1. Over the years we have seen large changes in US federal income tax rates, with the highest marginal rates falling from 70% to under 40% today. Describe the impact of this change on the spread between US Treasury bonds and municipal bonds?

2. A risk-averse investor will

A) Always prefer an investment with certain return of 4% over an uncertain investment with an expected return of 5%.

B) Be indifferent between an investment with certain return of 4% and an uncertain investment with an expected return of 4%.

C) Always avoid investments where the return is uncertain.

D) None of the above.

3. Under the expectations theory of the term structure:

A) The yield curve should usually be downward sloping

B) The yield curve should usually be upward sloping

C) The slope of the yield curve reflects the risk premium associated with longer-term bonds

D) The slope of the yield curve depends on the expectations for future short-term rates

4. The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us to:

A) Explain why yield curves usually slope upward.

B) Explain why interest rates of different maturities move together.

C) Explain why long term interest rates are less volatile than short term interest rates.

D) Explain why yield curves are flat.

5. During 2001, the Yen/$ exchange rate rose from 117 Yen/$ to 127 Yen/$. This meant that

A) the yen had depreciated and the dollar has appreciated.

B) the yen had appreciated and the dollar has depreciated.

C) U.S exports became cheaper in Japan.

D) Both a and c.

E) Both b and c.

6. Suppose purchasing power parity holds between Canada and the U.S., and the exchange rate is C$1.20/US$1. A Big Mac that costs $3.40 in the U.S. should cost ____ in Canada.

A) C$ 2.20

B) C$ 2.83

C) C$ 4.08

D) C$ 4.60

7. Between 2000 and 2007 the Canadian/US dollar exchange rate fell from C$1.50/US$ to C$1.10/US$. This meant that

A) the C$ has depreciated and the dollar has appreciated.

B) the C$ had appreciated and the dollar has depreciated.

C) U.S exports became cheaper in Canada.

D) Both a and c.

E) Both b and c.