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Economics of Money, Banking & Financial Markets, 5e (Mishkin) Chapter 1 Why Study Money, Banking, and Financial Markets? 1.1 Why Study Financial Markets?

1) Financial markets promote economic efficiency by ________. A) channelling funds from investors to savers B) creating inflation C) channelling funds to those who have a productive use for them D) reducing investment Answer: C Diff: 1 Type: MC Page Ref: 2 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 2) Well-functioning financial markets promote ________. A) inflation B) deflation C) unemployment D) economic growth Answer: D Diff: 1 Type: MC Page Ref: 2-3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 3) A key factor in producing high economic growth is ________. A) eliminating foreign trade B) well-functioning financial markets C) high interest rates D) stock market volatility Answer: B Diff: 1 Type: MC Page Ref: 2-3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 4) Markets in which funds are transferred from those who do not have a productive use for them to those who do are called ________. A) commodity markets B) fund-available markets C) derivative exchange markets D) financial markets Answer: D Diff: 1 Type: MC Page Ref: 2-3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets

5) ________ markets transfer funds from people who do not have a productive use for them to people who do. A) Commodity B) Fund-available C) Financial D) Derivative exchange Answer: C Diff: 1 Type: MC Page Ref: 2-3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 6) Poorly performing financial markets can be the cause of ________. A) wealth B) poverty C) financial stability D) financial expansion Answer: B Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 7) The bond markets are important because they are ________. A) easily the most widely followed financial markets in Canada B) the markets where foreign exchange rates are determined C) where corporations and governments borrow to finance their activities D) the markets where all borrowers get their funds Answer: C Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 8) A security is also known as ________. A) a financial instrument B) a contingent claim C) the interest rate D) a liability Answer: A Diff: 1 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets

9) A bond is ________. A) not as good as investment as stocks B) pays interest sporadically C) never pays interest D) makes payments periodically for a specified period of time Answer: D Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 10) The fluctuation of interest rates ________. A) never occurs because the central bank is involved in setting the rate B) is due to changes in stock prices C) cannot occur because there is only one interest rate D) impacts all Canadians Answer: D Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 11) The cost of borrowing is commonly referred to as the ________. A) inflation rate B) exchange rate C) interest rate D) aggregate price level Answer: C Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 12) Compared to interest rates on long-term bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher Answer: A Diff: 1 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets

13) The interest rate on long-term corporate bonds is ________, on average, than other interest rates. The spread between it an other rates ________ over time. A) lower; remains constant B) lower; fluctuates C) higher; remains constant D) higher; fluctuates Answer: D Diff: 1 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets 14) Everything else held constant, a rise in interest rates will cause spending on housing to ________. A) rise B) remain unchanged C) either rise, fall, or remain the same D) fall Answer: D Diff: 2 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets 15) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage Answer: A Diff: 2 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets 16) An increase in interest rates might ________ saving because more can be earned in interest income. A) encourage B) discourage C) disallow D) invalidate Answer: A Diff: 2 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets

17) Everything else held constant, an increase in interest rates on student loans ________. A) may increase the cost of education B) may reduce the cost of education C) has no effect on educational costs D) increases costs for students with no loans Answer: A Diff: 2 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets 18) A common stock ________. A) cannot be purchased by individuals B) is also known as a debt security C) is a share of ownership in a corporation D) is a claim on assets Answer: C Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 19) A share of common stock is a claim on a corporation's ________. A) debt B) liabilities C) expenses D) earnings and assets Answer: D Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 20) Lower interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) postpone C) consider D) start Answer: C Diff: 1 Type: MC Page Ref: 3 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets

21) Bonds of different maturities ________. A) show no common features B) have interest rates that tend to move together C) have interest rates that can differ substantially D) Both B and C Answer: D Diff: 1 Type: MC Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 22) The stock market is important because it is ________. A) where interest rates are determined B) the most widely followed financial market in the Canada C) where foreign exchange rates are determined D) the market where most borrowers get their funds Answer: B Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 23) Stock prices, as measured by the S&P/TSX Composite Index, ________. A) have not changed much over time B) have risen smoothly over time C) have been extremely volatile over time D) have declined substantially since they peaked in the mid 1980s Answer: C Diff: 1 Type: MC Page Ref: 4 Skill: Applied Objective List: 1.1 Outline what is involved in the study of financial markets 24) Stock prices are ________. A) relatively stable trending upward at a steady pace B) relatively stable trending downward at a moderate rate C) extremely volatile D) unstable trending downward at a moderate rate Answer: C Diff: 2 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets

25) Changes in stock prices ________. A) do not affect people's wealth and their willingness to spend B) affect firms' decisions to sell stock to finance investment spending C) are predictable D) are unimportant to decision makers Answer: B Diff: 2 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 26) A ________ is an example of a security, which is a claim on future income or ________. A) bond; interest rate B) bond; debt C) stock; assets D) stock; debt Answer: C Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 27) On ________, October 19, 1987, the market experienced its worst one-day drop in its entire history with the S&P/TSX Composite falling by 11 percent. A) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" Answer: D Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 28) Fluctuations in stock prices ________. A) increased individuals' willingness to spend B) had no effect on individual spending C) reduced individuals' willingness to spend D) increased individual wealth Answer: C Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets

29) The S&P/TSX Composite reached a peak of over 14,000 in both ________. A) 2000 and 2002 B) 2002 and 2005 C) 2008 and 2011 D) 2002 and 2011 Answer: C Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 30) Why is it important to understand the bond market? Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Diff: 2 Type: SA Page Ref: 3 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets 31) What is a stock? How do stocks affect the economy? Answer: A stock represents a share of ownership of a corporation, or a claim on a firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment. Diff: 2 Type: SA Page Ref: 3-4 Skill: Recall Objective List: 1.1 Outline what is involved in the study of financial markets

1.2

Why Study Financial Institutions and Banking?

1) Channelling funds from individuals with savings to those desiring funds when the saver does not purchase the borrower's security is known as ________. A) barter B) redistribution C) financial intermediation D) taxation Answer: C Diff: 2 Type: MC Page Ref: 5 Skill: Applied Objective List: 1.2 Identify what it means to study financial institutions 2) A financial crisis is ________. A) not possible in the modern financial environment B) a major disruption in the financial markets C) a feature of developing economies only D) typically followed by an economic boom Answer: B Diff: 1 Type: MC Page Ref: 5 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 3) Banks are important to the study of money and the economy because they ________. A) channel funds from investors to savers B) have been a source of rapid financial innovation C) are the only important financial institution in the US economy D) create inflation Answer: B Diff: 1 Type: MC Page Ref: 5 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 4) Financial crises are characterized by ________. A) surging employment B) hyperinflation C) decline in asset prices D) high profits in the financial sector Answer: C Diff: 1 Type: MC Page Ref: 5 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions

5) Chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires ________. A) no longer provide financial intermediation B) since deregulation now provide services only to small depositors C) accept deposits and make loans D) create fluctuations in the stock market Answer: C Diff: 2 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 6) Banks ________. A) are the smallest of the financial intermediaries B) are the largest financial intermediaries C) are barred from providing financial intermediation services D) can only provide services to corporations Answer: B Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 7) Financial institutions that accept deposits and make loans include ________. A) exchanges B) banks C) over-the-counter markets D) finance companies Answer: B Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 8) Which of the following are the largest financial intermediaries in the Canadian economy? A) Insurance companies B) Finance companies C) Banks D) Mutual funds Answer: C Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions

9) The term "bank" generally includes all of the following institutions except ________. A) chartered banks B) credit unions C) trust and mortgage loan companies D) finance companies Answer: D Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 10) The delivery of financial services electronically is called ________. A) e-business B) e-commerce C) e-finance D) e-possible Answer: C Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 11) Financial innovation can lead to ________ and ________. A) phishing; financial gain B) higher interest rates; higher inflation C) higher profits; financial disasters D) lower interest rates; lower inflation Answer: C Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 12) What crucial role do financial intermediaries perform in an economy? Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy. Diff: 1 Type: SA Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions 13) Why is the study of financial innovation important? Answer: Financial innovation shows how creative thinking on the part of financial institutions can lead to higher profits. Diff: 2 Type: SA Page Ref: 6 Skill: Recall Objective List: 1.2 Identify what it means to study financial institutions

1.3

Why Study Money and Monetary Policy?

1) Money is defined as ________. A) bills of exchange B) anything that is generally accepted in payment for goods and services or in the repayment of debt C) a repository of spending power D) the unrecognized liability of governments Answer: B Diff: 1 Type: MC Page Ref: 6 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 2) The upward and downward movement of aggregate output produced in the economy is referred to as the ________. A) roller coaster B) see saw C) business cycle D) shock wave Answer: C Diff: 1 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 3) Sustained downward movements in the business cycle are referred to as ________. A) inflation B) recessions C) economic recoveries D) expansions Answer: B Diff: 1 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 4) During a recession, output declines resulting in ________. A) lower unemployment in the economy B) higher unemployment in the economy C) no impact on the unemployment in the economy D) higher wages for the workers Answer: B Diff: 1 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates

5) Prior to all recessions, there has been a drop in ________. A) inflation B) the money stock C) the rate of money growth D) interest rates Answer: C Diff: 1 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 6) Evidence from business cycle fluctuations in Canada indicates that ________. A) a negative relationship between money growth and general economic activity exists B) recessions have been preceded by declines in share prices on the stock exchange C) recessions have been preceded by dollar depreciation D) recessions have been preceded by a decline in the growth rate of money Answer: D Diff: 2 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 7) ________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level. A) Monetary B) Fiscal C) Financial D) Systemic Answer: A Diff: 1 Type: MC Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 8) A sharp increase in the growth of the money supply is likely followed by ________. A) a recession B) a depression C) an increase in the inflation rate D) no change in the economy Answer: C Diff: 2 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates

9) Inflation ________. A) can be explained by changes in the price level and money supply B) cannot be explained historically C) is unrelated to monetary variables D) changes in government policy Answer: A Diff: 1 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 10) The average price of goods and services in the economy is called ________. A) the aggregate price level B) inflation C) interest rates D) deflation Answer: A Diff: 1 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 11) It is true that inflation is a ________. A) continual increase in the money supply B) continuous fall in prices C) decline in interest rates D) continual increase in the price level Answer: D Diff: 1 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 12) Which of the following is a true statement? A) Money or the money supply is defined as Bank of Canada notes. B) The average price of goods and services in an economy is called the aggregate price level. C) The inflation rate is measured as the rate of change in the federal government budget deficit. D) The aggregate price level is measured as the rate of change in the inflation rate. Answer: B Diff: 2 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates

13) If ten years ago the prices of the items bought last month by the average consumer would have been much lower, then one can likely conclude that ________. A) the aggregate price level has declined during this ten-year period B) the average inflation rate for this ten-year period has been positive C) the average rate of money growth for this ten-year period has been positive D) the aggregate price level has risen during this ten-year period Answer: D Diff: 2 Type: MC Page Ref: 8 Skill: Applied Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 14) From 1968-2011 the price level in Canada increased more than ________. A) twofold B) threefold C) sixfold D) ninefold Answer: C Diff: 2 Type: MC Page Ref: 8 Skill: Applied Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 15) Complete Milton Friedman's famous statement, "Inflation is always and everywhere a ________ phenomenon." A) recessionary B) discretionary C) repressionary D) monetary Answer: D Diff: 1 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 16) There is a ________ association between inflation and the growth rate of money ________. A) positive; demand B) positive; supply C) negative; demand D) negative; supply Answer: B Diff: 1 Type: MC Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates

17) Evidence from Canada and other foreign countries indicates that ________. A) there is a strong positive association between inflation and growth rate of money supply over long periods of time B) there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon" C) countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant D) money growth is clearly unrelated to inflation Answer: A Diff: 2 Type: MC Page Ref: 9 Skill: Applied Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 18) Countries with low inflation rates include ________. A) Canada, Sweden and the United States B) Canada, Ukraine and the United States C) Turkey, Ukraine and Zambia D) Turkey, Ukraine and Canada Answer: A Diff: 1 Type: MC Page Ref: 9 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 19) Countries that experience very high rates of inflation may also have ________. A) balanced budgets B) rapidly growing money supplies C) falling money supplies D) constant money supplies Answer: B Diff: 2 Type: MC Page Ref: 9 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 20) In the 1970s, in Canada, interest rates trended upward. During this same time period, A) the rate of money growth declined B) the rate of money growth increased C) the government budget deficit (expressed as a percentage of GNP) trended downward D) inflation fell Answer: B Diff: 2 Type: MC Page Ref: 10 Skill: Applied Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 21) The management of money and interest rates is called ________ policy and is conducted by

a nation's ________ bank. A) debt; superior B) fiscal; superior C) fiscal; central D) monetary; central Answer: D Diff: 1 Type: MC Page Ref: 10 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 22) ________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Risk Management D) Systemic Answer: B Diff: 1 Type: MC Page Ref: 10 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 23) When tax revenues are greater than government expenditures, the government has a budget ________. A) crisis B) deficit C) surplus D) revision Answer: C Diff: 1 Type: MC Page Ref: 10 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 24) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A) deficit B) surplus C) surge D) surfeit Answer: A Diff: 1 Type: MC Page Ref: 10 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 25) Budget deficits can be a concern because they might ________. A) ultimately lead to higher inflation

B) lead to lower interest rates C) lead to a slower rate of money growth D) lead to higher bond prices Answer: A Diff: 1 Type: MC Page Ref: 10 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 26) Budget deficits are important because deficits ________. A) cause bank failures B) always cause interest rates to fall C) may lead to a financial crisis D) always cause prices to fall Answer: C Diff: 1 Type: MC Page Ref: 11 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 27) What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession? Answer: During a recession, output declines and unemployment increases. Prior to every recession in Canada the money growth rate has declined, however, not every decline is followed by a recession. Diff: 2 Type: SA Page Ref: 7 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates 28) Describe the relationship between the aggregate price level and the growth rate in money supply. Can the relationship be used to explain inflation? Answer: The price level and the money supply generally move closely together. There is a positive relationship between inflation and the growth rate of the money supply. Friedman says that "inflation is always and everywhere a monetary phenomenon." Diff: 2 Type: SA Page Ref: 8 Skill: Recall Objective List: 1.3 Describe why money is a major influence on inflation, business cycles, and interest rates

1.4

Why Study International Finance?

1) Canadian companies can borrow funds ________. A) only in Canadian financial markets B) only in foreign financial markets C) in both Canadian and foreign financial markets D) only from the Canadian government Answer: C Diff: 1 Type: MC Page Ref: 11 Skill: Recall Objective List: 1.4 Describe the importance of international finance? 2) The price of one country's currency in terms of another country's currency is called the ________. A) foreign exchange rate B) interest rate C) TSE index D) inflation rate Answer: A Diff: 1 Type: MC Page Ref: 11 Skill: Recall Objective List: 1.4 Describe the importance of international finance? 3) The foreign exchange rate is ________. A) determined by the banks B) not important to Canadian individuals C) the relative price of two currencies D) the ratio of the foreign aggregate price level to the domestic aggregate price level Answer: C Diff: 1 Type: MC Page Ref: 11 Skill: Recall Objective List: 1.4 Describe the importance of international finance? 4) The market where one currency is converted into another currency is called the ________ market. A) security B) bond C) derivatives D) foreign exchange Answer: D Diff: 1 Type: MC Page Ref: 11 Skill: Recall Objective List: 1.4 Describe the importance of international finance?

5) Everything else constant, a stronger Canadian dollar will mean that ________. A) vacationing in England becomes more expensive B) vacationing in England becomes less expensive C) French cheese becomes more expensive D) Japanese cars become more expensive Answer: B Diff: 2 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 6) Which of the following is most likely to result from a stronger Canadian dollar? A) Canadian goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. B) Canadian goods exported aboard will cost more in foreign countries and so foreigners will buy more of them. C) Canadian goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them. D) Canadians will purchase fewer foreign goods. Answer: C Diff: 2 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 7) Everything else held constant, a weaker Canadian dollar will likely hurt ________. A) textile exporters in Quebec B) wheat farmers in Saskatchewan that sell domestically C) automobile manufacturers in Ontario that use domestically produced inputs D) furniture importers in British Columbia Answer: D Diff: 2 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 8) Everything else held constant, Canadians who love French wine benefit most from ________. A) a decrease in the dollar price of euros B) an increase in the dollar price of euros C) a constant dollar price for euros D) a ban on imports from Europe Answer: A Diff: 2 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance?

9) Everything else held constant, a stronger Canadian dollar benefits ________ and hurts ________. A) Canadian businesses; Canadian consumers B) Canadian businesses; foreign businesses C) Canadian consumers; Canadian businesses D) foreign businesses; Canadian consumers Answer: C Diff: 2 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 10) From 1973 to 1986, the Canadian dollar ________ in value, thereby benefiting Canadian ________. A) appreciated; consumers B) appreciated, businesses C) depreciated; consumers D) depreciated, businesses Answer: D Diff: 1 Type: MC Page Ref: 11 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 11) When in 1985 a British pound cost approximately C$1.30, a Shetland sweater that cost 100 British pounds would have cost $130. With a weaker Canadian dollar, the same Shetland sweater would have cost ________. A) less than $130 B) more than $130 C) $130, since the exchange rate does not affect the prices that Canadian consumers pay for foreign goods D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar Answer: B Diff: 2 Type: MC Page Ref: 12 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 12) Everything else held constant, a decrease in the value of the Canadian dollar relative to all foreign currencies means that the price of foreign goods purchased by Canadians ________. A) increases B) decreases C) remains unchanged D) increases initially but then decreases Answer: A Diff: 1 Type: MC Page Ref: 12 Skill: Recall Objective List: 1.4 Describe the importance of international finance? 13) Canadian farmers who sell beef to Europe benefit most from ________.

A) a decrease in the Canadian dollar price of euros B) an increase in the Canadian dollar price of euros C) a constant Canadian dollar price for euros D) a European ban on imports of Canadian beef Answer: B Diff: 2 Type: MC Page Ref: 12 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 14) If the Canadian dollar price of a euro increases from $1.00 to $1.10, then, everything else held constant, ________. A) a European vacation becomes less expensive B) a European vacation becomes more expensive C) the cost of a European vacation is not affected D) foreign travel becomes impossible Answer: B Diff: 2 Type: MC Page Ref: 12 Skill: Applied Objective List: 1.4 Describe the importance of international finance? 15) From 2002-2011, the dollar strengthened in value against other currencies. Who was helped and who was hurt by this strong dollar? Answer: Canadian consumers benefitted because imports were cheaper and consumers could purchase more. Canadian businesses and workers in those businesses were hurt as domestic and foreign sales of Canadian products fell. Diff: 2 Type: SA Page Ref: 12 Skill: Applied Objective List: 1.4 Describe the importance of international finance?

1.5

Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

1) The most comprehensive measure of aggregate output is ________. A) gross domestic product B) net national product C) the TSE Index D) national income Answer: A Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 2) The gross domestic product is the ________. A) the value of all wealth in an economy B) the value of all goods and services sold to other nations in a year C) the market value of all final goods and services produced in an economy in a year D) the market value of all intermediate goods and services produced in an economy in a year Answer: C Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 3) Which of the following items are not counted in Canadian GDP? A) Your purchase of a new Ford Mustang B) Your purchase of new tires for your old car C) GM's purchase of tires for new cars D) A foreign consumer's purchase of a new Ford Mustang Answer: C Diff: 2 Type: MC Page Ref: 18 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 4) If an economy has aggregate output of $2 trillion, then aggregate income is ________. A) $1 trillion B) $2 trillion C) $3 trillion D) $4 trillion Answer: B Diff: 2 Type: MC Page Ref: 18 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 5) When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as ________.

A) real GDP B) the GDP deflator C) nominal GDP D) the index of leading indicators Answer: C Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 6) Nominal GDP is output measured in ________ prices while real GDP is output measured in ________ prices. A) current; current B) current; fixed C) fixed; fixed D) fixed; current Answer: B Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 7) GDP measured with constant prices is referred to as ________. A) real GDP B) nominal GDP C) the GDP deflator D) industrial production Answer: A Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 8) If your nominal income in 2013 was $30,000, and prices doubled between 2002 and 2013, to have the same real income, your nominal income in 2002 must be ________. A) $10,000 B) $15,000 C) $20,000 D) $100,000 Answer: B Diff: 2 Type: MC Page Ref: 19 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 9) If your nominal income in 2002 is $50,000, and prices increase by 50 percent between 2002 and 2013, then to have the same real income, your nominal income in 2013 must be ________. A) $50,000

B) $75,000 C) $100,000 D) $150,000 Answer: B Diff: 2 Type: MC Page Ref: 19 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 10) To convert a nominal GDP to a real GDP, you would use ________. A) the PCE deflator B) the CPI measure C) the GDP deflator D) the PPI measure Answer: C Diff: 1 Type: MC Page Ref: 19 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 11) If nominal GDP in 2013 is $10 trillion, and 2013 real GDP in 2002 prices is $9 trillion, the GDP deflator price index is ________. A) 1 B) 1.1 C) 11 D) 100 Answer: C Diff: 2 Type: MC Page Ref: 19 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 12) When prices are measured in terms of fixed (base-year) prices they are called ________ prices. A) nominal B) real C) inflated D) aggregate Answer: B Diff: 1 Type: MC Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 13) The measure of the aggregate price level that is most frequently reported in the media is the ________. A) GDP deflator B) producer price index

C) consumer price index D) household price index Answer: C Diff: 1 Type: MC Page Ref: 19 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 14) To calculate the growth rate of a variable, you will ________. A) calculate the percentage change from one time period to the next B) calculate the difference between the two variables C) add the ending value to the beginning value D) divide the increase by the number of time periods Answer: A Diff: 1 Type: MC Page Ref: 19 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 15) If real GDP grows to $9.5 trillion in 2014 from $9 trillion in 2013, the growth rate for real GDP is ________. A) 6 percent B) 10 percent C) 5 percent D) 0.5 percent Answer: A Diff: 2 Type: MC Page Ref: 20 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 16) If real GDP in 2013 is $10 trillion, and in 2014 real GDP is $9.5 trillion, then real GDP growth from 2013 to 2014 is ________. A) 0.5 percent B) 5 percent C) 0 percent D) -5 percent Answer: D Diff: 2 Type: MC Page Ref: 20 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 17) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is defined as A) =( )/ B) = (Pt + 1 - Pt - 1) /Pt - 1

C) = (Pt + 1 - Pt) /Pt D) = (Pt - Pt - 1) /Pt Answer: A Diff: 3 Type: MC Page Ref: 20 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 18) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is ________. A) 20 percent B) 10 percent C) 11 percent D) 120 percent Answer: B Diff: 3 Type: MC Page Ref: 19 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 19) If the CPI is 120 in 2002 and 180 in 2012, then between 2002 and 2012, prices have increased by ________. A) 180 percent B) 80 percent C) 60 percent D) 50 percent Answer: D Diff: 2 Type: MC Page Ref: 20 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

20) If the CPI in 2012 is 200, and in 2013 the CPI is 180, the rate of inflation from 2012 to 2013 is ________. A) 20 percent B) 10 percent C) 0 percent D) -10 percent Answer: D Diff: 2 Type: MC Page Ref: 20 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 21) What is measured by the Gross Domestic Product (GDP)? what is included and what is excluded in the calculation of GDP? Answer: GDP is the most commonly used measure of aggregate output. It is the market value of all final goods and services produced in the economy during the course of a year. In calculating the GDP we exclude two sets of items. First, we exclude all goods that have been produced in the past, and not in the measured year, and second we exclude all intermediate goods as their value is included in the value of the final goods. Diff: 2 Type: SA Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 22) Are the following transactions included in the calculation of the GDP? Why? a. books you buy from the university bookstore b. purchase of government bonds c. writing a cheque to your dentist for his services d. purchase by a car manufacturer of tyres for the produced vehicles Answer: a. Yes, it is a purchase of a final good, the book. b. No, purchases of stocks and bonds are not included in the calculation of the GDP. c. Yes, it is a service that should be included in the GDP. d. No, because the tyres for the car manufacturer are an intermediate good and as such it is not included in the calculation of the GDP. Diff: 2 Type: SA Page Ref: 18 Skill: Applied Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

23) What is the aggregate income? How is the aggregate income related to the gross domestic product? Answer: Aggregate income is the total income of factors of production. It is equal to aggregate output. Diff: 2 Type: SA Page Ref: 18 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 24) Why is the real GDP a better measure of economic activity than nominal GDP? Answer: Real GDP is a more reliable measure because values are measured in terms of fixed prices. Diff: 2 Type: SA Page Ref: 19 Skill: Recall Objective List: Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate


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