Q&A Hero

Q: An index fund isa. a mutual fund that mimics a stock index.b. an investment company that pools the funds of many investors and buys government bonds. c. a mutual fund that buys mortgage-backed securities (MBSs).d. a company that rates companies in terms of their financial strength.

Q: The law of one price does not hold for A) agricultural goods. B) tradeable goods. C) differentiated goods. D) goods whose production causes pollution.

Q: The process by which identical products that are tradeable converge to the same price is called A) arbitrage. B) hedging. C) speculation. D) risk aversion.

Q: Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is real growth? A. +3.0%B. 1%C. 4.0%D. -1.0%

Q: A mutual fund isa. a hedge fund that only wealthy people may invest in.b. a company that buys a share of each stock in the entire stock market.c. an investment company that buys stocks in companies that are not growing strongly.d. an investment company that pools the funds of many investors and buys a large number of different stocks.

Q: According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan, A) the law of one price has been violated. B) the nominal value of the pound will appreciate against the yen. C) the nominal value of the yen will appreciate against the pound. D) the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.

Q: Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to A) some goods being nontradeable. B) changes in the real exchange rate. C) differentiated products. D) all of the above.

Q: Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation? A. +1.0%B. It is constant or a 0% changeC. It is the same as the growth rate of money, or 3.0%D. -1.0%

Q: If your after-tax realized real interest rate was 1 percent over the past year and you owned a one-year bond that paid 6 percent interest, what was the inflation rate if your tax rate was 15 percent?a. 3.95 percent b. 4.1 percent c. 4.25 percent d. 5.0 percent

Q: Which of the following statements is true?a. Different stock indexes normally show the same total returns. b. Stock indexes do not provide information on dividends.c. Mutual funds encourage investors to invest in the same security instead of diversifying. d. The S&P 500 is an example of a mutual fund.

Q: Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in A) a 10% appreciation of the yen. B) a 10% appreciation of the dollar. C) an appreciation of the yen by an amount that depends upon what happens to the real exchange rate. D) an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.

Q: Purchasing power parity's assumption that the real exchange is constant A) is correct in nearly all instances. B) would be correct were it not for the existence of trade barriers. C) is not reasonable. D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Q: If the equation of exchange is MV = PY the Y represents: A. nominal GDP.B. real GDP.C. potential output.D. economic growth.

Q: Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is: A. Zero; velocity is constant.B. -0.5%.C. +4.5%.D. +0.5%.

Q: If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?a. −0.6 percent b. 0.0 percent c. 1.1 percent d. 2.0 percent

Q: The Wilshire 5000 stock index isa. an index of the 2000 largest industrial companies whose shares trade in U.S. markets. b. an index of all the companies with U.S. headquarters whose shares trade in the U.S. c. an index of 5000 major companies whose shares trade in U.S. markets.d. an index of the average stock prices of many small firms operating in the U.S.

Q: According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level, A) its currency's real exchange rate relative to the other country's currency should rise. B) its currency should depreciate relative to the other country's currency. C) its currency should appreciate relative to the other country's currency. D) its nominal interest rate should rise relative to the other country's nominal interest rate.

Q: If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money? A. (Y × M)/PB. (P × M)/YC. (P × Y)/MD. (P × Y) + M

Q: Which of the following expresses the equation of exchange? A. MY = PVB. MV = YC. MV = PYD. MP = VY

Q: If actual inflation was 4 percent over the past year and you owned a one-year bond that paid 6 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?a. −0.6 percent b. 0.0 percent c. 1.1 percent d. 2.0 percent

Q: An index of thirty major U.S. industrial companies is the a. NASDAQ index.b. NYSE index.c. Dow Jones Industrial Average. d. S&P

Q: The theory of purchasing power parity assumes that A) nominal exchange rates are not affected by movements in relative price levels. B) real exchange rates are fixed. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

Q: The velocity of money equals: A. nominal GDP times the price level.B. nominal GDP times the money supply.C. nominal GDP divided by the price level.D. nominal GDP divided by the money supply.

Q: According to the equation of exchange, if real output and the money supply stay the same and the price level increases: A. the velocity of money has to increase.B. the velocity of money has to decrease.C. the real GDP had to rise.D. nominal GDP remains constant.

Q: An index that measures the average stock prices of small firms in the United States is the a. Russell 2000 index.b. NYSE index.c. Dow Jones Industrial Average. d. S&P

Q: If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5 percent interest, what is your after-tax expected real interest income if the price of the bond is $200 and your tax rate is 40 percent?a. $0.20 b. $20c. $10 d. $2

Q: The theory of purchasing power parity assumes that A) movements in nominal exchange rates are the result of movements in relative price levels. B) real exchange rates are volatile. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

Q: The velocity of money increases if: A. each unit of money is used more frequently.B. each unit of money is used less frequently.C. more purchases are made.D. none of the above answers is correct; the velocity of money is constant.

Q: If M2 is four times larger than M1, the velocity of M1 should be: A. one-fourth of the velocity of M2.B. equal to the velocity of M2.C. equal to four.D. four times larger than the velocity of M2.

Q: If you expect inflation to be 3 percent next year and you buy a one-year bond paying 4 percent interest, what is your after-tax expected real interest rate if you face a tax rate of 30 percent?a. −0.2 percent b. 0.0 percent c. 0.3 percent d. 1.0 percent

Q: The theory of purchasing power parity A) extends the law of one price to a group of goods. B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. C) assumes that inflation rates are roughly the same in most countries. D) was valid only under the gold standard.

Q: The law of one price states that A) most countries require that all entering goods have the same price. B) most countries require that all exported goods have the same price. C) identical goods should have the same price anywhere in the world. D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

Q: If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means: A. it would take more goods to buy the same dollar.B. it would take fewer goods to buy the same dollar.C. the same number of goods would buy fewer dollars.D. it would take fewer dollars to buy the same goods.

Q: Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying a. corporate bonds.b. inflation-indexed securities. c. stock.d. mortgage-backed securities.

Q: A tariff is a A) limit on the volume of foreign goods that can be brought into the country. B) tax on goods purchased from other countries. C) tax on goods exported to other countries. D) subsidy by governments to firms that produce goods for export to other countries.

Q: If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 forA) 0.025 peso.B) 4 pesos.C) 40 pesos.D) 400 pesos.

Q: Inflation can be thought of as: A. an increase in the price of money.B. a decrease in the price of money.C. no change in the price of money, just in the supply of money.D. no change in the price of money, just in the demand for money.

Q: One way that homeowners and banks can share the risk of inflation is through a. fixed-rate mortgages.b. refinancing. c. default.d. adjustable-rate mortgages.

Q: If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the exchange rate is $1.35 = £1, A) the law of one price has been violated. B) either the British government or the American government must be interfering with the market determination of the exchange rate. C) the value of the dollar versus the pound is likely to rise. D) there is no contradiction in the information given because pizza is not a tradeable good.

Q: If the price level in Japan increases more rapidly than the price level in Britain, we would expect A) interest rates in Japan to lower than interest rates in Britain. B) the Japanese yen to depreciate against the British pound. C) the British pound to depreciate against the Japanese yen. D) Japanese productivity to have increased more rapidly than British productivity.

Q: If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be: A. a decline in the price of money.B. an increase in the price of money.C. no change in the real price of money, just the nominal price increases.D. no change in the real or nominal price of money.

Q: For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now tobuy the same amount of goods and services after N years of inflation at rate p is called the ______ inflation discount factor.a. futureb. realized c. expected d. past

Q: Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?a. Eliminating taxation of interestb. Introducing inflation-indexed bondsc. Taxing only real interest income, not nominal interest income d. Reducing inflation to zero

Q: An exception to the law of one price occurs if A) the good is not tradeable. B) demand for the good is stronger in some countries than in others. C) exchange rates are flexible, rather than fixed. D) interest rates differ across countries.

Q: If the price level in the United States increases more slowly than the price level in Canada, we would expect A) interest rates in the United States to be higher than interest rates in Canada. B) the U.S. dollar to depreciate against the Canadian dollar. C) the Canadian dollar to depreciate against the U.S. dollar. D) U.S. productivity to have increased more slowly than Canadian productivity.

Q: Which of the following statements is most correct? A. The current rate of inflation is the result of money growth.B. Money growth is the result of inflation.C. There is no clear link between high, sustained inflation and the monetary aggregates.D. It is impossible to have high, sustained inflation without monetary accommodation.

Q: For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing extremely high rates of inflation. To solve this problem, a number of countries: A. turned the authority to print money over to an independent central bank.B. imposed price controls.C. devalued their currencies.D. returned to a gold standard.

Q: John bought an inflation-indexed security for $10,000 in January The security promises an annual interest rate of 5 percent and makes payments twice a year. If the value of the inflation index in January 2014 was 106 and its value in July 2014 was 105, John will receive an interest income of ____.a. $504.76b. $226.40c. $182.72d. $368.56

Q: In recessions, the long-term expected real interest rate usually a. rises.b. declines.c. stays unchanged.d. rises early in the recession; declines later in the recession.

Q: What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?

Q: For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing: A. rapid economic growth.B. severe deflation.C. rapid development of financial intermediaries.D. extremely high rates of inflation.

Q: Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the: A. unemployment rate.B. money growth rate.C. real economic growth rate.D. productivity of labor.

Q: In recessions, the short-term expected real interest rate usuallya. rises by about 4 percentage points.b. rises by about 2 percentage points.c. declines by about 2 percentage points.d. declines by about 4 percentage points.

Q: Suppose you bought an inflation-indexed security for $12,000 in January 2013 which pays an annual interest of 4 percent. If the value of the inflation index in January 2013 was 106 and its value in January 2014 was 105, what is the value of the inflation-adjusted principal?a. $12,114.29 b. $11,342.58 c. $8,000.60 d. $13,126.41

Q: What is an advantage of using options instead of forward contracts when speculating on exchange rates?

Q: When the currency loses value, causing people to spend it more quickly, this: A. has the same effect on inflation as an increase in money growth.B. has the same effect on inflation as a decrease in money growth.C. causes higher inflation but not as much as an increase in money growth would.D. causes even higher inflation than an increase in money growth would.

Q: Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be: A. less than one.B. greater than one.C. that is infinite.D. exactly one.

Q: According to the Fisher hypothesis, an increase in the expected inflation rate should lead to____in the nominal____interest rate and in the expected real interest rate.a. an increase; a decrease b. an increase; no change c. an increase; an increase d. a decrease; a decrease

Q: If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is____than the expected real interest rate and borrowers_____relative to lenders.a. less; gainb. less; losec. greater; gaind. greater; lose

Q: What is an advantage of using options instead of forward contracts when hedging against exchange-rate risk?

Q: Economic researchers have found: A. no examples of countries with high rates of money growth and low inflation rates.B. many examples of countries with low rates of money growth and high inflation rates.C. many examples of countries with high rates of money growth and low inflation rates.D. no relationship between rates of money growth and inflation rates.

Q: Consider the following ratio: the average annual inflation rate/the average annual money growth rate. A country with a ratio less than one would have: A. an average inflation rate greater than the average rate of money growth.B. an average inflation rate less than the average rate of money growth.C. to have a high unemployment rate.D. an economy suffering from a recession.

Q: If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then a. borrowers gained in real terms at the expense of lenders.b. lenders gained in real terms at the expense of borrowers. c. borrowers and lenders were not affected.d. the government lost because it collected less in taxes.

Q: Which of the following is an advantage of hedging with options instead of forward contracts? A) Options prices tend to be lower than forward prices. B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. D) Options allow investors to purchase a forward contract at a later date.

Q: Briefly explain how a U.S. company that exports to Europe can hedge against exchange rate risk.

Q: History shows that: A. countries with low rates of money growth have high rates of inflation.B. money growth and inflation are not related.C. countries with high rates of money growth have high rates of inflation.D. money growth rates equal inflation rates.

Q: If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_____than the expected real interest rate and borrowers____relative to lenders.a. less; gainb. less; losec. greater; gaind. greater; lose

Q: In financial markets, leverage refers to: A) the use of borrowed money in an investment B) the power to influence the market C) the use of political connections in attaining financial outcomes D) the role that speculators have in impacting market outcomes

Q: Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT A) buying put options on euros. B) sell euro futures contracts. C) sell euro forward contracts. D) buying call options on euros.

Q: If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar to purchase: A. 1.365 Canadian dollars.B. 1.262 Canadian dollars.C. 1.300 Canadian dollars.D. 1.339 Canadian dollars.

Q: If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then a. borrowers gained in real terms at the expense of lenders.b. lenders gained in real terms at the expense of borrowers. c. borrowers and lenders were not affected.d. the government gained because it collected more in taxes.

Q: The largest financial market in the world is the: A) stock market B) bond market C) options market D) foreign exchange market

Q: An exporter can hedge against the possible decline in a foreign currency by purchasing A) put options on the currency. B) call options on the currency. C) the currency on the spot market. D) currency on forward contracts.

Q: If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be: A. +0.5%.B. -0.5%.C. +16.7%.D. +6.5%.

Q: A debt security sold by large corporations to raise short­term funds is known as a(n)a. commercial paper.b. treasury bill.c. debenture.d. bond.

Q: From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized real interest rate averaged about −2 percent. The main reason for the difference was thata. actual inflation was about 4 percentage points lower than expected inflation.b. actual inflation was about 4 percentage points higher than expected inflation.c. a monopoly cornered the market on short-term bonds.d. nominal rate of interest was zero.

Q: Large commercial banks are considered to be market makers because: A) without them, there would be no foreign exchange market B) they can easily manipulate the value of currencies in the foreign exchange market C) they are willing to buy and sell major currencies at any time D) they created the foreign exchange market

Q: If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange rate, A) inflation must be lower in the United States than in Britain. B) inflation must be higher in the United States than in Britain. C) market participants must be expecting the dollar to appreciate against the pound. D) market participants must be expecting the dollar to depreciate against the pound.

Q: Within the United States, every city has: A. a fixed exchange rate with every other city.B. a floating exchange rate with every other city.C. an independent monetary policy.D. their own currency board.

Q: If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as: A. the inflation rate in country B - the inflation rate in country A.B. the inflation rate in country A - the inflation rate in country B.C. the inflation rate in country A times the inflation rate in country B.D. the inflation rate in country A divided by the inflation rate in country B.