MBA 820, Finance, Summer 2005, Final Exam


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MBA 820, Finance, Summer 2005, Final Exam
OSU Ohio State University
Answer Key Included





Part I: Multiple-Choice: [1 point each]
1. If the Markets Desk at the New York Federal Reserve Bank purchases T-bills, this will:
1. Increase the Federal Funds Rate
2. Decrease the Federal Funds Rate
3. Raise the value of the dollar on the foreign exchange market
4. Lower the value of the dollar on the foreign exchange market
5. Both a and c
6. Both a and d
7. Both b and c
8. Both b and d




2. Demand influences production according to (choose the answer/answers that does/do NOT apply):
1. Classical Economics
2. Keynesian Economics
3. Monetarists
4. New Classical Economics
5. New Keynesian Economics




3. For a country to peg its exchange rate, the country’s central bank must (choose the answer/answers that does/do NOT apply):
1. Keep monetary autonomy
2. Change the money supply
3. Buy short term bonds
4. Buy foreign exchange
5. Accumulate reserves




4. GDP in 1981 was $2.96 trillion. It grew to $3.07 trillion in 1982, yet the quantity of output actually decreased. This is because:
1. Prices increased
2. GDP is not the same as Real GDP
3. Statistical discrepancies caused in error in the 1981 reading
4.

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Double counting occurred in 1982.
5. a and b
6. a and c
7. a and d
8. b and c
9. b and d
10. c and d




5. If the number of unemployed is 5 million, the number of employed is 20 million, and the population between 16 and 65 years of age that is not retired or institutionalized is 50 million, then the unemployment rate is:
1. 25 percent
2. 20 percent
3. 10 percent
4. 7.1 percent
5. 6.6 percent





6. Assume that the US and Europe are the only two countries in the world. US Real GDP will grow as a result of:
1. Domestic Investment in Europe being greater than domestic savings
2. The sale of short-term bonds by the European Central Bank.
3. A decline in the value of the euro relative to the dollar
4. All of the above
5. None of the above
6. a and b
7. a and c
8. b and c





7. Oil prices are currently rising because of (choose the answer/answers that does/do NOT apply):
1. Higher demand from China
2. Higher growth in the European Union
3. Lack of investment
4. High Oil prices during the 1990s
5. Shortage of oil reserves





Part II: Definitions (pick 2 of 3) [2 points each]

1) Adaptive Expectations

WHAT:

* Expectations based on what just occurred
* Developed by Monetarists.





WHY:

* Advancement on Keynes’ “Animal Spirits” (irrational) expectations
* Runs counter to Rational Expectations








2) Okun’s Law

WHAT:

* When Real GDP increases, Unemployment decreases





WHY:

* Describes what we typically see when observing the business cycle








3) FOMC

WHAT:

* Federal Open Market Committee. Comprised of 7 Governors of the Federal Reserve System, the President of the New York Federal Reserve Bank, and 4 other Federal Reserve Bank Presidents.






WHY:

* The body assigned with setting the targets for monetary policy in the United States, specifically Open Market Operations.








Part III: True/False and Why [2 points each]

1. If the outsourcing of service jobs to India continues, the US will lose its comparative advantage.





GAVE AUTOMATIC CREDIT.









2. If the Federal Funds Rate is 4%, GDP growth rate is 3.5% and inflation is 2.5%, then we should expect the Federal Reserve to enact a large decrease in the federal funds rate.





* FALSE.
* According to Taylor Rule, we should expect a small decrease in the federal funds rate (because inflation is above 2%).












3. If it costs 20 peso to buy a Big Mac in Mexico and ¥260 to purchase a Big Mac in Japan, then at a current exchange rate value of 15 ¥/peso, the peso is undervalued and should appreciate.




* FALSE
* Using PPP, ¥/peso exchange rate should be (¥260/20 peso) 13 ¥/peso. Therefore, it is requiring more yen to purchase peso than it should. Therefore, the peso is overvalued and should depreciate.







Part IV: Equation Short-Answer Essays. Show your work. [3 points each]

1. Why is inflation necessary for monetary policy to be effective?




* Real Interest rate = Nominal Interest Rate – Inflation Rate
* If deflation, then real interest rate will still be positive even if nominal interest rate is zero.










2. If the growth rate of the money supply is increased by 2%, then, in the long run, how much higher should be prices?




* M*V = P*Y
* In long run, prices should be 2% higher.












3. If US households suddenly and dramatically increase the amount of money they save, how might this impact international trade and financial flows?




* (X – M) = (S+(T-G)]-I
* US imports should be lower than exports and investment money should begin flowing from the US to the rest of the world.













Part V: Essay Question:

If the Commerce Department announces a very high Real GDP growth rate for the previous quarter, why might this NOT result in higher sales for your business? How might it result in higher sales for your business? [4 points]



GAVE AUTOMATIC CREDIT.


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