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Page 1
Econ 121 Midterm #1: (100 pts.)
Name___________________________________
FORM A
MULTIPLE CHOICE (30pts).
Choose the one alternative that best completes the statement or answers the
question. Mark your answers on your scantron form.
1.
Every financial market has the following characteristic:
a.
It determines the level of interest rates.
b.
It allows loans to be made.
c.
It allows common stock to be traded.
d.
It channels funds from lenders-savers to borrowers-spenders.
2.
Paper currency that has been declared legal tender but is not convertible into precious metals is called
________ money.
a.
electronic
b.
commodity
c.
funny
d.
fiat
3.
In which of the following situations would you prefer to be the lender?
a.
The interest rate is 25 percent and the expected inflation rate is 50 percent.
b.
The interest rate is 9 percent and the expected inflation rate is 7 percent.
c.
The interest rate is 13 percent and the expected inflation rate is 15 percent.
d.
The interest rate is 4 percent and the expected inflation rate is 1 percent.
4.
Everything else held constant, if interest rates are expected to fall in the future, the demand for long-
term bonds today ________ and the demand curve shifts to the ________.
a.
rises; right
b.
falls; left
c.
falls; right
d.
rises; left
5.
The opportunity cost of holding money is
a.
the level of income.
b.
the price level.
c.
the discount rate.
d.
the interest rate.
6.
Which of the following can be described as involving indirect finance?
a.
You buy a U.S. Treasury bill from the U.S. Treasury.
b.
A corporation buys a share of common stock issued by another corporation in the primary
market.
c.
You make a deposit at a bank.
d.
You make a loan to your neighbor.
7.
Risk sharing is profitable for financial institutions due to
a.
asymmetric information.
b.
low transactions costs.
c.
adverse selection.
d.
moral hazard.
8.
If expectations are formed rationally, then individuals
a.
change their forecast when faced with new information.
b.
will have a forecast that is 100% accurate all of the time.
c.
use only the information from past data on a single variable to form their forecast.
d.
have forecast errors that are persistently low.


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9.
An example of the problem of ________ is when a corporation uses the funds raised from selling bonds
to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
a.
moral hazard
b.
credit risk
c.
adverse selection
d.
risk sharing
10.
Which of the following statements best explains how the use of money in an economy increases
economic efficiency?
a.
Money cannot have an effect on economic efficiency.
b.
Money increases economic efficiency because it is costless to produce.
c.
Money increases economic efficiency because it decreases transactions costs.
d.
Money increases economic efficiency because it discourages specialization.
11.
The payments system evolves from barter to a monetary system,
a.
specialization decreases.
b.
transaction costs increase.
c.
the number of prices that need to be calculated increase rather dramatically.
d.
commodity money is likely to precede the use of paper currency.
12.
The efficient markets hypothesis implies that prices in the stock market
a.
always undervalue the true assets of a corporation.
b.
are more likely to go up than down.
c.
are unpredictable.
d.
follow a definite pattern.
13.
Enron failed because of:
a.
a multi-institutional failure to their fiduciary duties
b.
Andy Fastow’s intent to defraud investors of money
c.
Kenneth Lay’s need to buy a new jet
d.
J
eff Skilling’s medical bills (rehab from motorbike crash)
e.
Lou Pai’s obsession with illicit entertainment
14.
Enron was successful in propping up its stock price by:
a.
using mark-to-market accounting treatment
b.
using monopolistic predatory pricing in energy markets
c.
using multilevel corporations to hide debt (structured finance)
d.
using political and monetary capital to effectively buy ratings
e.
all of the above
15.
In a portfolio of assets with “all else constant” you prefer to:
a.
increase risk
b.
increase the expected return
c.
decrease liquidity
d.
all of the above
e.
none of the above