ECON Practice Essay

Econ 111, Summer 2008 Practice Final
Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1)

Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called ________, and it creates the ________ problem.

1)

_______
A)

adverse selection; risk sharing
B)

adverse selection; moral hazard
C)

asymmetric information; risk sharing
D)

asymmetric information; adverse selection

2)

Money is

2)

_______
A)

anything that is generally accepted in payment for goods and services or in the repayment of debt.
B)

the total collection of pieces of property that are a store of value.
C)

a flow of earnings per unit of time.
D)

always based on a precious metal like gold or silver.

3)

Which of the following statements uses the economists' definition of money?

3)

_______
A)

The job with New Company gave me the opportunity to earn more money.
B)

Betsy is richshe has a lot of money.
C)

I hope that I have enough money to buy my lunch today.
D)

I plan to earn a lot of money over the summer.

4)

Which of the following statements best explains how the use of money in an economy increases economic efficiency?

4)

_______
A)

Money increases economic efficiency because it decreases transactions costs.
B)

Money increases economic efficiency because it is costless to produce.
C)

Money increases economic efficiency because it discourages specialization.
D)

Money cannot have an effect on economic efficiency.

5)

In explaining the evolution of money

5)

_______
A)

paper money is always backed by gold and therefore more desirable than checks.
B)

new forms of money evolve to lower transaction costs.
C)

government regulation is the most important factor.
D)

commodity money, because it is valued more highly, tends to drive out paper money.

6)

The present value of an expected future payment ________ as the interest rate increases.

6)

_______
A)

is constant

B)

falls

C)

is unaffected

D)

rises

7)

If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is

7)

_______
A)

$1000.

B)

$1210.

C)

$2000.

D)

$2200.

8)

Which of the following are true for a coupon bond?

8)

_______
A)

The price of a coupon bond and the yield to maturity are positively related.
B)

The yield to maturity is greater than the coupon rate when the bond price is above the par value.
C)

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
D)

The yield is less than the coupon rate when the bond price is below the par value.

9)

A discount bond

9)

_______
A)

pays the bondholder the face value at maturity.
B)

pays the face value at maturity plus any capital gain.
C)

pays the bondholder a fixed amount every period and the face value at maturity.
D)

pays all interest and the face value at maturity.

10)

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

10)

______
A)

5 percent

B)

-5 percent

C)

10 percent

D)

-10 percent

11)

An equal increase in all bond interest rates

11)

______
A)

increases the return to all bond maturities by an equal amount.
B)

decreases the return to all bond maturities by an equal amount.
C)

decreases long-term bond returns more than short-term bond returns.
D)

has no effect on the returns to bonds.

12)

If you expect the inflation

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