“ECON 303 Exercise 3 Due: 5/28/14 @ 10:00am

Multiple choice @ .75 points each. Circle the Answer
corresponding the best alternative offered.

1. The bond markets are important
because they are
A) easily the most widely followed financial markets in the United States.
B) the markets where foreign
exchange rates are determined.
C) the markets where interest
rates are determined.
D) the markets where all
borrowers get their funds.

2. Stock prices are
A) relatively stable trending
upward at a steady pace.
B) relatively stable trending
downward at a moderate rate.
C) extremely volatile.
D) unstable trending downward at
a moderate rate.

3. Prior to all recessions since
1900, there has been a drop in
A) inflation.
B) interest rates.
C) the money stock.
D) the growth rate of the money
stock.

4. GDP measured at existing
prices is referred to as
A) real GDP.
B) nominal GDP.
C) the GDP deflator.
D) industrial production.

Use the following information to answer questions 5
& 6.

Time period 1995 1996 1997 1998 1999
Price index 100 120 140 142 130

5. During the time from period 1995 through period
1997,
A) the annual rate of inflation
rises.
B) the annual rate of inflation
falls.
C) prices are relatively stable
when compared to the other periods.
D) deflation is rapid.

6. During the time from period
1997 through period 1998,
A) the annual rate of inflation rises.
B) the annual rate of deflation
declines rapidly.
C) the annual rate of deflation
increases rapidly.
D) prices are relatively stable
when compared to the other periods.

7. Which of the
following is NOT a key financial service provided by the financial system?
A) Sharing risk B) Creating profit C) Creating
liquidity D) Providing
information

8. Which of the
following rankings of sources of funds for businesses from the least important
to the most
important is correct?
A) Stock issues, bond issues, loans from
financial institutions
B) Bond issues, stock issues, loans from
financial institutions
C) Loans from financial institutions, stock
issues, bond issues
D) Loans from financial institutions, bond
issues, stock issues

9. Securitization is the process
of
A) issuing stocks to finance
capital spending.
B) issuing bonds to finance
purchases of equipment and structures.
C) reducing risk by decreasing
corporate debt loads.
D) converting non
liquid financial assets into liquid financial assets

10.
If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion,
then real GDP growth from 2002 to 2003 is exactly
A)
0.5%.
B)
5%.
C)
0%.
D)
-5%.
E)
none of the above is correct.

11.
Modern U.S. monetary policy is best described as:
A) aimed at keeping inflation low and stable and growth high and stable
B) determining the denominations of a country’s currency
C) one of the most important functions of Congress
D) attempting to keep inflation constant at zero percent

12. In the United
States, the economic agents that are the biggest issuers of securities (in
terms of $ value) are
A) households.
B) governments.
C) business firms.
D) financial
intermediaries.

13. An important financial institution that assists
in the initial sale of securities in the primary market is the
A) stock broker.
B) commercial bank.
C) stock exchange.
D) investment bank

14. falling stock
market prices might ________ consumers willingness to spend and might ________
businesses
willingness to undertake investment
projects.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

15. The relationship between money
growth and inflation across countries is:

A)

negative and fairly strong

B)

negative and fairly weak

C)

positive and fairly strong

D)

positive and fairly weak

16.
Asymmetric information in financial markets is a potential problem usually
resulting from:
A)
Borrowers having more information than the lenders, and not disclosing this
information
B)
Lenders having more information than borrowers and not disclosing this
information
C) The
fact that people are basically dishonest
D) The
uncertainty about Federal Reserve monetary policy

17. In the United States, loans from ________ are far
________ important for corporate finance than are securities markets.
A) government
agencies; more
B) government
agencies; less
C) financial
intermediaries; more
D) financial
intermediaries; less
18. A
non-marketable security is one that
A) cannot be
resold in a secondary market.
B) is not widely
advertised.
C) has no maturity
date.
D) has a present
value of zero.
E) has only a
current yield and not a capital gain or loss.

19. A professional
baseball player may be contractually prohibited from skiing. The team owner
includes this clause
in the players contract to protect
against
A) fraud
B) moral hazard
C) adverse
selection
D) risk sharing

20. Which of the
following can be described as indirect finance?
A) Your parents
lend you the money for tuition.
B) You borrow
$2500 from a friend.
C) You buy car
insurance.
D) Google buys
shares of commercial paper from Microsoft.

21. Which of the
following do not provide charters to operate depository institutions?
A) The Office of
the Comptroller of the Currency
B) The Federal
Reserve System
C) The National
Credit Union Administration
D) State banking
and insurance commissions

22. The primary
purpose of deposit insurance is to
A) improve the
flow of information to investors.
B) protect the
banking system.
C) protect bank
shareholders against losses.
D) protect
depositors against losses
E) bank employees
from unemployment.

23. Purchasing financial instruments in
today’s economy versus purchasing financial instruments 30 years ago:
A) is an activity still practiced only by the wealthy.
B) involves costly transactions.
C) requires a relatively large sum of money (more than $100,000).
D) is made easier by the use of innovations such as mutual funds.

24. If an
individual goes to a bank and receives a $500 loan which the bank deposits
electronically in your checking
account,
then
A)
M1 stays the same and M2 decreases.
B)
M1 increases and M2 stays the same.
C)
M1 increases and M2 increases.
D)
M1 stays the same and M2 stays the same.
E)
M1 increases and M2 decreases.

25. Suppose your
bank lowers the minimum balance requirement on checking accounts by $500. As A
result you
withdraw $500 from your regular checking
account to take with you on your summer trip to Las Vegas.
What are the net effects on M1 and M2?
A) M1 falls by
$500 and M2 rises by $500.
B) M1 is unchanged
and M2 is unchanged.
C) M1 falls by
$500 and M2 is unchanged.
D) M1 is unchanged
and M2 rises by $500.

26.
If a corporation uses money from a demand deposit account to purchase a
negotiable CD,
A)
M1 decreases and M2 stays the same.
B)
M1 stays the same and M2 increases.
C)
M1 stays the same and M2 stays the same.
D)
M1 decreases and M2 decreases.

27. The use of money makes us more
efficient because:
A) We spend more time trading and more time producing
B) Money increases in value over time
C) With money we borrow less
D) People can specialize in what they do well

28. During periods of rapidly rising prices
the function of money that is most affected is:
A) the speculative function.
B) the unit
of account function.
C) the
medium of exchange function.
D) the store of
value function.

29. In
explaining the evolution of money, which if the following provides the most
logical explanation?
A) Government regulation.
B) Commodity money, because it is valued more highly,
tends to drive out paper money.
C) New forms of money evolve to lower transaction
costs.
D) All of the above are true.

30. People hold money even during
inflationary episodes when other assets prove to be better stores of value.
This
can be explained by the fact that money
is
A) extremely liquid.
B) a unique good for which there
are no substitutes.
C) the only thing accepted in
economic exchange.
D) backed by gold.

31. The primary
means by which the Federal Reserve creates money is by
A) electronically
adjusting account balances in its computer system.
B) giving the
printed bills directly to commercial banks for distribution.
C) printing bills
and distributing them through the Federal Reserve District Banks.
D) spending money
on government purchases.

32. Which of the
following is not a form of e-money?
A) a debit card
B) a credit card
C) a stored-value
card
D) a smart card

Part II: Short Answer &
ProblemsShow work for full credit on problems.

1. Explain the differences in the financial
asset configurations between life insurance companies, casualty insurance
companies,
and money market mutual funds. (6 points)

2. For each of the following financial
transactions, indicate whether it involves direct finance or indirect finance
by
writing a D or I for each item. (4 points)

i. You take out a car
loan from a finance company.
ii. You buy a U.S. savings
bond.
iii. You buy a share of a
mutual fund.
iv. You borrow a $500 from
you parents.
v. You obtain a $50,000 mortgage from your local
S&L.
vi. You buy a life
insurance policy.
vii. GM sells a share of its
stock to IBM.
viii. AT&T issues commercial paper to Mobil Oil Corp.
ix. You buy a share of GM
stock from your broker.
x. You accept your buddies
IOU in a poker game.

3. Categorize the following transactions by
each of the following criteria: (5 Points)
a. Categorize each transaction as a primary or
secondary market transaction.
b. Categorize each transaction as a money or
capital market transaction.

I.
A bank
makes a 30-year mortgage loan for a new house.
II.
The
Biederman-Blackwell Money Market Mutual Fund buys $1.5 million worth of 3-month
Treasury bills in the U.S. governments weekly auction.
III.
The
Biederman-Blackwell Money Market Mutual Fund buys $150,000 worth of 3-month
Treasury bills from Alerus Financial.
IV.
The
bank in part I sells the mortgage loan to a government sponsored financial
intermediary
V.
The
Owens Black Jack Corporation opens for business by selling shares of stock to
his students (which they must buy to pass ECON 303).

4. The following
table contains the CPI and the Federal Minimum hourly wage rates. (6 points)
YEAR CPI Hourly
Min. wage
1945 18.0 $0.40
1955 26.8 0.75
1965 31.5 1.25
1975 53.8 2.10
1980 82.4 3.10
1985 107.6 3.35
1990 130.7 3.80
1995 152.4 4.25
2000 172.2 5.15
2005 195.3 5.15
2014 237.1 7.25

a.
Convert
each nominal minimum wage into base year dollars and rank them (by year) from
lowest to highest real wage.

b.
Determine
how much the current minimum wage must be to equal the purchasing power of the
highest real minimum wage on the list.
ECON 303 Exercise 3 Due: 5/28/14 @ 10:00am Multiple choice @ .75 points each. Circle the Answer
corresponding the best alternative offered.1. The bond markets are important
because they areA) easily the most widely
followed financial markets in the United States.B) the markets where foreign
exchange rates are determined.C) the markets where interest
rates are determined.D) the markets where all
borrowers get their funds.2. Stock prices areA) relatively stable trending
upward at a steady pace.B) relatively stable trending
downward at a moderate rate.C) extremely volatile.D) unstable trending downward at
a moderate rate.3. Prior to all recessions since
1900, there has been a drop inA) inflation.B) interest rates.C) the money stock.D) the growth rate of the money
stock.4. GDP measured at existing
prices is referred to asA) real GDP.B) nominal GDP.C) the GDP deflator.D) industrial production.Use the following information to answer questions 5
& 6. Time period 1995 1996 1997 1998 1999 Price index 100 120 140 142 1305. During the time from period 1995 through period
1997,A) the annual rate of inflation
rises.B) the annual rate of inflation
falls.C) prices are relatively stable
when compared to the other periods.D) deflation is rapid.6. During the time from period
1997 through period 1998,A) the annual rate of inflation rises.B) the annual rate of deflation
declines rapidly.C) the annual rate of deflation
increases rapidly.D) prices are relatively stable
when compared to the other periods.7. Which of the
following is NOT a key financial service provided by the financial system?A) Sharing risk B) Creating profit C) Creating
liquidity D) Providing
information8. Which of the
following rankings of sources of funds for businesses from the least important
to the most important is correct? A) Stock issues, bond issues, loans from
financial institutions B) Bond issues, stock issues, loans from
financial institutions C) Loans from financial institutions, stock
issues, bond issues D) Loans from financial institutions, bond
issues, stock issues9. Securitization is the process
ofA) issuing stocks to finance
capital spending.B) issuing bonds to finance
purchases of equipment and structures.C) reducing risk by decreasing
corporate debt loads.D) converting non
liquid financial assets into liquid financial assets10.
If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion,
then real GDP growth from 2002 to 2003 is exactlyA)
0.5%.B)
5%.C)
0%.D)
-5%.E)
none of the above is correct.11.
Modern U.S. monetary policy is best described as:
A) aimed at keeping inflation low and stable and growth high and stable
B) determining the denominations of a country’s currency
C) one of the most important functions of Congress
D) attempting to keep inflation constant at zero percent12. In the United
States, the economic agents that are the biggest issuers of securities (in
terms of $ value) areA) households.B) governments.C) business firms.D) financial
intermediaries.13. An important financial institution that assists
in the initial sale of securities in the primary market is theA) stock broker.B) commercial bank.C) stock exchange.D) investment bank14. falling stock
market prices might ________ consumers willingness to spend and might ________
businesses willingness to undertake investment
projects.A) increase; increaseB) increase; decreaseC) decrease; decreaseD) decrease; increase 15. The relationship between money
growth and inflation across countries is:A)negative and fairly strongB)negative and fairly weakC)positive and fairly strongD)positive and fairly weak16.
Asymmetric information in financial markets is a potential problem usually
resulting from:A)
Borrowers having more information than the lenders, and not disclosing this
informationB)
Lenders having more information than borrowers and not disclosing this
informationC) The
fact that people are basically dishonestD) The
uncertainty about Federal Reserve monetary policy17. In the United States, loans from ________ are far
________ important for corporate finance than are securities markets.A) government
agencies; moreB) government
agencies; lessC) financial
intermediaries; moreD) financial
intermediaries; less18. A
non-marketable security is one thatA) cannot be
resold in a secondary market.B) is not widely
advertised.C) has no maturity
date.D) has a present
value of zero.E) has only a
current yield and not a capital gain or loss.19. A professional
baseball player may be contractually prohibited from skiing. The team owner
includes this clause in the players contract to protect
againstA) fraudB) moral hazardC) adverse
selectionD) risk sharing20. Which of the
following can be described as indirect finance?A) Your parents
lend you the money for tuition.B) You borrow
$2500 from a friend.C) You buy car
insurance. D) Google buys
shares of commercial paper from Microsoft.21. Which of the
following do not provide charters to operate depository institutions?A) The Office of
the Comptroller of the CurrencyB) The Federal
Reserve SystemC) The National
Credit Union AdministrationD) State banking
and insurance commissions22. The primary
purpose of deposit insurance is toA) improve the
flow of information to investors.B) protect the
banking system.C) protect bank
shareholders against losses.D) protect
depositors against lossesE) bank employees
from unemployment.23. Purchasing financial instruments in
today’s economy versus purchasing financial instruments 30 years ago:
A) is an activity still practiced only by the wealthy.
B) involves costly transactions.
C) requires a relatively large sum of money (more than $100,000).
D) is made easier by the use of innovations such as mutual funds.24. If an
individual goes to a bank and receives a $500 loan which the bank deposits
electronically in your checking account,
then A)
M1 stays the same and M2 decreases.B)
M1 increases and M2 stays the same.C)
M1 increases and M2 increases.D)
M1 stays the same and M2 stays the same.E)
M1 increases and M2 decreases.25. Suppose your
bank lowers the minimum balance requirement on checking accounts by $500. As A
result you withdraw $500 from your regular checking
account to take with you on your summer trip to Las Vegas. What are the net effects on M1 and M2?A) M1 falls by
$500 and M2 rises by $500.B) M1 is unchanged
and M2 is unchanged.C) M1 falls by
$500 and M2 is unchanged.D) M1 is unchanged
and M2 rises by $500.26.
If a corporation uses money from a demand deposit account to purchase a
negotiable CD,A)
M1 decreases and M2 stays the same.B)
M1 stays the same and M2 increases.C)
M1 stays the same and M2 stays the same.D)
M1 decreases and M2 decreases.27. The use of money makes us more
efficient because:
A) We spend more time trading and more time producing
B) Money increases in value over timeC) With money we borrow less
D) People can specialize in what they do well28. During periods of rapidly rising prices
the function of money that is most affected is: A) the speculative function. B) the unit
of account function. C) the
medium of exchange function. D) the store of
value function.29. In
explaining the evolution of money, which if the following provides the most
logical explanation? A) Government regulation.B) Commodity money, because it is valued more highly,
tends to drive out paper money. C) New forms of money evolve to lower transaction
costs. D) All of the above are true. 30. People hold money even during
inflationary episodes when other assets prove to be better stores of value.
This can be explained by the fact that money
isA) extremely liquid.B) a unique good for which there
are no substitutes.C) the only thing accepted in
economic exchange.D) backed by gold.31. The primary
means by which the Federal Reserve creates money is by A) electronically
adjusting account balances in its computer system.B) giving the
printed bills directly to commercial banks for distribution.C) printing bills
and distributing them through the Federal Reserve District Banks.D) spending money
on government purchases.32. Which of the
following is not a form of e-money?A) a debit cardB) a credit cardC) a stored-value
cardD) a smart cardPart II: Short Answer &
ProblemsShow work for full credit on problems.1. Explain the differences in the financial
asset configurations between life insurance companies, casualty insurance companies,
and money market mutual funds. (6 points)2. For each of the following financial
transactions, indicate whether it involves direct finance or indirect finance
by writing a D or I for each item. (4 points)
i. You take out a car
loan from a finance company. ii. You buy a U.S. savings
bond. iii. You buy a share of a
mutual fund. iv. You borrow a $500 from
you parents. v. You obtain a $50,000 mortgage from your local
S&L. vi. You buy a life
insurance policy. vii. GM sells a share of its
stock to IBM. viii. AT&T issues commercial paper to Mobil Oil Corp. ix. You buy a share of GM
stock from your broker. x. You accept your buddies
IOU in a poker game.3. Categorize the following transactions by
each of the following criteria: (5 Points)a. Categorize each transaction as a primary or
secondary market transaction.b. Categorize each transaction as a money or
capital market transaction.I.
A bank
makes a 30-year mortgage loan for a new house.II.
The
Biederman-Blackwell Money Market Mutual Fund buys $1.5 million worth of 3-month
Treasury bills in the U.S. governments weekly auction.III.
The
Biederman-Blackwell Money Market Mutual Fund buys $150,000 worth of 3-month
Treasury bills from Alerus Financial.IV.
The
bank in part I sells the mortgage loan to a government sponsored financial
intermediaryV.
The
Owens Black Jack Corporation opens for business by selling shares of stock to
his students (which they must buy to pass ECON 303).4. The following
table contains the CPI and the Federal Minimum hourly wage rates. (6 points)YEAR CPI Hourly
Min. wage1945 18.0 $0.401955 26.8 0.751965 31.5 1.251975 53.8 2.101980 82.4 3.101985 107.6 3.351990 130.7 3.801995 152.4 4.252000 172.2 5.152005 195.3 5.152014 237.1 7.25a.
Convert
each nominal minimum wage into base year dollars and rank them (by year) from
lowest to highest real wage. b.
Determine
how much the current minimum wage must be to equal the purchasing power of the
highest real minimum wage on the list.”