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Quiz 9

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Question 1 (1.0 points)
Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping. If financial market participants now expect a fiscal expansion in one year, we know with certainty that:
  1. the yield curve will become downward sloping.
  2. the yield curve will become steeper.
  3. the yield curve will become flatter.
  4. the yield curve will become horizontal.
Question 2 (1.0 points)
A share of stock will pay a dividend of $10 in one year, and will be sold for an expected price $100 at that time. If the current one year interest rate is 5%, then the current price of the stock is approximately:
  1. $90.
  2. $120.
  3. $105.
  4. $72.
  5. $109.
Question 3 (1.0 points)
Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping. If financial market participants now expect a monetary contraction in one year, we know with certainty that:
  1. the yield curve will become flatter.
  2. the yield curve will become horizontal.
  3. the yield curve will become downward sloping.
  4. the yield curve will become steeper.
Question 4 (1.0 points)
Assume that the yield curve is downward-sloping yield curve. This suggests that financial market participants expect short-term interest rates to:
  1. not change in the future.
  2. increase in the future.
  3. rise in the near future, and fall in the more distant future.
  4. be unstable in the future.
  5. decrease in the future.
Question 5 (1.0 points)
Assume that the one-year rate is 3% and the two-year rate is 5%. Given this information, the one-year rate expected one year from now is:
  1. 12%.
  2. 6%.
  3. 9%.
  4. 7%.
  5. 2%.
Question 6 (1.0 points)
Suppose policy makers implement an expected expansionary monetary policy. This expected policy will tend to cause:
  1. a reduction in stock prices.
  2. an increase in stock prices.
  3. no change in stock prices.
  4. an ambiguous effect on stock prices.
Question 7 (1.0 points)
When a firm uses equity finance, it:
  1. sells shares of stock.
  2. borrows money from banks.
  3. sells off part of its capital stock.
  4. sells bonds.
  5. draws down retained earnings.
Question 8 (1.0 points)
Assume policy makers implement an unexpected contractionary fiscal policy. Further assume that monetary policy is expected to keep interest rates constant in response to this unexpected fiscal policy. Given this information, we would expect that this will cause:
  1. stock prices to rise.
  2. an ambiguous effect on stock prices.
  3. stock prices to remain constant.
  4. none of the above
Question 9 (1.0 points)
Suppose the Fed is expected to respond to the following event by keeping the interest rate constant (i.e., equal to its initial level). An unexpected increase in consumer confidence will cause:
  1. an ambiguous effect on stock prices.
  2. stock prices to fall.
  3. no change in stock prices.
  4. stock prices to rise.
Question 10 (1.0 points)
Suppose policy makers implement an unexpected expansionary monetary policy. This unexpected policy will tend to cause:
  1. an increase in stock prices.
  2. a reduction in stock prices.
  3. no change in stock prices.
  4. an ambiguous effect on stock prices.
Question 11 (1.0 points)
In general, when the short-term interest rate decrease, long-term rates will:
  1. increase.
  2. decrease, but by less than the short-term rate.
  3. remain the same.
  4. decrease by more than the short-term rate.
  5. decrease by the same amount as the short-term rate.
Question 12 (1.0 points)
Suppose the current one-year interest rate is 6%, and financial markets expect the one-year interest rate next year to be 7%, and the year after that to be 8%. Given this information, the yield to maturity on a three-year bond will be approximately:
  1. 5%.
  2. 8%.
  3. 6%.
  4. 18%.
  5. 7%.
Question 13 (1.0 points)
Suppose the Fed is expected to respond to the following event by keeping output constant (i.e., equal to its initial level). An unexpected increase in consumer confidence will cause:
  1. stock prices to rise.
  2. stock prices to fall.
  3. an ambiguous effect on stock prices.
  4. no change in stock prices.
Question 14 (1.0 points)
Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping. If financial market participants now expect a fiscal contraction in one year, we know with certainty that:
  1. the yield curve will become steeper.
  2. i2t will decrease.
  3. i2t will increase.
  4. the yield curve will become downward sloping.
Question 15 (1.0 points)
Which of the following variables would NOT influence the ex-dividend price of a share of stock at time t?
  1. $Det+1
  2. i1et+1
  3. i1t
  4. none of the above
Question 16 (1.0 points)
An expected reduction in the money supply will tend to cause:
  1. an increase in stock prices.
  2. a reduction in stock prices.
  3. no change in stock prices.
  4. an ambiguous effect on stock prices.
Question 17 (1.0 points)
An unexpected increase in consumer confidence will tend to cause:
  1. an increase in stock prices.
  2. a reduction in stock prices.
  3. no change in stock prices.
  4. an ambiguous effect on stock prices.
Question 18 (1.0 points)
Suppose policy makers implement an expected contractionary fiscal policy. This expected policy will tend to cause:
  1. an increase in stock prices.
  2. a reduction in stock prices.
  3. no change in stock prices.
  4. an ambiguous effect on stock prices.
Question 19 (1.0 points)
Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping. If financial market participants now expect a monetary expansion in one year, we know with certainty that:
  1. i2t will increase.
  2. i2t will decrease.
  3. the yield curve will become downward sloping.
  4. the yield curve will become steeper.
Question 20 (1.0 points)
One reason that long-term interest rates change less than short-term rates is that:
  1. the mathematical calculations are more difficult for analysts in the case of long-term bonds.
  2. financial markets assume that, in the future, the central bank will reverse part of any change in short-term rates.
  3. financial markets are often swept up by bubbles and fads.
  4. financial markets assume that the central bank will be passive as interest rates rise or fall.
  5. long-term rates are always lower than short-term rates, so there is less room for them to change.
Question 21 (1.0 points)
Since there is arbitrage in the stock market, economists believe that:
  1. movements in stock prices are largely unpredictable.
  2. stocks will generally earn a lower rate of return than bonds.
  3. stock prices will generally keep rising after a rise, and keep dropping after a drop.
  4. most stocks diverge widely from their fundamental value.
  5. movements in stock prices can be easily predicted.
Question 22 (1.0 points)
Suppose the Fed is expected to respond to the following event by keeping output constant (i.e., equal to its initial level). An unexpected reduction in consumer confidence will cause:
  1. no change in stock prices.
  2. an ambiguous effect on stock prices.
  3. stock prices to fall.
  4. stock prices to rise.
Question 23 (1.0 points)
As the LM curve becomes steeper, an unexpected increase in consumer confidence:
  1. is more likely to cause stock prices to fall.
  2. will cause a relatively small increase in output and relatively small increase in the interest rate.
  3. is more likely to cause stock prices to rise.
  4. will cause a relatively large increase in output and relatively large increase in the interest rate.
Question 24 (1.0 points)
Suppose the current one-year interest rate is 2%, and financial markets expect the one-year interest rate next year to be 6%. Given this information, the yield to maturity on a two-year bond will be approximately:
  1. 7.5%.
  2. 6.66%.
  3. 10%.
  4. 4%.
  5. 8%.
Question 25 (1.0 points)
Which of the following represents a stock's fundamental value?
  1. the price the stock would sell at in the midst of a rational bubble
  2. the present value of its expected future dividend payments
  3. the price the stock would sell at if the interest rate were zero
  4. the simple sum of its future dividend payments
  5. none of the above
Copyright 2008, by the Contributing Authors. Cite/attribute Resource . admin. (2009, January 27). Quiz 9. Retrieved January 07, 2011, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/economics/macroeconomics-for-managers/quiz9.htm. This work is licensed under a Creative Commons License Creative Commons License