Download Midterm 1

Name _____________________
Exam # ________
Student ID# ________________
ECO 212
Mid-Term #1
Fall 2011
Prof. S. Sullivan
Instructions: Write your answers directly on the exam sheet. For part II, circle the one best
answer.
Part I
Suppose there are 2 countries – Belgium and Denmark – that trade only with each other. Belgium
exports waffles, and will produce any amount of waffles Denmark wants for BF 3 (3 Belgian
Francs) per waffle. Denmark produces pastries, and will produce any amount of pastries that
Belgium might want for DK 2 (two Denmark Krone) per pastry.
1. Fill in the missing values in the table below:
Denmark’s demand for waffles depends on the price per waffle in DK:
If the exchange
rate is:
then the price per
waffle in Denmark is:
number of waffles
demanded is:
DK supplied
by Denmark:
3.5 BF/DK
DK 0.857 (6/7)
70
60
3.0 BF/DK
DK 1
50
50
2.5 BF/DK
DK 1.2
30
36
Belgium’s demand for pastries depends on the price per pastry in BF. Belgium’s demand for
pastries is shown in the graph below:
–1–
If the exchange
rate is:
then the price per
pastry in Belgium is:
number of pastries
demanded is:
DK demanded
by Belgium:
3.5 BF/DK
____________
__________
__________
3.0 BF/DK
____________
__________
__________
2.5 BF/DK
____________
__________
__________
2.
Assume that all of the demand for Danish krone in the foreign exchange market arises
from Belgium’s demand for Danish pastries. Fill in the missing demand curve for DK in the
foreign exchange market.
3.
If the official price of gold is DK 80 per gram in Denmark and BF 280 per gram in
Belgium, what is the official exchange rate?
4.
Show how the value of Denmark’s imports of goods, services, and assets equal the value
of exports of goods, services, and assets. (Some values might be zero.)
Denmark imports:
__________ DK of waffles
__________ DK of gold
Denmark exports:
__________ DK of pastries
__________ DK of gold
–2–
5.
Suppose Bond A pays an 8% yield-to-maturity with an 80% probability (0.80) and pays a
0% yield-to-maturity with a 20% probablility (0.20).
a.
Write out the formula you would use to calculate the Expected Return on Bond A.
b. Write out the formula you would use to calculate the variance of the return on Bond A.
–3–
Part II
Select the one best answer to each question.
1.
An increase in the money supply can affect the interest rate through the liquidity effect,
the income effect, the price-level effect, and the expected inflation effect. Following an increase
in the money supply, the ____ effects will tend to raise interest rates, while the ____ effect will
tend to lower interest rates.
a.
b.
c.
d.
e.
liquidity and income
income and price level
liquidity and expected inflation
income and expected inflation
none of the above.
expected inflation
expected inflation
income
price level
2.
The amount of extra return people demand in order to hold an asset that is risky compared
to a risk-free asset is called:
a.
b.
c.
d.
e.
the risk premium.
the default risk.
the “beta”.
systematic risk
the standard deviation.
3.
Which would cause the supply curve for bonds to shift to the right?
a.
b.
c.
d.
e.
an increase in interest rates.
an increase in the liquidity of bonds.
more interest among savers in planning for retirement.
greater perception of riskiness of bonds.
an increase in the expected profits from the firms’ investment opportunities.
The following information applies to the next three questions:
Suppose the risk-free asset (RF) pays a return of 0.04 (4%) and the perfectly-diversified-portfolio
(PDP) pays an expected return of 0.06 (6%) with a variance of 0.04 (or standard deviation of
0.2).
4.
If I start with $1 of my own, borrow one dollar at the risk-free rate, and buy $2 of the
PDP, what will be the standard deviation of my portfolio?
a.
b.
c.
d.
e.
0.4
0.02
-0.04
0.08
-0.02
–4–
5.
If I combine the two assets RF and PDP to create a portfolio with an expected return of
0.045 (4.5%), what amount of risk should I expect?
a.
b.
c.
d.
e.
standard deviation of 0.45
standard deviation of 0.075.
standard deviation of 0.05.
variance of 0.0075.
none of the above.
6.
If I start with $1 and want to create a portfolio by combining RF and PDP that will have
an expected return of 10%, I should take my one dollar and add to it ___ borrowed at the riskfree rate and invest in the perfectly-diversified portfolio.
a.
b.
c.
d.
e.
$9
$8
$3
$2
$1
7.
The key piece of evidence that supports the idea that money plays an important role in
generating business cycles is:
a.
b.
c.
d.
e.
inflation rises whenever the unemployment rate rises.
financial crises have occurred for hundreds of years.
the money growth rate is more unstable than the long-term interest rate.
the average inflation rate and the average rate of money growth are closely related.
the rate of money growth declines before every recession.
8.
Which of the following is NOT a “capital market instrument”?
a.
b.
c.
d.
e.
stocks
commercial paper
corporate bonds
consumer and bank commercial loans
mortgages
9.
Investment intermediaries include:
a.
b.
funds.
c.
d.
e.
money market mutual funds, life insurance companies, and mutual savings banks.
life insurance companies, fire and casualty insurance companies, pension and retirement
savings and loan associations, credit unions, and life insurance companies.
finance companies, mutual funds, money market mutual funds, and investment banks.
none of the above.
–5–
The following information applies to the next two questions:
The USA and Bulgaria are using the gold standard, and the official price of gold in the USA is
USD 40 per gram, and the official price of gold in Bulgaria is BGN 55 per gram.
10.
If the foreign exchange market set the exchange rate between USD and BGN at BGN 1.5
= USD 1, then whoever exploits the arbitrage opportunity will also:
a.
cause the official price of gold to change.
b.
cause imports of goods, services, and assets to be unequal to exports of goods, services,
and assets.
c.
cause gold to move from the USA to Bulgaria.
d.
cause the money supply of Bulgaria to fall.
e.
none of the above.
11.
Suppose the market exchange rate between USD and BGN is BGN 1.375 = USD 1. At
this rate, the number of BGN supplied by BGN buyers of US goods, services, and assets
(excluding gold) is BGN 50 million, and the number of BGN demanded by US buyers of BGN
goods, services, and assets (excluding gold) is BGN 44 million. What is also true?
(i)
(ii)
(iii)
(iv)
Bulgaria will export BGN 6 million worth of gold.
Bulgaria will import BGN 6 million worth of gold.
Bulgaria’s money supply will shrink by BGN 6 million.
Bulgaria’s money supply will expand by BGN 6 million.
a.
b.
c.
d.
e.
both (i) and (iii) are true.
both (i) and (iv) are true.
both (ii) and (iii) are true.
both (ii) and (iv) are true.
both (iii) and (iv) are true.
12.
The main benefit of diversification is that it:
a.
b.
c.
d.
e.
eliminates economies of scale.
lowers risk.
eliminates moral hazard.
raises transactions costs.
eliminates adverse selection
13.
Which asset is counted as part of M2 but not counted as part of M1?
a.
b.
c.
d.
e.
currency
traveler’s checks
demand deposits.
time deposits.
none of the above.
–6–
14.
On some of the remote islands of the Pacific Ocean, cans of beer are used to pay for small
purchases. A person with 2 cans of beer – one high-quality brand (Kamenitza) and one lowquality brand (Pirinsko) will pay for his/her purchases with Pirinsko. This is an example of:
a.
b.
c.
d.
e.
Gresham’s Law
double coincidence of wants
fiat money
inflation.
seigniorage
15.
My landlord has given me a rental contract which specifies how much my rent is in euros,
but when I pay the rent, I make a deposit into his bank account in Bulgarian Leva. In this case,
the lev is serving as _____ , but not _____.
a.
b.
c.
d.
e.
unit of account
store of value
medium of exchange
medium of exchange
unit of account
medium of exchange
unit of account
store of value
unit of account
store of value
15.
At pre-registration time, AUBG faculty can give students slips of paper with codes that
allow the student to register for a popular, exciting class (like Money and Banking) even if the
course is full. If AUBG students begin buying and selling goods among themselves using these
slips of paper with “full-class permission” codes as a means of payment, then the slips of paper
are:
a.
b.
c.
d.
e.
commodity-backed money
fiat money
store of value
unit of account
commodity money
17.
The concept that measures the actual incentives of a saver to save or borrower to borrow
is the:
a.
b.
c.
d.
e.
real interest rate.
rate of capital gain.
yield-to-maturity.
nominal interest rate.
coupon rate.
–7–
18.
A bond matures in 2 years, and has a 4% coupon, and a principal of $100. Its price today
is $98. Its yield-to-maturity is closest to:
a.
b.
c.
d.
e.
3%
5%
8%
4%
12%
19.
In the money supply – money demand diagram, an increase in the money supply shifts the
MS/P curve to the right, and lowers the interest rate. This would show the ____ of the money
supply increase.
a.
b.
c.
d.
e.
interest rate effect.
income effect.
expected inflation effect.
liquidity effect.
price level effect
20.
What makes something money?
a.
b.
c.
d.
e.
It is used as the medium of exchange.
It is used as a store of value.
It is used as the unit of account.
all of the above.
none of the above.
Extra Credit: (2 points)
Which of the persons in the photos below is Federal Reserve System Chairman Ben Bernanke?
a.
b.
c.
d.
A
B
C
D
Identify the 3 other individuals:
A_______________________________
B_______________________________
C_______________________________
D_______________________________
–8–
–9–