Docsity
Log inSign up
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Docsity AI
Docsity AI
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search for your university

Find the specific documents for your university's exams

Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

Econ 310 Exam 02: Practice Exam Questions and Answers, Exams of Banking and Finance

George Mason University (GMU)Banking and Finance

Practice exam questions and answers for Economics 310 students. The exam covers topics such as loan commitments, Bastiat's broken window theory, credit rationing, international trade, and fixed exchange rates. Students are expected to answer multiple choice, true/false, and short answer questions.

Typology: Exams

2019/2020

Uploaded on 11/25/2020

koofers-user-13g
koofers-user-13g 🇺🇸

5

(2)

10 documents

1 / 5

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
Name: PRACTICE
Econ 310
EXAM 02—KEY
•There are 110 possible points on this exam, but the exam is out of 100.
•You have one hour and fifteen minutes to complete this exam, but you should be able to
finish it in less than that.
•Please turn off all cell phones and other electronic equipment.
•You are allowed a calculator for the exam.
•Be sure to read all instructions and questions carefully.
•You are allowed one 3’’ x 5’’ note card to assist you in the exam.
•Remember to show all your work.
•Recall basic logic. “Water is wet” is a true statement. “Water is wet and leopards have
stripes” is a false statement.
•Please print clearly and neatly.
pf3
pf4
pf5

Partial preview of the text

Download Econ 310 Exam 02: Practice Exam Questions and Answers and more Exams Banking and Finance in PDF only on Docsity!

Name: PRACTICE Econ 310

EXAM 02—KEY

  • There are 110 possible points on this exam, but the exam is out of 100.
  • You have one hour and fifteen minutes to complete this exam, but you should be able to finish it in less than that.
  • Please turn off all cell phones and other electronic equipment.
  • You are allowed a calculator for the exam.
  • Be sure to read all instructions and questions carefully.
  • You are allowed one 3’’ x 5’’ note card to assist you in the exam.
  • Remember to show all your work.
  • Recall basic logic. “Water is wet” is a true statement. “Water is wet and leopards have stripes” is a false statement.
  • Please print clearly and neatly.

Part I: Multiple Choice. Circle the letter that corresponds to the best answer. 5 points each.

  1. A loan commitment tends to foster long term relationships and: a. Combats adverse selection. b. Combats moral hazard. c. Acts as a way to learn if a borrower is engaging in risky behavior. d. A & C e. None of the above. Because banks choose who they give the standing option for a loan to, they are less likely to fall into an adverse selection problem.
  2. Bastiat uses the story of the broken window to illustrate: a. The role of present value in investment. b. What stock brokers and bankers contribute to the marketplace. c. The idea of opportunity costs. d. A & C e. None of the above One of the most important ideas in economics, we use opportunity costs to calculate present value. But Bastiat never talks about present value in his broken window story.
  3. Credit rationing: a. Combats moral hazard. b. Combats adverse selection. c. Sets the interest rate below equilibrium. d. B & C e. None of the above. By setting the interest rate below equilibrium, the bank improves the pool of applicants applying for loans (con artists care little what the interest rate is but people who plan to pay back the loan do) and this increases the likelihood of avoiding the adverse selection problem.
  4. The law of one price claims that prices between ______ products in different countries will ______, assuming low transportation costs. a. identical, diverge b. identical, converge c. different, diverge d. different, converge e. None of the above If two identical goods can be moved seamlessly between two points, then the price of that good in one place will be the same as the price of that good in the other place.
  5. Once a currency leaves its domestic country, which of these can it not be used for?

False. The trade deficit is not debt but merely the arbitrary distinction between

capital flow and net exports. If the trade deficit was debt, then so would the trade

deficits between domestic cities and even people. For example, I have a trade

deficit with Wegman’s but I have no debt concerning the grocery store.

  1. According to Tyler Cowen (“So We Thought. But Then Again…”), the major principal- agent problem during the housing bubble was “predatory lending.”

False. Cowen argues “predatory borrowing” was a bigger problem for the

principals regarding the agents. Many (as much as 70%) of loan applicants

outright lied about their income, sometimes doubling or tripling the actual value.

It’s hard to argue banks lent to those they knew couldn’t afford the payments when

they were vastly misinformed about the borrower’s income.

  1. An increase in the expected demand for exports from a country causes that country’s currency to appreciate.

True. As the country’s exports increase, that increases the demand for their

currency. Like any upward shift in the demand curve, this increases the price of the

currency. Savvy investors will predict this basic causation and, upon knowing the

demand for exports will increase, buy the country’s currency thus causing the

currency to appreciate.

  1. Both your attire and your bank statements are important when trying to get a loan.

True. Your bank statements are how the bank engages in screening—trying to make

sure you can afford the loan. Your attire is signaling. Dressing nicely demonstrates

to the loan officer that you take this loan seriously, will use the money responsibly,

and will pay it back in due course.

Part III: Short Answer. Answer the following. 15 points each.

  1. Suppose J.M. Meriwether approached you with an exciting new business deal. Pay him $10,000 now and he’ll return your money in four years plus $5,000 (assume you have the money make this investment). The current interest rate is 3%. Setting aside issues of risk and inflation, use the present value equation to determine if his offer is a good deal.

If you make this deal, in four years you’ll have $15,000. Thus the present value of

that $15,000 is,

4

In other words, this investment right now is worth over $13,000 but Meriwether is

offering it for only $10,000. Thus, this is a good deal.

  1. Carefully explain how a country maintains a fixed exchange rate.

Exchange rates—fixed or not—are always under pressure from the international

market. While flexible exchange rates are allowed to change with market

pressures, fixed ones—by their very nature—do not want to change. To maintain

the same rate in light of economic forces, the government steps in. Fixed exchange

rates are maintained through impersonating the aspect of the market which pushes

the exchange rate in the opposite direction that the rest of the market pushes it.

All fixed exchange rate regimes have an official reserve transaction balance, or a

bank of currency from the country their currency is anchored to. If the currency

market puts upwards pressure on the fixed currency (perhaps domestic productivity

is expected to increase or the price level is falling), then the currency is

undervalued. There is a shortage of the fixed currency. Thus the government prints

more of its currency and uses it to buy the anchor currency. It simulates people

giving up the currency, thus alleviating the shortage.

If currency market puts downwards pressure on the fixed currency (perhaps

domestic productivity is expected to decrease or the price level is increasing), then

the currency is overvalued. Now the government can dip into its official reserves

transaction balance and use the anchor currency to buy up domestic money. Once

again, this simulates the side of the market that isn’t happening as much—this time

it’s people desiring the fixed currency. Thus the surplus of the currency is

eliminated.

Note the critical role the official reserves transaction balance plays. Without it, an

overvalued currency will continue to be overvalued, the regime cannot be

defended, and the currency will have to be revalued.