Practice Multiple Choice Questions

These are not meant to explore the full range of possibilities that will be seen on the final exam. The final exam for the fall of 2001 will have questions that come from the text, from the lecture, and from the assigned supplementary readings. Multiple Choice questions on the final will have five answers.

Doing these questions is NOT adequate preparation for the final. These questions are offered as practice and should not be interpreted as necessarily typical of what you might see on the exam. (Invariably students find the questions on the FINAL MUCH tougher than any set of practice questions!)

1. Every financial market has the following characteristic:
a. it determines the level of interest rates.
b. it allows common stock to be traded.
c. it allows loans to be made.
d. it channels funds from lenders-savers to borrowers-spenders.

2. Which of the following can be described as involving direct finance?
a. A corporation takes out loans from a bank.
b. People buy shares in a mutual fund.
c. A corporation buys commercial paper issued by another corporation.
d. An insurance company buys shares of common stock in the over-the-counter markets.

3. Which of the following can be described as involving indirect finance?
a. You make a loan to your neighbor.
b. A corporation buys a share of common stock issued by another corporation.
c. You buy a U.s. Treasury bill from the U.S. Treasury.
d. You make a deposit to a bank.

4. Financial markets improve economic welfare because:
a. They allow funds to move from those without productive investment opportunities to those who have such opportunities.
b. They allow consumers to time their purchases better.
c. They weed out inefficient firms.
d. All of the above.
e. (a) and (b).

5. Which of the following are primary markets?
a. The N. Y. Stock Exchange
b. The U.S. government bond market
c. The over-the-counter market
d. The options market
e. None of the above

6. Which of the following financial intermediaries is not a depository institution?
a. A savings and loan association.
b. A commercial bank.
c. A credit union.
d. A finance company.
e. All of the above are depository institutions

7. The primary liabilities of a commercial bank are:
a. bonds
b. mortgages
c. deposits
d. commercial paper

8. A situation in which a party issuing a debt instrument is unable to make its interest payments is called a
a. failure.
b. insolvency.
c. devaluation.
d. default.

9. Federal funds are
a. funds raised by the federal government in the bond market.
b. loans made by banks to each other.
c. loans made by banks to the federal reserve system.
d. loans made by the federal reserve system to banks.

10. Suppose you take out a simple loan at 10% interest. If at the end of the year you pay back $5500, then the initial loan was _________ and the present value of the $5500 to the lender is __________.
a. $5500; $5500
b. $5500; $5000
c. $5000; $5000
d. $5000; $5500

11. Suppose you purchase a house using a mortgage for $5000. This mortgage is a 20-year, fixed payment loan with a 12 % interest rate. The monthly payment for this mortgage is ________, the yearly payment is _________, and over twenty years the total amount you pay out for the mortgage is ___________. The present value of this series of payments you will make over the next twenty years is __________.
a. $600; $7200; $144000; $5000
b. $55.06; $660.72; $13214.40; $5000
c. $50; $600; $12000; $5000
d. $40; $480; $5000; $5000

12. Suppose you are paying 8% interest on a loan and the expected inflation rate is 6%. What is the real interest rate?
a. 2%
b. 4%
c. 6%
d. 8%

13. Suppose you are paying 20% interest and the expected inflation rate is 12%. If your marginal tax rate is 28%, what is the real rate of interest?
a. 1.4%
b. 2.4%
c. 3.4%
d. 4.4%

14. Suppose that the wealth elasticity for an asset is greater than one. As wealth increases people will
a. Purchase fewer units of the asset.
b. Purchase the same amount of the asset as they did prior to the change in their wealth.
c. Purchase more units of the asset.
d. We cannot predict with certainty what happens to people's demand for this asset without knowing whether or not the asset is few as a luxury by the buyer.

15. Which of the following is inversely related to asset demand?
a. Return
b. Risk
c. Expectations
d. Wealth

16. Suppose there are two assets: Asset a has a return of 20% one half of the time and 12% the other half of the time; Asset B has a return on 30% one half of the time and 4% the other half of the time. The expected return for asset A is ______ and the expected return for asset B is ________.
a. .16; .17
b. .32; .34
c. .16; .34
d. .16.00; 17.00

Answer the next five questions using the following information:

Suppose you are given the following model:
C = 10 + (3/4)(Y - T)
I = 500 - 100r
G = 20
T = 20

17. What is the IS equation (solve for Y)?
a. Y = 515- 100r
b. Y = 2000 - 100r
c. Y = 2060 - 400r
d. Y = 515 - 400r

18. Assume that money demand is equal to 40 + 10Y - 20r and that the money supply is equal to 100. What is the LM equation (solve for Y)?
a. Y = 6 + 2r
b. Y = 60 + 20r
c. Y = 60 + 2r
d. Y = 6 + 20r

19. What is the difference between the money supply and the money demand if if Y = 10 and the interest rate is .10?
a. There is excess demand for money equal to 42.
b. There is excess demand for money equal to 38.
c. There is excess supply of money equal to 42.
d. There is excess supply of money equal to 38.

20. If Y equals 6.5, what will the equilibrium interest rate equal in the above problem?
a. .5
b. .25
c. 5.108.
d. none of the above

21. Suppose that the government decides to increase taxes so that aggregate output will increase by $400. If the mpc is equal to .8, how much will taxes need to be changed?
a. $400
b. $300
c. $200
d. $100