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Final Exam Part 3

26 Questions
Chemistry Quizzes & Trivia

Lab Questions & Old Exam Questions for the Second Test

Questions and Answers
  • 1. 
    Which of the following statements pertaining to the yield curve is not true?
    • A. 

      Yield curves usually slope upwards

    • B. 

      The yield curve shows the difference in default risk between securities

    • C. 

      The yield curve shows the relationship among bonds with the same risk characteristics but different maturities

    • D. 

      The yield curve can be flat or downward sloping depending on market conditions

  • 2. 
    The yield on a 30-year U.S. Treasury security is 6.5%; the yield on a 2-year U.S. Treasury bond is 4.0%. This data:
    • A. 

      Indicate the yield curve is downward sloping

    • B. 

      Indicate the yield curve is flat since the risk premium needs to be added for longer maturities

    • C. 

      Indicate the yield curve is upward sloping

    • D. 

      Indicate that people expect inflation to decrease in the future

  • 3. 
    The Expectations Hypothesis suggests:
    • 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 rate

  • 4. 
    Assume the Expectation Hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting:
    • A. 

      The future one-year rate to be 4%

    • B. 

      The future one-year rate to be 8%

    • C. 

      The future one-year rate to be 6%

    • D. 

      The future one-year rate to be 5%

  • 5. 
    According to the Expectations Hypothesis:
    • A. 

      When short-term interest rates are expected to rise in the future, the long-term interest rates are equal to current short-term interest rates

    • B. 

      When short-term rates are expected to remain constant in the future, the long-term interest rates are higher than current short-term interest rates

    • C. 

      Short-term bonds are perfect substitutes for long-term bonds

    • D. 

      Expectations of future short-term rates equal estimates of current short-term rates

  • 6. 
    The Expectations Hypothesis cannot explain:
    • A. 

      Why yields on securities of different maturities move together

    • B. 

      Why short-term yields are more volatile than long term yields

    • C. 

      Why yield curves usually slope upward

    • D. 

      Why yield curves usually slope downward

  • 7. 
    Under the Expectations Hypothesis, a downward-sloping yield curve suggests:
    • A. 

      Investors expect future short-term interest rates to fall

    • B. 

      Investors expect future short-term interest rates to rise

    • C. 

      This is a trick question, the yield curve always slopes upward

    • D. 

      Investors expect future short-term interest rates to remain constant

  • 8. 
    Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be:
    • A. 

      Upward sloping and very steep

    • B. 

      Upward sloping and relatively flat

    • C. 

      Inverted

    • D. 

      Vertical

  • 9. 
    Suppose the economy has an inverted yield curve. According to the Liquidity Premium Theory, which of the following interpretations could be used to explain this?
    • A. 

      Interest rates are expected to rise in the future

    • B. 

      Investors expect an economic slowdown

    • C. 

      Investors are indifferent between bonds with different time horizons

    • D. 

      The term spread has increased

  • 10. 
    If a one-year bond currently yields 4% and is expected to yield 6% next year, the Liquidity Premium Theory suggests the yield today on a two-year bond will be:
    • A. 

      More than 4% but less than 5%

    • B. 

      5%

    • C. 

      4%

    • D. 

      More than 5%

  • 11. 
    Under the liquidity premium theory, if investors become less certain about future monetary policy, the yield curve should:
    • A. 

      Become more upward sloping

    • B. 

      Become flatter

    • C. 

      Become inverted

    • D. 

      Be vertical

  • 12. 
    We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:
    • A. 

      Vary directly with economic growth

    • B. 

      Show no variation over the business cycle

    • C. 

      Vary inversely with economic growth

    • D. 

      Breakdown with economic growth

  • 13. 
    An inverted yield curve is a valuable forecasting tool because:
    • A. 

      The yield curve usually is inverted so it reflects a growing economy

    • B. 

      The yield curve seldom is inverted and can signal an economic slowdown

    • C. 

      Investors are expecting higher short-term rates in the future, and this usually signals an economic slowdown

    • D. 

      Inverted yield curves signal better economic times are expected

  • 14. 
    A proposed increase in the federal income tax rate should:
    • A. 

      Have no impact on the slope of the yield curve since the tax laws impact all maturities the same

    • B. 

      Cause the slope of the yield curve to become negative

    • C. 

      Increase the slope of the yield curve since it increases the risk premium of longer maturities

    • D. 

      Flatten the yield curve

  • 15. 
    If an American traveling abroad can obtain 115 euros for $100 U.S, the current euro per $ exchange rate is:
    • A. 

      0.870 euros/$

    • B. 

      1.15 euros/$

    • C. 

      115euros/$

    • D. 

      1euro/1.15$

  • 16. 
    The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by:
    • A. 

      The nominal exchange rate

    • B. 

      The real exchange rate

    • C. 

      Whether the nominal exchange rate is > or < than 1

    • D. 

      You cannot determine the answer until you travel to the foreign country and convert $ to the foreign currency

  • 17. 
    If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/$U.S., then the dollar price of the Japanese automobile is:
    • A. 

      22,727 yen

    • B. 

      $20,000

    • C. 

      $25,000

    • D. 

      $22,727

  • 18. 
    Appreciation of the real exchange rate:
    • A. 

      Makes U.S. exports more expensive to foreigners

    • B. 

      Makes U.S. exports less expensive to foreigners

    • C. 

      Means a basket of U.S. goods would exchange for fewer foreign goods

    • D. 

      Benefits all U.S. residents

  • 19. 
    Concrete likely does not follow the law of one price due to:
    • A. 

      Technical differences

    • B. 

      Lack of information regarding prices

    • C. 

      Tariffs

    • D. 

      High transportation costs

  • 20. 
    Purchasing power parity says that:
    • A. 

      Differences in inflation rates between countries should have no impact on the exchange rate between those countries

    • B. 

      Differences in inflation rates between countries will create changes in exchange rates

    • C. 

      The changes in exchange rates move independently from inflation

    • D. 

      For inflation to change the exchange rate, the rate of inflation has to be the same between countries

  • 21. 
    If inflation in the United States averages more than inflation in Europe over a long period of time, we should expect:
    • A. 

      The dollar to appreciate relative to the euro

    • B. 

      The euro dollar exchange rate to stay relatively fixed

    • C. 

      The dollar to depreciate relative to the euro

    • D. 

      No effect; there isn't a link between inflation and exchange rates over the long run

  • 22. 
    Which of the following are reasons to supply dollars on the foreign exchange market?
    • A. 

      To purchase goods and services produced abroad

    • B. 

      To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations

    • C. 

      To invest in U.S. assets

    • D. 

      To take advantage of higher inflation rates in other countries

  • 23. 
    Considering the dollar-euro market, as a dollar will purchase more euros, holding other factors constant:
    • A. 

      We would expect the supply curve of dollars to slope downward

    • B. 

      Foreign goods become relatively less expensive than American goods

    • C. 

      Foreign assets become relatively more expensive than American assets

    • D. 

      American goods become relatively less expensive than foreign goods

  • 24. 
    An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:
    • A. 

      The demand for dollars will decrease

    • B. 

      The supply of dollars will increase

    • C. 

      The dollar will depreciate relative to foreign currencies

    • D. 

      The demand for dollars will increase

  • 25. 
    An expected appreciation of the dollar, everything else held constant, should cause:
    • A. 

      The supply of dollars to increase

    • B. 

      The demand for dollars to increase

    • C. 

      The demand for dollars to decrease

    • D. 

      The dollar to depreciate now relative to other currencies

  • 26. 
    If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause:
    • A. 

      The demand for dollars to increase

    • B. 

      The supply of dollars to decrease

    • C. 

      The supply of dollars to increase

    • D. 

      The dollar to appreciate