo simulation. (d) rule-of- thumb estimation of the fudge factor. (e) estimating abandonment and expansion costs. 332. According to the capital asset pricing model. (CAPM), the expected: (a) risk premium on an investment is proportional to its beta. (b) rate of return on an investment is proportional to its beta. (c) rate of return on an investment is totally independent of the risk-free rate of return. (d) risk premium on an investment depends primarily on the risk-free rate of return. 333. Not among three major steps used in Monte Carlo simulations to assess NPV would be: (a) modeling the project. (b) specifying probabilities. (c) modeling the corporate strategy. (d) simulating the cash flows. 334. A "factor" in the arbitrage pricing model (APT) is a variable that: (a) affects the return of risky assets in a systematic manner. (b) correlates with risky asset returns in an unsystematic manner. (c) is purely "noise". (d) affects the return of a risky asset in a random manner. 335. If common stock returns are on the Y axis of a graph and market returns are on the X-axis, the slope of the regression line represents the: (a) Alpha. (b) Beta. (c) R-squared. (d) Adjusted beta 336. One drawback of the CAPM is that it: (a) ignores the return on the market portfolio. (b) assumes (requires) a single measure of systematic risk. (c) ignores risk-free return. (d) utilizes too many factors. 337. The hurdle rate for capital budgeting decisions is the cost of: (a) equity. (b) debt. (c) capital. (d) new issuance of stock. 338. Taj Mahal Tour company proposes to invest $3 million in a new tour package. Fixed costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the break-even number of tourists per year? (Ignore taxes, give an approximation.). (a) 2000. (b) 1000. (c) 15000. (d) None of the above. 339. Assumptions that underpin the capital asset pricing model (CAPM) include: (a) returns from alternative investments are totally random. (b) higher fixed costs increase risks for start-ups and reduce abandonment values. (c) homogeneous expectations among investors about income streams from alternative assets. (d) the idea that risk premiums depend on the specific incidence of risk avoidance by each individual investor. 340. The hardest. (and perhaps, most important) part of a Monte Carlo simulation for the NPV of a project would be: (a) simulating the cash flows. (b) specifying numbers on a roulette randomizer. (c) specifying interdependencies among variables. (d) specifying probabilities. (e) identifying appropriate pricing strategies. 341. Not among the three factors in the Three-Factor Model would be a: (a) market factor. (b) size factor. (c) book-to-market factor. (d) risk-to-return factor. 342. For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between changes in the market values of the two stocks is: (a) +1. (b) zero. (c) –0.5. (d) –1. 32