Q&A Hero

Q: Describe the coin shortage of 1999 and 2000 and describe why it occurred. What ended the shortage?

Q: A sterilized foreign exchange intervention would: A. alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged.B. alter the liability side of the central bank's balance sheet but leave the asset side unchanged.C. leave the central bank's balance sheet unchanged.D. not alter the central bank's holdings of international reserves.

Q: Which of the following statements correctly identifies a difference between inside money and outside money?a. Inside money has value because the government decrees that it has value for payment of taxes, while outside money has value because it is made using expensive metals.b. Inside money consists of wages and salaries earned by employees in the private sector, while outside money consists of wages and salaries earned by employees of the government sector.c. Inside money cannot be used for making purchases from foreign sellers, while outside money can be used for making purchases from foreign sellers.d. Inside money is created in the private sector, while outside money is created by the government or by nature.

Q: The seller of a futures contract A) assumes the long position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Q: A foreign exchange intervention that does not alter the domestic monetary base is: A. sterilized.B. unsterilized.C. likely to change domestic interest rates.D. impossible.

Q: Which of the following statements is incorrect? A. A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates.B. Any central bank policy that influences the domestic interest rate will affect the exchange rate.C. Higher U.S. interest rates would likely result in an appreciation of the U.S. dollar.D. Sterilized changes in foreign exchange reserves alter a country's monetary base.

Q: An example of inside money is a. Fedwire.b. silver.c. a traveler's check. d. $100 bills.

Q: The seller of a futures contract A) assumes the short position. B) assumes the long position. C) has the obligation to receive the underlying financial instrument at the specified future date. D) is expecting the price of the underlying financial instrument to rise.

Q: Behavioral economics can best be described as A) the study of situations in which people's choices do not appear to be economically rational. B) the study of human economic behavior. C) the basis for efficient markets. D) the study of how the economy affects human behavior.

Q: Assume that the Fed performs a foreign exchange intervention in which it does nothing except buy German government bonds. One result of this will be that: A. the dollar depreciates.B. the euro depreciates.C. both the dollar and the euro depreciate.D. the dollar appreciates and the euro depreciates.

Q: Money that is created in the private sector, such as checking accounts at banks, is referred to as:a. representative money. b. commodity money.c. outside money. d. inside money.

Q: The buyer of a futures contract A) assumes the short position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Q: Noise traders A) pursue trading strategies based on inflated view of their ability to understand the significance of a piece of news. B) make use of inside information. C) reduce the amount of risk in the market. D) help to ensure that asset prices reflect the fundamental values of the securities being traded.

Q: Any central bank policy that influences the domestic interest rate will: A. have no effect on the exchange rate if exchange rates are flexible.B. have an effect on the exchange rate.C. not impact the supply of and demand for the domestic currency if exchange rates are flexible.D. be compatible with fixed exchange rates.

Q: Which of the following statements correctly differentiates between commodity money and fiat money?a. Commodity money is created by the government while fiat money is created in the private sector. b. Fiat money is created by the government while commodity money is created by the government.c. Commodity money can be used for transactions in the international market, while fiat money cannot be used for transactions in the international market.d. Fiat money has value decreed by the government, while commodity money is valued because of the material it is made of.

Q: The buyer of a futures contract A) assumes the short position. B) assumes the long position. C) may not sell the contract without the permission of the original seller. D) has the obligation to deliver the underlying financial instrument at the specified future date.

Q: How would proponents of the efficient markets hypothesis use the Gordon-Growth model to explain the movement of stock prices during the Financial Crisis of 2007-2009?

Q: A foreign exchange intervention by a central bank affects the value of a country's currency if it: A. alters banking system reserves.B. leaves domestic interest rates unchanged.C. results in a fixed exchange rate.D. alters banking system reserves and it changes domestic interest rates.

Q: Which of the following statements correctly identifies a disadvantage of fiat money?a. It is very expensive to manufacture.b. It cannot be used for international transactions. c. It is possible to create counterfeit fiat money.d. It can be created only in the private sector.

Q: Explain how a bubble can develop in the market for an asset.

Q: Suppose that the price of a stock is $50 at the beginning of a year and $53 at the end of the year, and it pays a dividend of $2 during the year.a. What is the stock's current yield?b. What is the stock's capital-gains yield?c. What is the stock's return?

Q: What factors do some who promote the profitability of elaborate trading strategies leave out? A) the effect of trading costs and taxes B) the difficulty of calculating the return on investment C) ignoring the effect of dividends D) not accounting for both capital gains and dividends

Q: If interest rates in the U.S. increases relative to interest rates in Europe: A. the demand for dollars on the foreign exchange market would increase.B. the supply of euros on the foreign exchange market would increase.C. the price of U.S. assets should increase.D. all of the answers given are correct.

Q: U.S. currency is currently a. representative money. b. full-bodied money.c. inside money. d. fiat money.

Q: Stocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to: A) compensation for the higher risk of small firms B) lower liquidity of stocks of small firms C) higher information costs of stocks of small firms D) all of the above

Q: Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.Investment A: Total return = 10 percent with probability 50 percent Total return = 20 percent with probability 50 percentInvestment B: Total return = 12 percent with probability 40 percent Total return = 14 percent with probability 60 percentInvestment C: Total return = 10 percent with probability 60 percent Total return = 30 percent with probability 40 percenta. Which investment provides the highest expected return? Show your work by calculating the expected return of all three investments.b. Calculate the standard deviation of all three investments.c. What type of investor might prefer investment A? Who might prefer investment B?

Q: Reserves in the banking system will increase if the Fed: A. buys euros or sells dollars.B. sells euros or buys dollars.C. sells euro-dominated bonds and exchanges the euros for dollars.D. sells euro-dominated bonds and keeps the euros from the sale.

Q: The impact on the foreign exchange market for dollars resulting from the Fed selling euros will be: A. a decrease in the demand for dollars.B. a decrease in the supply of dollars.C. an increase in the supply of dollars.D. a decrease in the interest rate in the U.S.

Q: Money that has value in large part by the government's proclamation is known as a. fiat money.b. M1.c. full-bodied money. d. inside money.

Q: If the Fed decides to control the euro/dollar exchange rate: A. they will also have to control the domestic interest rate.B. they will have to control the amount of banking system reserves.C. the market will determine the interest rate.D. they will have to control the domestic rate of inflation or it won't work.

Q: Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.Investment A: Total return = 10 percent with probability 50 percent Total return = 20 percent with probability 50 percentInvestment B: Total return = 12 percent with probability 40 percent Total return = 18 percent with probability 60 percentInvestment C: Total return = 5 percent with probability 60 percent Total return = 25 percent with probability 40 percenta. Which investment provides the highest expected return? Show your work by calculating the expected return of all three investments.b. Calculate the standard deviation of all three investments.c. What type of investor might prefer investment A? Who might prefer investment B?

Q: The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk. B) information costs. C) liquidity. D) all of the above.

Q: If the Fed were to enter the foreign exchange market and purchase euros, the impact on domestic banking reserves would be: A. the opposite of what it would be with an open market purchase.B. domestic banking reserves would decrease.C. the same as it would be with an open market purchase.D. uncertain.

Q: Which of the following statements is true of commodity money?a. The manufacturing cost is cheaper than that of fiat money. b. Large quantities of commodity money may not be portable.c. The most common example of commodity money is paper currency.d. Commodity money has value because it is decreed by the government.

Q: If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros: A. there will be pressure on domestic interest rates to increase.B. the domestic money supply will increase.C. this will increase banking system reserves.D. they will have to impose capital controls.

Q: How can the Gordon Growth model help explain the major decline in stock indexes during 2007-2009? A) There was an increase in the required return on equities and a decrease in the expected growth rate of dividends. B) There was a decrease in the required return on equities and an increase in the expected growth rate of dividends. C) There was an increase in the required return on equities and an increase in the expected growth rate of dividends. D) There was a decrease in the required return on equities and a decrease in the expected growth rate of dividends.

Q: Consider the following four debt securities, which are identical in every characteristic except as noted:W: A corporate bond rated AAA X: A corporate bond rate BBBY: A corporate bond rated AAA with a shorter time to maturity than bonds W and XZ: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or YList the bonds in the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest. Explain your work.

Q: The Fed holds its euro reserves primarily in the form of: A. euro currency.B. a weighted portfolio of European government bonds.C. German government bonds.D. international mutual funds.

Q: If the Fed decides to maintain a fixed euro/dollar exchange rate when they purchase euros: A. they increase the number of dollars.B. downward pressure is put on domestic interest rates.C. the domestic money supply increases.D. all of the answers given are correct.

Q: Excess volatility refers to A) the unwillingness of financial analysts to consistently recommend the same stocks. B) the greater volatility of futures prices compared to the volatility of prices of the underlying assets. C) the tendency for stocks with high rates of returns also to have quite variable returns. D) the larger movements in market prices of stock than in their fundamental values.

Q: Suppose a discount bond costs $5,000 today and pays off some amount bin one year. Suppose that bis uncertain according to the following table of probabilities:b:$5,000$5,500$6,000$6,500$7,000Probability:0.10.20.30.20.2a. Calculate the return (in percent) for each value of b.(Note: you may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.)b. Calculate the expected return.c.Suppose an investor has a choice between buying this security or purchasing a different security that also costs $5,000 today, but pays off $5,500 with certainty in one year. How is an investor's choice of which security to purchase related to her degree of risk aversion?

Q: The small-firm effect A) shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s. B) may be the result of the low liquidity and high information costs of small-firm stock. C) was stronger during the 1980s than in previous decades. D) is the tendency for stocks of large firms to outperform those of small firms.

Q: An open-market purchase of foreign bonds to increase a central bank's international reserves: A. increases the central bank's liabilities and assets.B. decreases the central bank's assets and liabilities.C. increases the central bank's assets but decreases its liabilities.D. increases the central bank's liabilities and decreases its assets.

Q: Momentum investing can be described as A) consistent with the efficient markets hypothesis. B) similar to mean reversion. C) follow the picks of investors who have been successful in the past. D) the trend is your friend.

Q: Consider three alternative bonds that you might invest in, each of which matures in one year. The following table shows the probability that you will receive each possible return. For example, if you buy bond A, the probability is 90 percent that your return will be 20 percent and the probability is 10 percent that your return will be −100 percent(in other words,you lose the entire amount invested).Bond Bond AProbability 90%Return 20%10%−100%Bond B75%40%25%−40%Bond C60%10%40%−10%a. Calculate the expected return for all three bonds in percentage terms.b.The standard deviations of the returns on these bonds are: Bond A, 0 percent; Bond B, 34.6 percent; Bond C, 8 percent. If you are extremely risk averse, which of the three bonds would you buy? Why?c. Would a risk-averse investor ever buy Bond A instead of one of the other bonds? Why or why not?Explain and show all your work. In your calculations, you may round after three significant digits.

Q: Suppose that research shows that by buying stocks issued by companies whose names begin with the letter G investors can earn above-normal returns in even-numbered years. From the perspective of the efficient markets hypothesis, A) this is further evidence that the hypothesis is correct. B) this would be considered a pricing anomaly. C) investors must have insider information on these companies. D) purchasers of these stocks must have been noise traders.

Q: If the Fed desired to fix the euro/dollar exchange rate, they would have to: A. get the European Central Bank to also agree to fixed exchange rates.B. maintain ample reserves of dollars.C. be willing to exchange dollars for euros whenever anyone asked.D. impose capital controls.

Q: Suppose the quantity demanded for a security isBD= 100 − 1b,and the quantity supplied of the security isBS= 50 + 1b,where bis the price of the security in dollars.a. Calculate the equilibrium price and quantity of the security.b. Suppose demand increases by 50, so that BD= 150 − 1b. Now, calculate the new equilibrium price and quantity of the security.

Q: Mean reversion refers to the tendency for A) futures prices to revert to the prices of the underlying securities. B) the long-run mean return on stocks to equal the long-run mean return on bonds. C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future. D) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future.

Q: The economist known for his early empirical work supporting the efficient markets hypothesis is A) Milton Friedman. B) John Muth. C) Eugene Fama. D) Glenn Hubbard.

Q: A country that frequently uses capital controls: A. increases the risk for foreign investors.B. decreases the risk for foreign investors.C. should see lower interest rates on its domestic bonds and lower prices.D. will attract more investment.

Q: A security has a price of $3,000 and an amount to be repaid in a single payment of $3,400. What is the amount of interest on the security?

Q: The January effect A) largely disappeared after receiving attention in the 1980s. B) refers to the gap between futures prices and the prices of the underlying securities that occurs each January. C) was stronger during the 1980s than during previous decades. D) is the observation that stocks tend to be sold off in January.

Q: In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to A) the existence of trading strategies that appear to have offered above-normal returns. B) the gap between actual and expected prices. C) the spread between the price at which a broker will purchase stock from an investor and the price at which the broker will sell stock to an investor. D) the difficulty in practice of computing stock prices on the basis of expectations of future dividends.

Q: Risk is the amount of uncertainty relating to the_____ a security.a. maturity ofb. principal ofc. liquidity ofd. return on

Q: A country announces capital outflow controls that will take effect in three months. This announcement will likely: A. stabilize the country's exchange rate.B. attract significant amounts of foreign investors.C. result in a significant appreciation of the country's currency.D. result in a significant depreciation in the country's currency.

Q: Risk that can be eliminated by diversification is a. unsystematic risk.b. systematic risk. c. default risk.d. interest-rate risk.

Q: Which of the following would be an example of a capital outflow control? A. Mexico limiting the number of U.S. dollars an American can bring into the countryB. Mexico excludes foreigners from purchasing short-term debtC. Mexico limiting the number of pesos its citizens can take out of the countryD. All of the answers given would be examples of capital outflow controls

Q: What should affect the fundamental value of a stock according to the efficient markets hypothesis?

Q: The dollar value of a company's stock rose from $20 to $21 during a year. If the stock paid a dividend of $3, the return on the stock was____a. 20 percentb. 1 percentc. 3 percentd. 14 percent

Q: If foreigners are restricted in their ability to buy investments in a country then that government is imposing: A. controls on capital inflows.B. controls on capital outflows.C. controls on both capital inflows and outflows.D. fixed exchange rates.

Q: Risk that cannot be eliminated by diversification is a. unsystematic risk.b. systematic risk. c. default risk.d. interest-rate risk.

Q: During the 1990s, the country of Chile required foreigners wishing to invest in the country to make a one-year, zero-interest deposit in the Chilean central bank equal to at least 20 percent of the investment. This is an example of: A. a capital outflow control.B. a capital inflow control.C. an exchange rate mechanism.D. a currency board.

Q: What is the difference between adaptive expectations and rational expectations?

Q: If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's return is____ percent.a. −15b. −5c. 5d. 10

Q: If foreigners are restricted in their ability to sell investments in a country then that government is imposing: A. controls on capital inflows.B. controls on capital outflows.C. controls on both capital inflows and outflows.D. fixed exchange rates.

Q: Capital controls: A. can be controls on capital inflows.B. can only be controls on capital outflows.C. can be controls on capital inflows or outflows.D. must be controls on both capital inflows and outflows in order to be effective.

Q: Risk that can be eliminated by diversification is a. idiosyncratic risk.b. market risk. c. default risk.d. interest-rate risk.

Q: If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's capital-gains yield is ___percent.a. −15b. −5c. 5d. 15

Q: In a competition of financial analysts vs. throwing a dart to choose stocks, according Burton Malkiel, financial analysts came out ahead due to all of the following reasons EXCEPT: A) it considered only stock prices, not dividends B) investors that followed the contest were influenced to purchase the stocks recommended by the analysts C) failure of the Efficient Markets Hypothesis D) part of the return for the analysts resulted from compensation for the higher risk of the stocks chosen

Q: If domestic residents are restricted in their ability to purchase foreign assets then their government is imposing: A. controls on capital inflows.B. controls on capital outflows.C. controls on both capital inflows and outflows.D. fixed exchange rates.

Q: Most economists view capital controls: A. unfavorably.B. unfavorably, emphasizing their harmful effects on developing countries.C. favorably, since this is the main way for countries to exploit their comparative advantage.D. favorably, since having them makes capital markets more efficient.

Q: If the price of a share of Aqua Inc. increased from $40 to $44 over a year, the capital-gains yield per share was_____.a. 10 percentb. 4 percentc. 11 percentd. 0.4 percent

Q: Which of the following bonds will have the highest yield-to-maturity if all three bonds appear identical to investors in terms of risk, liquidity, information costs, tax treatment? A) one with a coupon of $50 B) one with a coupon of $100 C) one with a coupon of $200 D) none of the above

Q: An investor will generally find that hiring an investment firm to actively manage his or her portfolio will A) result in a higher return than would be received from an index mutual fund. B) be less expensive than simply placing money in an index mutual fund. C) result in a higher return, but will be more expensive than placing money in an index mutual fund. D) result in about the same return, but be more expensive than placing money in an index mutual fund.

Q: The United States would be characterized as having: A. a controlled domestic interest rate, a closed capital market and a flexible exchange rate.B. a controlled domestic interest rate, an open capital market and a flexible exchange rate.C. no control over the domestic interest rate, an open capital market and a flexible exchange rate.D. a controlled domestic interest rate, an open capital market and a fixed exchange rate.

Q: If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's current yield is_____ percent.a. −15b. −5c. 5d. 10

Q: Which type of stock should result in the best return according to the Efficient Markets Hypothesis? A) a firm that is expected to be highly profitable in the future B) a firm that is considered to be undervalued C) a firm expected to earn little profit in the future D) none of the above

Q: One implication of the efficient markets hypothesis is that investors should A) concentrate their investments in just a few well-chosen assets. B) hold a diversified portfolio of assets. C) buy stocks rather than bonds. D) buy bonds rather than stocks.

Q: Which of the following statements is incorrect? A. A country cannot be open to international capital flows, control its domestic interest rate and fix its exchange rate.B. A country can be open to international capital flows and control its own domestic interest rate but it can't fix its exchange rate.C. A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate.D. A country can be open to international capital flows and fix its exchange rate but could not also control its own domestic interest rate.