Quiz 1

Question 1

Examples of the effects of price controls: Gas lines, SF quake, Bread/wheat example, trailer parks

Answer 1

a

Question 2

Taxes: burdens on the buyer and seller

Answer 2

a

Question 3

New Zealand tariff example—why a small country is hurt by a tariff while a big country can gain

Answer 3

a

Question 4

Dollar outflows—the harmless kind caused by trade deficits

Answer 4

a

Question 5

Subsidy: benefits to buyers and sellers and DWL

Answer 5

a

Question 6

Exhaustible resources: graph showing loss from forced conservation

Answer 6

a

Question 7

Present/future value calculations for 1 period, n periods, perpetuities, annuities

Answer 7

a

Question 8

PV of an annuity, and how to shrink the equation

Answer 8

a

Question 9

The net present value rule for investments

Answer 9

a

Question 10

Compounding: relation between annual, monthly, daily, and continuous compounding

Answer 10

a

Question 11

PV/FV calcs with changing interest rates

Answer 11

a

Question 12

How to arbitrage mis-priced bonds

Answer 12

a

Question 13

Bond pricing: interest/principal distinction Tranching and coupon stripping, zero-coupon bonds

Answer 13

a

Question 14

Duration and volatility

Answer 14

Vol=Dur/(1+R)

Question 15

The aging problem: when to cut a tree

Answer 15

a

Question 16

Interest parity, and arbitrage resulting from parity violations

Answer 16

a

Question 17

Measuring inflation with the CPI

Answer 17

a

Question 18

The Fisher Equation

Answer 18

a

Question 19

Inflation and the stacking of loan repayments

Answer 19

a

Question 20

The Gold Lease Rate as a measure of the real interest rate

Answer 20

a

Question 21

Equivalent Annual Cost: How to compare projects with different lives and initial costs

Answer 21

a

Question 22

Intertemporal choice graph: Borrowing and lending shown with budget lines and indifference curves

Answer 22

a

Question 23

1. Demand curve: P = $100 – 2Q Supply curve: P = $10 + 4Q If a tax of $30 per unit is imposed in this market, the dollar price paid by buyers will be a. 10 b. 20 c. 40 d. 60 e. 80

Answer 23

e. 80

Question 24

2. The market interest rate is 5% and a bond promises a single payment of $105 in 1 year. That bond is currently selling for $99. The correct arbitrage strategy for an investor to follow would have to involve: a. buying that bond b. lending money c. going long in stocks d. borrowing that bond and selling it e. selling that bond.

Answer 24

a. buying that bond

Question 25

3. You invest $100 in a project today. In the first year you earn a 20% return. In the second year you re-invest all the principal and interest and earn a return of -10%. Thus your average rate of return is 5%. How much money will you have at the end of two years? a. $105 b. $106 c. $108 d. $110 e. $112

Answer 25

c. $108

Question 26

4. In the intertemporal choice model (C0 and C1 ) an individual is endowed with only future goods and no current goods. A drop in the real interest rate would cause the budget line to ______and move______. a. steepen, downward b. steepen, upward c. flatten, downward d. flatten, upward e. keep a constant slope, upward

Answer 26

d. flatten, upward

Question 27

5. If the forward price of pounds is lower than the spot price of pounds ($/pound), that is an indication that: a. the British interest rate is expected to rise b. the US inflation rate is low c. the US inflation rate is less than the British interest rate d. the British interest rate is greater than the US interest rate e. the US interest rate is expected to fall

Answer 27

d. the British interest rate is greater than the US interest rate

Question 28

6. When the demand curve for some good is relatively steep and the supply curve is relatively flat, a subsidy on that good will mostly benefit: a. consumers b. producers c. taxpayers d. foreigners e. producers of substitute goods

Answer 28

a. consumers

Question 29

7. An acre of land rents for $2 per year, payable at the end of each year. The land, and the rent payments, last forever. The land currently sells for $40. What is the nominal market rate of interest? a. 3% b. 4% c. 5% d. 6% e. 7%

Answer 29

c. 5%

Question 30

8. The market interest rate is 5% and a bond promises a single payment of $105 in 1 year. That bond is currently selling for $99. The correct arbitrage strategy for an investor to follow would have to involve: a. buying that bond b. lending money c. going long in stocks d. borrowing that bond and selling it e. selling that bond.

Answer 30

a. buying that bond

Question 31

9. When a 1-year forward contract for wheat is delivered, the seller of the wheat receives a price_____. a. equal to the current (i.e., at the time of delivery) spot price b. equal to the 1-year forward price that had been set 1 year before c. equal to last year’s spot price d. equal to the current spot price, plus any increase in price that happened since last year e. equal to the current spot price marked to market

Answer 31

b. equal to the 1-year forward price that had been set 1 year before

Question 32

10. Countries A and B trade only with each other. No cash ever flows between the two countries. Country A buys apples and bonds from B, while B buys only bananas from A. We can be certain that: a. this trade is not mutually beneficial b. B will experience inflation c. A will experience inflation d. B is running a trade deficit e. A will be poorer as a result of this trade

Answer 32

d. B is running a trade deficit