ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

INTERNATIONAL TRADE AND INVESTMENT MANAGEMENT DEPARTMENT
Final exam

Name: _________________________________________ Time allowed:

1:45 hr
ID: No.:_____________
General Instruction
Any trying of cheating invalidate your results
Please put your answers on the separate answer sheet provided
Switch of your cell phone
PART I: TRUE/FALSE
Directions: State whether each of the Following Statements is True or False (1point each)
1. The purpose of the financial system is to bring savers and borrowers together.
2. Commercial banks lend to businesses in direct financial markets.
3. The money market provides liquidity; the capital market finances economic growth.
4. All money market instruments are short-term debt.
5. The money market is a market where liquidity is bought and sold.
6. Commercial banks are the major issuer and investor of money market securities.
7. Declining interest rates can be caused by an upward shift in the demand for loanable
funds relative to the supply of loanable funds.
8. The expected real rate of interest is likely to be negative.
9. The realized real rate of interest can be negative if expected inflation is less than actual
inflation.
10. The Fisher Effect holds that nominal interest rates include an expected inflation rate.
PART II: Choose the best Answer from the Given Alternatives (1.5 points each)
1. All but one of the following factors influences the real rate of interest.
a. the rate of inflation
b. Investor positive time preference for current versus future consumption.
c. The return on alternative real investments.
d. The real level of output in the economy.
2. ________ Real rates are almost always positive; _______real rates may be negative.
a. Realized; expected
b. Expected; realized
c. Government; private
d. Expected; expected
3. Which statement is true about interest rate movements?
a. Interest rates move counter-cyclically with the business cycle.
b. Long-term interest rates have greater swings than short-term rates.
c. The expected rate of inflation impacts the level of interest rates.
d. Bond prices and interest rates move directly with one another.
4. Which one of the following statements about interest rates is incorrect?
a. Bond prices and interest rates change inversely with one another.
b. The expected rate of inflation affects current market interest rates.

c. Short-term interest rates are not as volatile as long-term interest rates.

d. Interest rates are directly related to the level of output in the economy.
5. The Fisher effect is a theory which holds that
a. Nominal rates include the real rate of interest plus past annual inflation rates.
b. Nominal rates include the real rate of interest plus expected annual inflation rates.
c. Real rates are always positive.
d. Inflation has no impact upon interest rates.
6. If nominal interest rates are 10% and expected inflation is 5%,
a. Actual inflation exceeds 10%.
b. The real rate of interest is 5%.
c. Market rates are expected to increase to 15%.
d. Expected interest rates are 5%.
7. If the real rate of interest is 4%, actual inflation for the last year was 5%, and expected
inflation is 8%, the Fisher effect predicts what current level of nominal interest rates?
a. 9%
b. 8%
c. 13%
d. 12%
8. Deficit spending units (DSU) are represented in loanable funds theory as
a. Suppliers of loanable funds.
b. Demanders of financial claims.
c. Demanders of loanable funds.
d. DSUs are not represented in the loanable funds theory of interest rate determination.
9. Increased government budget deficits
a. Shifts the demand for loanable funds to the left, reducing interest rates.
b. Shifts the supply of loanable funds to the right, reducing interest rates.
c. Shifts the demand for loanable funs to the right, increasing interest rates.
d. Shifts the supply of loanable funds to the left, reducing interest rates.
10. The realized rate of return may be negative if
a. Investors' expected rate of inflation (Pe) was less than actual inflation (Pa).
b. Investors' expected rate of inflation (Pe) was greater than actual inflation (Pa).
c. Investors over-anticipated the level of inflation.
d. Investors expected more inflation than was realized.
11. If the actual rate of inflation is less than the rate expected during a period,
a. Borrowers benefited at the expense of lenders.
b. Lenders benefited at the expense of borrowers.
c. Both borrowers and lenders benefited.
d. Neither borrowers nor lenders benefited.
12. An investor earned 12 percent last year, a year when actual inflation was 9 percent and
was expected to have been 6 percent. The investor realized real rate of return was:
a. 3%
b. 6%
c. 18%
d. 12%

13. Which of the following is not a characteristic of a money market instrument?

a.
Liquidity
b.
Marketability
c.
long maturity
d.
liquidity premium
e.
C and D
14. Which one of the following is not a money market instrument?
a.
a Treasury bill
b.
a negotiable certificate of deposit
c.
commercial paper
d.
a Treasury bond
15. T-bills are financial instruments initially sold by ________ to raise funds.
a.
commercial banks
b.
the U.S. government
c.
state and local governments
d.
agencies of the federal government
e.
B and D
16. The bid price of a T-bill in the secondary market is
a.
The price at which the dealer in T-bills is willing to sell the bill.
b.
The price at which the dealer in T-bills is willing to buy the bill.
c.
Greater than the asked price of the T-bill.
d.
The price at which the investor can buy the T-bill.
e.
Never quoted in the financial press.
17. Of the following are long-term financial instruments?
a. six-month loan
b. A negotiable certificate of deposit
c. A bankers acceptance
d. Treasury bill
18. Money market securities have very little
a.
Default risk.
b.

Price risk.

c.

Marketability risk.

d.

All of the above.

19. Which one of the following is not an explanation for paying interest on borrowed
money?
a.

Interest is the rental cost of purchasing power.

b.

Interest is the penalty paid for consuming income before it is earned.

c.

Interest is always paid at the maturity of a loan.

d.

Interest is the time value of delayed consumption.

20. Which statement is true about interest rate movements?

a.

Interest rates move counter-cyclically with the business cycle.

b.

Long-term interest rates have greater swings than short-term rates.

c.

The expected rate of inflation impacts the level of interest rates.

d.

Bond prices and interest rates move directly with one another.

ANSWER SHEET
True or False
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Choice
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