Midterm1 practice MC

Topics: Money, Bond, Inflation Pages: 9 (1199 words) Published: April 19, 2014

1. Financial markets contain people and firms that buy and sell two kinds of assets: ________ and ________.
A) travelers checks; insurance policies
B) currency; securities
C) dollars; euros
D) bonds; stocks

2. Which of the following best defines a security?
A) It is a claim on the past flow of income.
B) It is a claim on the depreciation of income.
C) It is a fixed payment.
D) It is a claim on the future flow of income.

3. A bond is an example of a:
A) fixed income security.
B) constant asset.
C) flexible income security.
D) security with an unknown payment.

4. To attract ________ of a zero coupon bond, the seller must ________ the bond at ________ its face value.
A) buyers; sell; less than
B) buyers; sell; greater than
C) sellers; buy; less than
D) sellers; buy; equal to

5. Which of the following arranges risk from least to most risky (left to right)? A) large corporations, government, small corporations
B) small corporations, large corporations, government
C) government, small corporations, large corporations
D) government large corporations, small corporations

6. Financial markets help transfer funds from the ________ to the ________. A) bankers; investors.
B) depositors; bankers
C) savers; investors
D) investors; savers

Page 1

7. The problem of adverse selection arises when the owners of a security have a(n): A) incentive to misbehave after an asset purchase.
B) incentive to behave according to expectations.
C) incentive to give potential buyers bad information.
D) disincentive to give potential buyers bad information.

8. The problem of moral hazard arises when the owners of a security have: A) an incentive to give potential buyers bad information.
B) little incentive to behave prudently after selling its asset. C) a disincentive to give potential buyers bad information.
D) an incentive to behave according to expectations.

9. Banks reduce ________ by screening ________.
A) moral hazard; potential borrowers
B) adverse selection; savers
C) adverse selection; potential borrowers
D) irrational exuberance; depositors

10. When money is used to measure prices and wages we are using it as a: A) medium of exchange.
B) unit of account.
C) store of value.
D) hedge against inflation.

11. Fiat money is backed by:
A) nothing.
B) gold.
C) silver.
D) cars.

12. When you buy something using a credit card,
A) you are borrowing money.
B) it is included in M1.
C) it is debited from your checking account.
D) you generally pay a lower interest rate than you would if you borrowed directly from a bank.

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13. The cost of holding onto money is:
A) the interest lost on other assets.
B) the gain of purchasing power as prices fall.
C) the price level.
D) zero.

Checking deposits
Traveler's checks
Savings deposits
Small time deposits
Retail money market mutual funds
Institutional money funds


Determine the amount of M1 and M2.
A) M1 = 1372 and M2 = 7661.6.
B) M1 = 7661.6 and M2 = 6289.6.
C) M1 = 1365.8 and M2 = 1372.
D) M1 = 1372 and M2 = 5224.3.

15. To prevent a liquidity crisis in the aftermath of September 11th, the Fed took which of the following actions?
I. It acted as a lender of last resort.
II. It raised the federal funds rate.
III. It reduced income taxes.
A) I only
B) II only
C) III only
D) I and II

16. What is the present value of $100 paid in 5 years if the interest rate is 5 percent? A) $78.35
B) $95.24
C) $105.00
D) $127.63

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17. If a bond's maturity is 3 years, with an annual coupon payment of $10 and the face value is $1000, and assuming the interest rate is 2 percent, which of the following is the bond's price?
A) $951.75
B) $961.74
C) $971.16
D) $980.39

18. Which of the following summarize(s) the classical theory of asset prices? I. An asset price equals the present value of expected...
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