risk premium = rate of return risky assets - rate of return on safe assets

3. 10,000/1.08

23/40

1. If the United States has a $300 billion trade deficit, then there must be:
YES net capital inflows of $300 billion.
NO net capital inflows of -$300 billion.
no capital inflows or capital outflows.
net capital outflows of $300 billion.
net capital outflows of $600 billion.
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For more information, see p. 308 of your textbook.

2. You own shares in a well-managed diversified company. If a court finds that
one of the company's products was seriously defective and orders the company to
pay damages to all purchasers of the product, then the price of your shares will
_____, holding other factors constant.
increase.
OK decrease.
not change.
either increase or decrease.
be indeterminate.
3. Ralph purchases a newly-issued, two-year government bond with a principal
amount of $10,000 and a coupon rate of 7% paid annually. One year before the bonds
matures (and after receiving the coupon payment for the first year), Ralph sells
the bond in the bond market. What price (rounded to the nearest dollar) will Ralph
receive for his bond if the prevailing interest rate is 8%?
NO $9,259
YES $9,907
$10,000
$10,700
$11,556
Feedback

For more information, see p. 300 of your textbook.

4. When exports exceed imports there is a(n):
output gap.
budget surplus.
budget deficit.
OK trade surplus.
trade deficit.
5. 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 4% return?
$60
$62
OK $64
$67
$70
6. You own shares in a well-managed diversified company. If the company
announces that it will increase dividend payments next year, then the price of
your shares will _____, holding other factors constant.
OK increase.
decrease.
not change.
either increase or decrease.
be indeterminate.
7. The financial system consists of financial _____, such as commercial banks,
and financial _____, such as the stock market.
markets; intermediaries
allocations; investments
investment; allocations
markets; institutions
OK institutions; markets
8. Which of the following transactions would cause a capital inflow to a
country?
Exports of goods or services
OK Imports of goods or services
Purchasing financial assets (e.g., a corporate bond) from abroad
Purchasing real assets (e.g., a factory) abroad
Lending money abroad
9. Capital outflows are:
purchases of domestic goods or services by foreigners.
purchases of domestic assets by foreigners.
purchases of foreign goods or services by domestic households or firms.
OK purchases of foreign assets by domestic households or firms.
purchases of domestic assets by domestic household or firms.
10. The amount originally lent by a bondholder is called the:
coupon payment.
dividend.
OK principal amount.
risk premium.
reserve.

. Holding constant risk and the real returns available abroad, lower domestic
real interest rates _____ capital inflows, _____ capital outflows, and _____ net
capital inflows.
increase; increase; increase
NO increase; increase; decrease
increase; decrease; increase
decrease; decrease; decrease
YES decrease; increase; decrease
Feedback

For more information, see p. 309 of your textbook.

2. A decrease in interest rates results in a(n) _____ in the required rate of
return to hold stocks and _____ current stock prices.
increase; lowers
increase; raises
NO increase; does not change
decrease; lowers
YES decrease; raises
Feedback

For more information, see p. 303 of your textbook.

3. A country's trade balance equals:
the value of tariffs less the number of quotas.
the number of quotas less the value of tariffs.
OK the value of exports minus the value of imports.
the value of imports minus the value of exports.
the quantity imported less the quantity exported.
4. Capital inflows minus capital outflows are called:
YES net capital inflows.
net capital outflows.
NO a trade deficit.
 a trade surplus.
net foreign aid.
Feedback

For more information, see p. 307 of your textbook.

5. When Federal Reserve actions cause interest rates on newly issued bonds to
decrease from 6% to 5%, the prices of existing bonds:
YES increase.
decrease.
NO remain unchanged.
decrease only if the coupon rate is less than 5%.
increase only if the coupon rate is greater than 6%.
Feedback

For more information, see p. 300 of your textbook.

6. You own shares in a start-up internet company. If the company announces that
it will not pay dividends next year as it has in the past, then the price of your
shares will _____, holding other factors constant.
increase
YES decrease
NO not change
either increase or decrease
be indeterminate
Feedback

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7. Firms that extend credit to borrowers using funds from savers are called:
bond dealers.
stock brokers.
NO central banks.
YES financial intermediaries.
credit funders.
Feedback

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8. A three-year bond with a principal amount of $5,000, a 3% coupon rate paid
annually, one year from maturity will sell for what price (rounded to the nearest
dollar) in the bond market if interest rates are 5%?
$4,762
YES $4,905
$5,000
NO $5,150
$5,408
Feedback

For more information, see p. 300 of your textbook.

9. Commercial banks are the most important of the:
government agencies.
OK financial intermediaries.
credit unions.
savings-and-loan associations.
stock brokerage firms.
10. Your financial investments consist of U.S. government bonds maturing in
twenty years and shares in a start-up internet company. If interest rates on newly
issued government bonds decrease, then the price of your bonds will _____ and the
price of the shares you own will ____.
YES increase; increase
decrease; decrease
 increase; not change
decrease; not change
NO not change; not change
Feedback

For more information, see p. 303 of your textbook.

1. An increase in interest rates results in a(n) _____ in the required rate of

return to hold stocks and _____ current stock prices.
YES increase; lowers
NO increase; raises
increase; does not change
decrease; lowers
decrease; raises
Feedback

For more information, see p. 303 of your textbook.

2. International capital flows are:

purchases of foreign goods or services.
sales of domestic goods or services to foreigners.
exports plus imports.
exports minus imports.
OK purchases or sales of real and financial assets across international
borders.

3. Claims to partial ownership of a firm are called:

bonds.
dividends.
capital gains.
principal.
OK stock.

4. The value of exports minus the value of imports in a period is called the:
budget balance.
YES trade balance.
trade gap.
NO international equilibrium.
level of potential trade.
Feedback

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5. When a U.S. oil company purchases oil from Saudi Arabia and the Saudi
Arabian firm uses the proceeds from its sale of oil to the United States to buy
U.S. government debt, U.S. _____ and there is a capital _____ to/from the United
States.
imports increase; outflow
imports decrease; inflow
OK imports increase; inflow
exports increase; outflow
exports increase; inflow

6. Firms that extend credit to borrowers using funds from savers are called:
bond dealers.
stock brokers.
NO central banks.
YES financial intermediaries.
 credit funders.
Feedback

For more information, see p. 297 of your textbook.

7. Purchases of foreign assets by domestic firms or households is called a(n):

NO import.
export.
YES capital outflow.
capital inflow.
protectionism.
Feedback

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8. The coupon rate on newly issued bonds is usually lower for bonds with ____
terms and ____ risk that the borrower will go bankrupt.
shorter; greater
OK shorter, smaller
longer; greater
longer; smaller
medium; medium

9. Regular interest payments made to bondholders are called _____ payments.

diversification
reserve
OK coupon
dividend
principal

10. Financial systems in market economies improve the allocation of saving in

each of the following ways EXCEPT by:
providing information about which potential use of funds will be most
productive.
helping savers to share the risk of individual investment projects.
NO evaluating the potential productivity of alternative capital
investments.
making savings available to risky, but potentially profitable projects.
YES allowing political favoritism to determine which projects are funded.
Feedback

For more information, see p. 297 of your textbook.