Question 1

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

Accepted Answer

A) commercial bank. 
B) credit union. 
C) stock exchange. 
D) mutual fund.

Question 2

In an open economy, an increase in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase

Question 3

The coupon rate on newly issued bonds is usually higher for bonds with ________ terms and ________ risk that the borrower will go bankrupt.

Accepted Answer

A) shorter; greater 
B) shorter; smaller 
C) longer; greater 
D) longer; smaller

Question 4

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

Accepted Answer

A) real interest rate. 
B) nominal interest rate. 
C) risk premium. 
D) discount rate.

Question 5

The interest rate promised when a bond is issued is called the:

Accepted Answer

A) coupon rate. 
B) real rate of interest. 
C) dividend rate. 
D) discount rate.

Question 6

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will ________, holding other factors constant.

Accepted Answer

A) increase 
B) decrease 
C) not change 
D) either increase or decrease

Question 7

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ________, the coupon rate is ________, and the term of this bond is ________.

Accepted Answer

A) $400; 40 percent; four years 
B) $10,000; 4 percent; four years 
C) $10,000; $400; 4 percent 
D) $10,400; 4 percent; four years

Question 8

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

Accepted Answer

A) an inability of U.S. companies to compete in the international market. 
B) a decline in private saving that resulted from an upsurge in consumption. 
C) a decline in national saving caused largely by rapidly rising government budget deficits. 
D) a worldwide recession that made it difficult for American companies to sell their products abroad.

Question 9

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar)for the stock today if you require an 8 percent return?

Accepted Answer

A) $60 
B) $62 
C) $67 
D) $70

Question 10

When an American buys stock in a French company, from the perspective of the United States, this is a(n):

Accepted Answer

A) import. 
B) export. 
C) capital outflow. 
D) capital inflow.

Question 11

In an open economy, a decrease in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase

Question 12

A trade deficit occurs when:

Accepted Answer

A) exports exceed imports. 
B) imports exceed exports. 
C) tariffs exceed quotas. 
D) quotas exceed tariffs.

Question 13

Fred purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 upon its maturity at the end of four years. The principal amount of this bond is ________, the coupon rate is ________, and the term of this bond is ________.

Accepted Answer

A) $1,000; 5 percent; four years 
B) $20,000; 5 percent; four years 
C) $20,000; $1,000; 50 percent 
D) $21,400; 5 percent; four years

Question 14

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, your expected gain will be ________.

Accepted Answer

A) $0 
B) $20 
C) $30 
D) $40

Question 15

The amount originally lent by a bondholder is called the:

Accepted Answer

A) coupon payment. 
B) dividend. 
C) principle amount. 
D) risk premium.

Question 16

Net capital inflows equal:

Accepted Answer

A) capital inflows minus capital outflows. 
B) capital outflows minus capital inflows. 
C) international production. 
D) domestic production.

Question 17

Shares of stock are:

Accepted Answer

A) legal promises to repay a debt. 
B) claims to partial ownership of a firm. 
C) regular payments made to owners of a firm. 
D) legal promises to make regular payments to the stockholder.

Question 18

Which of the following events will increase the domestic real interest rate in an open economy?

Accepted Answer

A) An increase in domestic saving 
B) A decrease in the domestic saving 
C) A decrease in the perceived riskiness of investing in the domestic economy 
D) An increase in net capital inflow

Question 19

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ________ capital inflows and ________ the equilibrium domestic real interest rate.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase

Question 20

The benefits of net capital inflows to a country include all of the following except:

Accepted Answer

A) a larger pool of total savings. 
B) a higher rate of investment in new capital. 
C) a potentially higher growth rate. 
D) interest and dividend payments owed to foreign investors.

Exam 23: Financial Markets and International Capital Flows

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

In an open economy, an increase in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

The coupon rate on newly issued bonds is usually higher for bonds with terms and risk that the borrower will go bankrupt.

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

The interest rate promised when a bond is issued is called the:

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will ________, holding other factors constant.

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8 percent return?

When an American buys stock in a French company, from the perspective of the United States, this is a(n) :

In an open economy, a decrease in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

A trade deficit occurs when:

The amount originally lent by a bondholder is called the:

Net capital inflows equal:

Shares of stock are:

Which of the following events will increase the domestic real interest rate in an open economy?

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will capital inflows and the equilibrium domestic real interest rate.

The benefits of net capital inflows to a country include all of the following except: