Econ 2035 practice test 2

If market participants have rational expectations, then the best forecast of the price of a stock
in the next period is
equal to the price of the stock in the current period.
The liquidity premium theory of the term structure _______.
does none of the above.
A one-year bond currently pays 5% interest. It's expected that it will pay 6% next year and 7%
the following year. The two-year term premium is 0.2% while the three-year term premium is
0.35%. What is the interest rate on a two-year bond ?
The demand for U.S. dollars represents
the demand for U.S. goods and financial assets by households and firms outside the
United States.
According to the theory of purchasing power parity, if the inflation rate in the U.S. is greater
than the inflation rate in Japan
the nominal value of the yen will appreciate against the U.S. dollar.
According to the Gordon growth model, which of the following can cause the value of a stock to
increased systemic risk
At the beginning of the year, you buy a share of Apple stock for $120. If during the year you
receive a dividend of $2.50, and Apple stock is selling for $130 at the end of year, what was
your rate of return from investing in the stock?
Suppose the Federal Reserve announces contractionary monetary policy while, at the same
time, the European Central Bank announces a more expansionary monetary policy. Everything
else held constant, this would cause the U.S dollar to_________ against the Euro.
George is trying to forecast the future price of IBM's common stock. To do so he makes use only
of past prices of IBM stock. George
has adaptive expectations.
Stocks of small firms have a higher annual average return than stocks in general. Some
economists attribute this to
lower liquidity of stocks of small firms.
compensation for the higher risk of small firms.
higher information costs of stocks of small firms.
Suppose some members of Enron's board of directors are aware of the company's true financial
condition, information that is not available to most investors. This is an example of
asymmetric information.
If the dollar depreciates relative to the British pound
British cars will become more expensive in the U.S.
One of the implications of the efficient market hypothesis is that
investors will not be able to consistently earn above-average returns by trading stocks.
Which of the following theories of the term structure can explain the fact that yield curves
usually slope upward?
Both the segmented markets theory and the liquidity premium theory
Lenders prefer to lend to firms with high net worth because
the owners of such firms have more to lose if the firm defaults on a loan.
According to the Expectations theory of the term structure,
when the yield curve is downward sloping, short-term interest rates are expected to
decline in the future.
when the yield curve is upward sloping, short-term interest rates are expected to rise in
the future.
Which of the following is an example of adverse selection?
A man with a bad heart condition buys a large life insurance policy.
A change in the dollar value of the British pound from $1.60 to $1.90 represents
a depreciation of the dollar relative to the pound.
Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real
exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds
should you receive in exchange for $1?
When interest rates in the bond market rise
adverse selection problems increase.
Which of the following assets is considered to be default-risk free?
a three-month Treasury bill.
According to the Segmented markets theory of the term structure, which of the following
statements is TRUE?
the interest rate for each maturity bond is determined by supply and demand for that
maturity bond.
bonds of one maturity are not substitutes for bonds of other maturities, therefore,
interest rates on bonds of different maturities do not move together.
investors' strong preference for short-term relative to long-term bond explains why the
yield curves typically slope upward.
The reduction in average cost resulting from an increase in the volume of a good or service
produced is called
economies of scale.
According to the efficient markets hypothesis, who is most likely to benefit from frequently
moving funds from one asset to another?
your broker
A Big Mac costs 400 yen in Japan and 50 pesos in Mexico. The purchasing power parity theory
would predict that the exchange rate in the long run is
1 peso = 8 yen.
Suppose that the U.S. government enacts an across-the-board increase in income tax rates.
Everything else held constant, this would cause the yields on U.S Treasury bonds to________
and the yields on municipal bonds to________.
increase; decrease
Suppose a European Union report indicates that the scope of banking and financial crisis in the
EU is far wider than was previously thought. Everything else held constant, the immediate
effect of the release of this report would be to cause the demand for U.S. dollar-denominated
assets to_____ and the euro to______against the dollar.
increase; depreciate
Default risk premiums on corporate bonds tend to _______ during business cycle expansions
and ______ during recessions, everything else held constant.
decrease; increase
Everything else held constant, a decrease in U.S. interest rates relative to foreign interest rates
causes the demand for dollars to ________ and the dollar will ________ relative to foreign
decrease; depreciate
Which of the following is NOT true of moral hazard?
It describes a lender's problem of distinguishing the good-risk applicants from the badrisk applicants.