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Flashcards in Economic Deck (54)
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1

Which of the following describes the hedging approach to financing?

A. Maturity dates of financing instruments are staggered so that they mature in a steady, predictable fashion when it is expected that funds will be needed.

B. The firm takes out insurance to protect itself against uneven cash flows.

C. Each asset is offset with a financing instrument of the same approximate maturity or duration.

D. Each asset is offset with either a put or a call.

C. Each asset is offset with a financing instrument of the same approximate maturity or duration.

Under the hedging approach the length of the financing term is matched to the maturity or duration of assets financed. Long-term debt is used to finance long-term assets and short-term debt is used to finance short-term assets.

Thus, each asset is offset with a financing instrument of the same approximate maturity.

2

Globalization is a process by which nations of the world become integrated through global networks of communication. Its current success is tied to a number of socioeconomic effects, with one of the key effects being:

A. an understanding that the success of the emerging economies is more than simply the cost advantage they have due to having relatively low-cost labor.

B. the relatively large labor force in emerging markets and declining birth rates that have historically been associated with dynamic positive economic change.

C. an undervalued currency in emerging economies that would stimulate exports and strong investment in infrastructure.

D. the fact that innovation blowbacks as the low-priced, high-quality products developed for the emerging economics now will be effectively marketed and sold in the developed world.

B. the relatively large labor force in emerging markets and declining birth rates that have historically been associated with dynamic positive economic change.

Socioeconomic effects are the social and economic experiences and realities that help mold one's personality, attitudes, and lifestyle. Declining birth rates reduce the dependency ratio, and the large labor force tends to keep wages low as economic activity expands. Most of the world's currently developed economies were in this phase of the demographic cycle when they began their economic expansion.

3

An individual had been working for a firm that supplies parts to the automotive industry. In which of the following circumstances would be said that the individual was structurally unemployed?

A. “I was laid off because there is a recession in the auto industry.”

B. “I was laid off due to the model changeover at the auto plant.”

C. “I was laid off because my firm installed robotic technology that allowed them to reduce production costs.”

D. “I was laid off because my company closed my plant.”

C. “I was laid off because my firm installed robotic technology that allowed them to reduce production costs.”

Structural unemployment is defined as unemployment due to workers not having the skills demanded by employers, and workers who cannot easily move to the location where jobs are available. In this case, it would not be feasible for the worker to work as fast and as long as the robotic technology.

4

In relation to the role of capital in mitigating financial risk, it has been strongly suggested that in the new regulatory environment, regulators treat capital:

A. as a necessary component of risk margin reserves that should be held to deal with black swan events.

B. as being inadequate on a prima facie basis and require that regulators mandate significantly higher levels of capital that would be fixed in nature to convince investors that the institutions could absorb risk.

C. as being inadequate and thus causing regulators to need to monitor and regulate compensation packages so that the incentive structure does not distort the proper evaluation of risk and cause management not to make appropriate contributions to capital.

D. as a shock absorber and allow firms to draw down capital during periods of market stress that would be expected to be replenished when market conditions improve.

D. as a shock absorber and allow firms to draw down capital during periods of market stress that would be expected to be replenished when market conditions improve.

Regulators are looking to be more proactive in dealing with potential bubbles in financial markets and, as a result, are looking at primary capital to serve as a “shock absorber” as early warning signs that a bubble might occur.

Regulators are concerned about the need to increase capital requirements for any market participant where remuneration and incentives focus excessively on short-term results. However, that is not the focus of this question. Risk margin capital is designed to be available in the event of high uncertainty or the occurrence of “black swan” events.

5

All other things being equal, movement along a supply curve occurs if:

A. the number of sellers increases or decreases.

B. the price of resources needed in the production of the product is expected to increase.

C. technology in the production of the product improves.

D. the price for the product increases or decreases.

D. the price for the product increases or decreases.

Movement along the supply curve occurs when the price for the product increases or decreases if all other factors remain constant. The supply curve shifts (a change in demand) when there are changes in other supply determinants such as technology, the prices of resources, the expectation of future prices, the number of sellers, and in taxes and other government restriction or subsidies.

6

As per FASB ASC 815, if an entity engages in a hedge against the exposure to the variable cash flow of a forecasted transaction, the entity would:

A. recognize the gain or loss as earnings in the period of loss together with the offsetting loss or gain on the hedged item attributable to the risk being hedged, in order to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

B. report the gain or loss in other comprehensive income as part of a cumulative translation adjustment.

C. recognize the gain or loss in earnings during the period of change.

D. recognize the effective portion of the derivative's gain or loss initially as a component of other comprehensive income, and subsequently reclassify it into earnings when the forecasted transaction affects earnings.

D. recognize the effective portion of the derivative's gain or loss initially as a component of other comprehensive income, and subsequently reclassify it into earnings when the forecasted transaction affects earnings.

FASB ASC 815 specifically indicates that for a derivative designated as hedging the exposure to variable cash flow of a forecasted transaction (i.e., a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any ineffective portion of the gain or loss is reported in earnings immediately.

If the hedge is designated as a hedging exposure to changes in fair value of a recognized asset or liability (i.e., a fair value hedge), the gain of loss is recognized as earnings in the period of change together with an offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

If the derivative is designated as hedging the foreign currency exposure of the firm's net investment in foreign operations, the gain or loss is reported in other income as part of the cumulative translation adjustment.

7

Bank reserves would be decreased by:

A. an increase in Federal Reserve float.

B. a sale of government securities by the Federal Reserve.

C. a loan to member banks by the Federal Reserve.

D. a purchase of gold by the Federal Reserve.

B. a sale of government securities by the Federal Reserve

The reserve level is affected by the Federal Reserve's open market operations. When the Federal Reserve sells a security to a household or firm, it receives the buyer's check drawn against its own deposits in a commercial bank. The Federal Reserve presents the check to the commercial bank for payment. On payment of the check, the commercial bank's reserves are reduced.

8

Supply chain metrics are created to measure the performance of the supply chain. If a firm developed metrics to measure things such as fill rates and on-time delivery, we would assume that they are trying to measure:

A. manufacturing flexibility.

B. supplier relationships.

C. customer service.

D. the flexibility the firm has to respond to environmental changes.

C. customer service.

One key element of customer service management is to provide customers with real-time information as to product availability and delivery and customer satisfaction could be measured by metrics such as fill-rates and on-time delivery.

9

Division A currently makes a widget. The following is information related to the production of the widgets:

Production capacity 100,000 units per year
Current sales level 80,000 units per year
Selling price to outside customers $20 per unit
Variable costs per unit $12 per unit
Total fixed costs $600,000
Division B wishes to purchase 15,000 widgets from Division A for $16 per unit. Division A has the capacity to handle all of Division B's needs without changing either fixed or variable costs nor losing any sales to outside customers. Division B currently purchases widgets from the outside for $18 per unit. If Division A accepted the $16 internal price and Division B purchases the widgets from Division A, the company as a whole will be:

A. $30,000 better off each period.

B. $90,000 better off each period.

C. $30,000 worse off each period.

D. $60,000 worse off each period.

B. $90,000 better off each period.

Division A will have an addition
Contribution Margin of $4 per widget
sold internally ($4 x 15,000) $60,000

Division B will have an addition
saving in variable cost of $2 per widget
Purchased internally ($2 x 15,000) 30,000
Savings to Company if purchased Division B
purchases the widget from Division A $90,000

10

When there is equilibrium in a monopolistically competitive industry, a firm:

A.
will operate efficiently at minimum average total cost.

B.
will not engage in advertising to promote product differentiation.

C.
will operate inefficiently with price greater than marginal revenue.

D.
will be able to make economic profits in the long run.

C. will operate inefficiently with price greater than marginal revenue

Given free entry and exit in a monopolistically competitive industry, firms only earn normal profits in the long-run. However, since the firm faces a downward-sloping demand curve with MR

11

The Bytax Company and the Tytax Company are both members of the same multinational corporation (MNC). The Bytax Company has a home-country 50% tax rate and the Tytax Company has a home-country 20% income tax rate. The Bytax Company desires to purchase a component part from the Tytax Company. An acceptable range for the transfer price has been established to be between $300 and $600 per unit. The following statement is true regarding the optimal transfer price:

A. The Bytax Company as well as the MNC will maximize earnings by setting the transfer price at $300 per unit.

B. The Bytax Company as well as the MNC will maximize earning by setting the transfer price at $600 per unit.

C. The Tytax Company as well as the MNC will maximize earnings by setting the transfer price at $300 per unit.

D. The Tytax Company as well as the MNC will maximize earning by setting the transfer price at $600 per unit.

D. The Tytax Company as well as the MNC will maximize earning by setting the transfer price at $600 per unit.

The Bytax Company (purchasing subsidiary) will maximize earnings by having the transfer price set at the lowest possible price. The Tytax Company (selling subsidiary) will maximize earning by having the transfer price set at the highest possible price. The multinational corporation (MNC) will benefit by having the higher income shifted to the Company with the lowest home-country tax rate; therefore, the Tytax Company as well as the MNC will maximize earning by setting the transfer price at $600 per unit since the Tytax Company has the lower home-country tax rate of 20%.

12

Which of the following variables is not one of the variables traditionally found in national income calculations?

A. Disposable income

B. Gross domestic product

C. Net domestic product

D. Real per capita gross domestic product

D. Real per capita gross domestic product

Real per capita gross domestic product is gross domestic product for a particular year adjusted for inflation compared to a base year using a price index. This adjusted number is then divided by population to derive real per capita GDP (gross domestic product). This measure is often used as an estimate of changes in well-being in a society over time, but it is not one of the variables one would traditionally see in national income calculations.

13

Which of the following scenarios would encourage a company to use short-term loans to retire its 10-year bonds that have five years until maturity?

A. The company expects interest rates to increase over the next five years.

B. Interest rates have increased over the last five years.

C. Interest rates have declined over the last five years.

D. The company is experiencing cash flow problems.

C. Interest rates have declined over the last five years.

If interest rates have declined, refunding with short-term debt may be appropriate. The bonds pay a higher interest rate than the new short-term debt. Assuming that rates continue to fall, the short-term debt can itself be refunded with debt having a still lower interest charge. The obvious risk is that interest rates may rise, thereby compelling the company to choose between paying off the debt or refunding it at higher rates.

14

Debt-servicing problems of less developed countries that primarily sell raw materials to the United States would be eased by:

A. a recession in the United States with declines in interest rates.

B. an expanding United States economy with stable money supply growth.

C. an expansion of the lending authority of the World Bank.

D. a significant increase in the level of U.S. tariffs.

B. an expanding United States economy with stable money supply growth.

An expanding United States economy with stable money supply growth would maintain a steady demand for raw materials of less developed countries. The moneys earned from the sale of raw materials will aid in servicing the debt of less developed nations.

15

The U.S. inflation rate is expected to be 5% per annum while the Italian lira is expected to depreciate against the U.S. dollar by 10% during the same period. During the next year, an Italian firm importing from its U.S. parent can expect its lira cost for these imports to:

A. decrease by about 5%.

B. increase by about 5%.

C. increase by about 15%.

D. decrease by about 15%.

C. increase by about 15%.

Taking the two events in order, if the inflation in the United States is expected to be 5%, then according to the purchasing power parity theorem of exchange rates, the exchange rate between the United States and Italy will increase by 5% (1 lira will increase in worth by 5% more dollars). On top of this expected inflation, is a 10% depreciation of the lira against the dollar, which will drive up the exchange rate another 10%, on top of the 5% inflation change.
Mathematically we have:
$1.00 x 1.05 = $1.05 $1.05 x 1.10 = $1.155
Therefore, the price of imported goods to Italy will rise from $1.00 to $1.1550, an overall increase of about 15%.

16

The Federal Financial Institutions Examination Council (FFIEC) has suggested that regulated institutions should engage in scenario planning and undertake stress tests to determine the impact of a series of possible changes in market interest rates. If the institution did a test for basis risk, they would be dealing with:

A. instantaneous and significant changes in the levels of interest rates.

B. changes in the relationship between key market interest rates.

C. changes in the shape and slope of the yield curve.

D. substantial changes in interest rates over time.

B. changes in the relationship between key market interest rates.

The FFIEC has suggested that institutions undertake stress tests for a variety of types of interest rate risks. Testing for basis risk would involve testing for the impact of the changes in relationships between key market interest rates.

Other tests would include tests for instantaneous rate shocks that deal with instantaneous and significant changes in the level of interest rates;

prolonged rate shocks that deal with substantial changes in rates over a longer period of time; and yield curve risk that deals with the impact of a changing shape of the yield curve.

Regulators understand that not all financial institutions will be required to develop the full range of scenarios; however, tests of interest rate shocks of significant magnitude should be run by all institutions, regardless of the institution's size or complexity.

17

Consider a world consisting of only two countries, Canada and Italy. Inflation in Canada in one year was 5%, and in Italy 10%. Which one of the following statements about the Canadian exchange rate (rounded) during that year will be true?

A.
The Canadian dollar will appreciate by 5%.

B.
The Canadian dollar will depreciate by 5%.

C.
The Canadian dollar will depreciate by 15%.

D.
The Canadian dollar will appreciate by 15%.

A. The Canadian dollar will appreciate by 5%.

The factors which affect exchange rates are changes in tastes (demand for each other's goods), changes in relative income, changes in relative prices (determined by respective inflation rates), speculation, and changes in real interest rates. In this case, there is a change in relative prices, as the two countries have differing inflation rates. If inflation is higher in Italy, Canadian goods will become relatively cheaper and Italian demand for Canadian goods will rise. This increases demand for the Canadian dollar and supply of the Italian lira, causing the Canadian dollar to appreciate and the Italian lira to depreciate. The difference in inflation rates is 5% (Italy's 10% minus Canada's 5%), so the Canadian dollar appreciates by 5%.

18

Which of the following formulas should be used to calculate the economic rate of return on common stock?

A. (Dividends + Change in price) ÷ Beginning price

B. (Net income - Preferred dividend) ÷ Common shares outstanding

C. Market price per share ÷ Earnings per share

D. Dividends per share ÷ Market price per share

A. (Dividends + Change in price) ÷ Beginning price

The economic rate of return is a percentage measure of the total return received by the investor. This is determined by the following formula:

[Dividends received + (Ending price - Beginning price)] ÷ Beginning price

19

A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's checking account earns interest at an annual rate of 2%. Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?

A. 6.00%

C. 6.44%

C. 6.66%

D. 7.11%

C. 6.44%

If a firm borrows $250,000 but is required to maintain $50,000 as a minimum compensating balance, then the firm only has use of $200,000, but is paying 6% interest on the entire $250,000. To determine the effective interest rate, the interest in dollars ($250,000 × 6%, or $15,000) should be divided by the amount of the loan available to the borrower, the effective loan amount, which is only $200,000. However, there are two issues that further complicate this problem. This company ordinarily maintains a $25,000 balance in its checking account. Therefore, the company will only be out $25,000 ($50,000 - $25,000). This means the effective loan amount is $225,000 ($250,000 - $25,000), not $250,000. Also, the company earns checking account interest which partially offsets the loan interest. The applicable amount on which to determine interest is only the part that pertains to this borrowing, the additional $25,000. The interest on this is $500 (2% × $25,000). The effective interest dollar amount for this borrowing is $14,500 ($15,000 - $500). The effective interest rate is now calculated as:

$14,500 ÷ $225,000 = .0644, or 6.44% effective interest

20

Which of the following is not an example of price discrimination?

A.
A department store charges $10 for an item while the same good sells for $7.75 at a discount store.

B.
An airline charges $175 for 14-day advance purchase ticket round trip between New York and Chicago and charges $400 for a ticket on the same route, purchased two days before the flight.

C.
A restaurant gives seniors a 15% discount if the order their food before 5:30 p.m.

D.
A grocery store provides discount coupons to everyone.

A. A department store charges $10 for an item while the same good sells for $7.75 at a discount store.

Price discrimination requires that consumers can be separated according to elasticity of demand, the firm must be able to prevent resale of the product, and there no cost difference for the product that would explain the different price.

Coupons represent what one might at least call quasi-price discrimination. It is a form of what is known as “third-degree price discrimination.”

The use of coupons is similar in some respects to the “senior discount” in that it is designed to attract the low-end customer who is more price-conscious and is likely to have a more flexible time schedule.

Coupons are available to all (most generally to anyone who subscribes to a newspaper). However, given the opportunity cost of their time, most middle-to-upper income individuals do not avail themselves of an opportunity to “clip the coupons.” Thus, it is the individuals from the lower-income households who, on the average, get the benefit of the coupons.

Department store vs. discount store:
The operative issue here relates to “when those price differences are not justified by cost differences.” The business model of the discount store is to be a low cost (relative to the department store) provider of merchandise. One of the key differences in cost drivers between the two types of stores is the “level of service” that is provided.

The department store charges higher prices due to their higher cost structure. This is independent of the basic “cost of the merchandise” itself which may, or may not, be the same for the two types of stores depending on the various firms' bargaining power with suppliers.

21

The primary sources of funds for sovereign wealth funds would be:

A. the export earnings that are driven by government policies designed to have a strong currency.

B. the Central Bank in an attempt to sterilize the inflationary impact of the inflow of foreign exchange reserves on the money supply of the country.

C. earnings from commodity-based exports and trade surpluses driven by the export of manufactured goods.

D. foreign direct investment attracted by donor governments that hope to gain political leverage by making such investments.

C. earnings from commodity-based exports and trade surpluses driven by the export of manufactured goods.

The primary sources of funds for sovereign wealth funds are export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods. The trade surplus is often tied to the country having a weak currency that causes a country's goods and services to be priced lower in terms of a foreign currency.

Additionally, increases in commodity prices have shifted the terms-of-trade in favor of nations exporting goods from extractive- and commodity-based industries.

22

Induced 引起 investment is the investment made in an economy in response to:

A. a decrease in the short-term interest rate.

B. innovations in industrial technology.

C. changes in the level of national income.

D. a decrease in the minimum lending rate.

C. changes in the level of national income.

The accelerator principle says that small changes in consumer spending can cause big percentage changes in investment. It plays a role in many business-cycle theories and is still used today to explain some of the fluctuation in investment.

In a very simple form, the accelerator principle 加速原理assumes that the ratio of capital to output tends to remain constant. Suppose, for example, that normally it takes $1,000 worth of equipment to manufacture $1,000 worth of shoes each year. Suppose further that each year one-tenth of the equipment wears out. If there is no growth or decline, total investment each year will be $100, all for replacement.

Now suppose that the sales of shoes jump by 5%, to $1,050 each year. The new desired amount of equipment will also rise by 5%, to $1,050. However, to obtain this new level, investment will have to increase by 50%, to $150. Thus, if firms desire a constant capital-to-output ratio, a small percentage change (either an increase or decrease) in final sales, can lead to a big percentage change in investment.

23

A key rationale or cause for the changing pattern of investment in agriculture by sovereign wealth funds would be:

A. to create markets for the output of their farmers in the countries where they are investing by attaching conditions to the loans that require those nations to make specific commodity purchases.

B. to ensure food security in the event that crop shortages would cause export bans that might curtail their ability to import crops.

C. to ensure getting the products at lower prices in the event that crop shortages caused price spikes in commodity markets.

D. to support the countries in which they are investing to produce cash crops that can be used for domestic consumption to provide for a better level of food security for the emerging market economy in which the investment took place as part of United Nations efforts to improve world food security.

B. to ensure food security in the event that crop shortages would cause export bans that might curtail their ability to import crops.

A key driver of SWF (sovereign wealth fund) investment in agriculture is to ensure food security for their country in the event worldwide food shortages would curtail the availability of foodstuffs in traditional agricultural markets. Also, many emerging market economies are not well-suited for adequate agricultural production as they lack sufficient arable land and have an inadequate water supply. Thus, they outsource food production by purchasing and/or leasing land and growing the crops elsewhere in the world and having the output exported to the homeland.

Traditional investment in agriculture involved investment to support shifting production from staple crops to those that could be exported to world agricultural markets to earn a profit for the investing country.

24

Which of the following set of economic variables or factors would not be characteristic of emerging market economies?

A. Low-cost labor and high savings rates

B. Large currency reserves and high investment in infrastructure

C. High debt-to-GDP (gross domestic product) ratios and decreasing trade among and between emerging market countries

D. Significant growth in the number of middle-class consumers and improving supply-chain effectiveness

C. High debt-to-GDP (gross domestic product) ratios and decreasing trade among and between emerging market countries

Some of the key characteristics of emerging market economies include low debt-to-GDP ratios, a significant increase in trade among and between emerging market economies, low-cost labor, high savings rates, large currency reserves, and high investment in infrastructure.

In addition, most emerging market economies are experiencing rapid growth in the number of middle-class consumers while many are improving supply-chain linkages in an attempt to capture more of value-added costs during the production process.

25

An auto parts store must maintain inventory of a wide variety of parts to satisfy its diverse customer base. As a result, the store's inventory has a high risk of obsolescence. Which of the following features would be most desirable to the store's creditors during a financial review of the auto parts store?

A. A high quick ratio

B. A high debt ratio

C. A high number of days sales outstanding in ending trade receivables

D. A low inventory turnover ratio

A. A high quick ratio

The quick ratio (acid-test ratio) is a sterner test for liquidity than the current ratio due to the fact that it includes only the more liquid of the current assets in the calculation. It is a measure of the ability to discharge currently maturing obligations based on the most liquid (quick) assets, so the higher the ratio, the better.

A high debt ratio indicates a relatively large amount of debt. A high number of days sales outstanding means that customers are slow in paying off their accounts. A low inventory turnover ratio means that inventories are sitting in the store and not being sold on a timely basis.

26

Assuming that exchange rates are allowed to fluctuate freely, which one of the following factors would likely cause a nation's currency to appreciate on the foreign exchange market?

A. A relatively rapid rate of growth in income relative to other countries that stimulates imports and depresses exports

B. A high rate of inflation relative to other countries

C. A slower rate of growth in income relative to other countries, which causes imports to lag behind exports

D. Foreign real interest rates that are higher than domestic real interest rates

C. A slower rate of growth in income relative to other countries, which causes imports to lag behind exports

Exchange rates are affected by changes in consumer tastes for products produced in various countries, relative changes in income in various countries, differing inflation rates, and differences in real interest rates.

If the demand for a nation's currency increases, the currency will appreciate, and if the supply of the nation's currency decreases, it will appreciate. A slower growth rate in a country compared to that of another country would cause a decline in the country's imports. Since one key source of supply of domestic currency is that made available to purchase foreign currency needed for imports, we would now be supplying less of our currency, and this would cause the domestic currency to appreciate vis-a-vis the foreign currency.

27

Suppose a firm borrows $100,000 for one year at 9% with interest being paid on a discount basis. The effective rate on the loan would be:

A.
8.0%.

B.
9.2%.

C.
9.9%.

D.
10.2%.

C. 9.9%.

Effective rate of interest = Interest paid / Usable funds
= (9% x $100,000) / ($100,000 - (9% x $100,000))
= $9,000 / $91,000
= .0989 or 9.9%

Usable funds = Loan amount - Discounted interest - Compensating balance

28

When dealing with supply chain management, one of the key differences between traditional manufacturing and demand management within the supply chain:

A. is how the firm will develop key alliances with suppliers to ensure the timely development of new products.

B. is that products are pulled through the production process in response to specific customer needs.

C. is that products are made-to-stock and placed into the distribution channel based on demand forecasts.

D. is based on metrics that provide historical demand data that is then forecasted into the future.

B. is that products are pulled through the production process in response to specific customer needs.

Demand management in the supply chain is designed to synchronize supply and demand to reduce inventory and production is pulled through the plant in response to specific customer needs.

29

Miller Manufacturing and Mining is facing potential translation exposure and believes that it would be desirable to use a money market hedge to reduce their risk to currency fluctuation. They have a 1.2 billion yen receivable that will come due one year from today. Current interest rates in the United States and Japan are 8% and 5% respectively. The current spot exchange rate is 120 yen = $1. If the money market hedge is structured correctly the firm would:

A. borrow 1.143 billion yen in Japan and invest it in a Japanese bank at 5% so that they would have 1.2 billion yen available when the receivable comes due.

B. borrow 1.111 billion yen and convert the proceeds into $9,259,259 and invest the money in the United States and use the proceeds of the receivable to repay the Japanese loan, collecting the proceeds $10,000,000 from the U.S. investment which would represent the guaranteed proceeds from the Japanese sale.

C. borrow 1.143 billion yen and convert the proceeds into $9,524,810 and invest the money in the United States and use the proceeds of the receivable to repay the Japanese loan, collecting the proceeds of $10,285,714 from the U.S. investment which would represent the guaranteed proceeds from the Japanese sale.

D. borrow $10,000,000 and convert the proceeds into 1.2 billion yen and invest the proceeds to have 1.26 billion yen available when the receivable comes due.

C. borrow 1.143 billion yen and convert the proceeds into $9,524,810 and invest the money in the United States and use the proceeds of the receivable to repay the Japanese loan, collecting the proceeds of $10,285,714 from the U.S. investment which would represent the guaranteed proceeds from the Japanese sale.

A money market hedge involves borrowing an amount equal to the discounted value of the receivable (1.2B yen ÷ 1.05 = 1.143 billion yen). The proceeds of the loan would be converted to dollars at the current spot rate (1.143B yen ÷ 120 = $9,524,810), and the proceeds would then be invested in the United States. When the receivable is paid, the firm will use the proceeds to pay off the loan balance in Japan and collect the proceeds of the U.S. investment ($9,524,810 × 1.08 = $10,285,714). This would be the guaranteed proceeds from the Japanese sale that were created by using a money market hedge.

30

Which of the following is not part of the control cycle approach to risk management?

A. Doing a profit test to determine whether a product provides a positive contribution margin

B. Developing the hedges necessary to mitigate interest rate risk

C. Determining, in both quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results

D. Using the feedback loops in the modeling of expected results to update the assumptions and determine what adjustments in reserves might be necessary

B. Developing the hedges necessary to mitigate interest rate risk

Key elements of the control cycle approach to risk management include the following:

Modeling the expected results using a set of initial assumptions
Doing a profit test to determine if the product provides a contribution margin
Measuring the actual results
Determining, both in quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results
Determining what actions need to be taken with respect to the product, including possible adjustments to reserves
Using the findings to strengthen the model and update the assumptions as needed with feedback from the process

31

The cost data in the table below is for a firm that is selling in a perfectly competitive industry.
Average Average Average
Fixed Variable Total Marginal
Output Cost Cost Cost Cost
1 250 80 330 330
2 125 70 195 60
3 83 65 148 55
4 63 60 123 45
5 50 67 117 95
6 42 78 120 133
7 36 91 127 169
8 31 105 136 203
9 28 122 150 258
10 25 141 166 312
If the market price for the firm's product is $133, the competitive firm would produce:

A. 5 units at an economic profit of $80.

B. 6 units at an economic profit of $78.

C. 7 units at an economic profit of $83.

D. 8 units at an economic profit of $95.

B. 6 units at an economic profit of $78.

The firm will maximize profits at the point where marginal cost equals marginal revenue. For a perfectly competitive firm MR = P, therefore, MR = $133. Thus the firm would produce 6 units. Economic profit is defined as total revenue minus total cost. TR = ($133 × 6) = $798; TC = ATC × output = ($120 × 6) = $720. Therefore economic profit equals $78.

32

When economists are concerned about the liquidity preference function they are interested in:

A. the relationship of the demand for money and the rate of interest.

B. the proportion of liquid (cash) reserves maintained by commercial banks.

C. the preference for a currency backed by gold.

D. a bank's desire for accounts receivable as collateral.

A. the relationship of the demand for money and the rate of interest.

The demand for money varies inversely with the rate of interest. The liquidity preference (LP) function relates money demand to the rate of interest. As interest rates fall, the quantity of money demanded increases. As rates rise, the quantity of money demanded decreases.

33

A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?

A. It will hurt all U.S. business.

B. It will benefit U.S. importers.

C. It will benefit U.S. exporters.

D. It will make foreign goods cheaper for U.S. consumers.

C. It will benefit U.S. exporters.

"It will benefit U.S. exporters" is correct because a decline in the exchange rate of the U.S. dollar will make goods produced in the U.S. less expensive in foreign currencies, improving the competitiveness of U.S. exporters.

The other answer choices are incorrect:
"It will hurt all U.S. business" is incorrect because some U.S. businesses will be helped and others will be hurt. U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers.
"It will benefit U.S. importers" is incorrect because U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers.
"It will make foreign goods cheaper for U.S. consumers" is incorrect because U.S. consumers will have to pay more dollars for goods priced in foreign currencies, making those goods more expensive for those consumers.

34

Information related to the economic activity for a country is given as follows with values stated in billions of dollars.
-- Gross domestic product (GDP) $4,000
-- Transfer payments 500
-- Corporate income taxes 50
-- Social Security contributions 200
-- Indirect business taxes 210
-- Personal income taxes 250
-- Undistributed corporate profits 25
-- Depreciation 500
-- Net income earned abroad for the country 0

National income is:

A. $3,500.

B. $3,290.

C. $3,515.

D. $3,265.

B. $3,290=4000-500-210

National income (NI) is defined as net domestic product (NDP), plus net income earned abroad, minus indirect business taxes (e.g., sales taxes). NDP is gross domestic product ($4,000) minus depreciation ($500), or $3,500. Thus, national income is $3,290 ($3,500 NDP + $0 net income earned abroad - $210 indirect business taxes).

Net domestic product $3,500
Net income earned abroad 0
Indirect business taxes (210)
National income $3,290

35

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds:

Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expense over the year. Assume that the fee and interest are not deductible in advance.
Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every six months.)
Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year on all of your calculations.

The cost of Alternative 3 is:
A. 10.0%.

B. 11.1%.

C. 18.2%.

D. 20.0%.

D. 20.0%.

The cost for Frame Supply Company to issue $110,000 of 6-month commercial paper to net $100,000 every six months is calculated as follows:
To retain $100,000 for a full 12 months requires two issues at $110,000 each.
Therefore, interest would be $10,000 + $10,000 = $20,000.
The cost would be $20,000 ÷ $100,000 = .20 or 20%.

36

An importing partnership has experienced a dramatic surge in its exporting business and is looking for ways to minimize its risks from foreign currency fluctuations. The partnership's imports and exports to European Union countries are at similar levels. Which of the following methods most effectively minimizes risk?

A. Purchase futures of the currency in which the payables will be paid.

B. Hold payables and receivables due in the same currency and amount.

C. Enter into an interest rate swap to mitigate the effects of exchange rate fluctuations.

D. Conduct all foreign transactions in U.S. dollars.

B. Hold payables and receivables due in the same currency and amount.

Foreign currency risk is the uncertainty of the value of net income resulting from the variability of the market value of foreign-currency-denominated assets and liabilities due to fluctuating exchange rates. A firm participating in financial markets can mitigate some of the risk by having an effective risk management process in place.

One of the most effective methods to minimize the risk of foreign currency fluctuations is to hold payables and receivables in the same currency and amount; any fluctuations will offset each other.

37

If the central bank of a country raises interest rates sharply, the country's currency will most likely:

A. increase in relative value.

B. remain unchanged in value.

C. decrease in relative value.

D. decrease sharply in value at first and then return to its initial value.

A. increase in relative value.

If the central bank of a country raises interest rates sharply, the country's currency will most likely increase in relative value. This is because as interest rates increase, the currency offers a higher return through the interests. The currency will become more desirable as an investment because the return is relatively higher. The currency “costs” more, so its value increases. (The demand for currency correspondingly decreases.)

38

Given the following data, what is the marginal propensity to consume?

Level of
Disposable Level of
Income Consumption
1. $40,000 $38,000
2. 48,000 44,000

A. 1.33

B. 1.16

C. 0.95

D. 0.75

D. 0.75=(44-38)/(48-40)

The marginal propensity to consume is the percentage of additional income that can be expected to be consumed. Disposable income increased ($48,000 - $40,000) or $8,000. Consumption increased ($44,000 - $38,000) or $6,000. This means that of the additional $8,000 of income, $6,000 will be consumed or 75% of the increase in income. Therefore the marginal propensity to consume equals .75.

39

If the Federal Reserve Board wanted to implement an expansionary monetary policy, which one of the following set of actions would the Federal Reserve Board take?

A. Raise the reserve requirement and the discount rate.

B. Purchase additional U.S. government securities and lower the discount rate.

C. Reduce the reserve requirement and raise the discount rate.

D. Lower the discount rate and raise the reserve requirement.

B. Purchase additional U.S. government securities and lower the discount rate.

The money supply (MI) consists of all coin and currency in the hands of the public and all checkable deposits. The Federal Reserve has the responsibility of controlling the money supply. They have three basic tools they use to achieve their goals, including open market operations (purchase and sale of government securities), the discount rate (the rate the Fed charges when it makes loans to member institutions), and the reserve requirement (the percentage that member institutions must hold on deposit with the Fed or as vault cash). An expansionary monetary policy is one where the Fed desires to increase the money supply. Purchasing government securities would provide additional reserves to member institutions that they could then lend to customers. Reducing the discount rate would make borrowing from the Fed to lend to customers more attractive.

40

A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company's situation?

A. Quantity increases proportionally more than the price declines.

B. Quantity increases proportionally less than the price declines.

C. Price increases proportionally more than the quantity declines.

D. Price increases proportionally less than the quantity declines.

A. Quantity increases proportionally more than the price declines.

Elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. If the fraction is greater than 1.0, the demand is elastic.

If demand is elastic, then reducing the price will increase the total revenue because the quantity sold increases proportionally more than the price decreases (the percentage increase in quantity exceeds the percentage decrease in unit price).

41

The following national income data are in billions of dollars:

Interest $ 22 Net foreign factor income $ 6
Undistributed corporate profits 18
Indirect business taxes 37
Social Security contributions 12
Imports of the U.S. 31
Gross private domestic investment 82
Corporate profits 62
Proprietor's Income 11
Government purchases 110
U.S. Exports 18
Consumption of fixed capital 34
Dividends 12
Transfer payments 23
Corporate taxes 10
Personal taxes 39
Personal consumption expenditures 275

Given this information and using the expenditure approach, the gross domestic product is:

A. $485 billion.

B. $472 billion.

C. $454 billion.

D. $420 billion.

C. $454 billion.

GDP = Personal consumption expenditure + Gross private domestic investment + Government purchases + (Exports − Imports).

GDP = 275 + 82 + 110 + (18 − 31) = 454

42

A U.S firm sold $3 million in finished goods to a firm in Thailand for delivery in six months with the contract to be invoiced in dollars. In the ensuing period, the value of the bhat declined by 80%, which meant that Thai firm could not afford to purchase the dollars necessary to fulfill the contract. This is an example of:

A. translation exposure.

B. economic exposure.

C. purchasing power risk.

D. transactions risk.

B. economic exposure.

Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flow. In this instance, the firm had attempted to protect itself from transactions exposure by invoicing the goods in dollars, but the foreign crisis make it impossible for foreign firms to afford to buy the dollars necessary to fulfill the contract. The firm could have protected itself somewhat from this exposure if some of their expenses had been denominated in bhat.

43

Globalization suggests that firms need to take a serious look at the variety of implications of globalization for business strategies. Among the major factors that need to be considered are:

A. the need for scenario planning, which causes the firm to look at a number of different future possibilities for the firm under varying conditions of high uncertainty.

B. a plan with how to deal with the expected shifts in labor arbitrage opportunities that will shift geographically over time.

C. the fact that the failure of exchange rates to adjust freely caused the first phase of global labor arbitrage to shift service sector jobs to India and the second phase caused manufacturing jobs to shift to China.

D. the consequences of the fact that emerging economies are becoming drivers in consumption with respect to worldwide growth in demand as well their current position as drivers in production with respect to worldwide production of output.

A. the need for scenario planning, which causes the firm to look at a number of different future possibilities for the firm under varying conditions of high uncertainty.

In a world with a rapid pace of change and high levels of uncertainty, scenario planning has taken on increasing importance as it allows firms to effectively look at a series of different potential future possibilities as part of their planning process. Labor arbitrage is a key driver in which path globalization efforts will follow. However, the movement of production is not a static factor. Moving production facilities to one country to capture the benefits of low-cost labor has a tendency to drive up wages in that area, thus making then-lower labor costs in other countries more attractive.

Early globalization efforts were driven by low production costs in emerging markets, and today a rising middle class in emerging economies is shifting the focus as many of these nations are now seeing rapid increases in their level of consumption.

44

The “true” rate of interest is the same as the ________ rate.

A. tax

B. stated

C. nominal

D. effective

D. effective

The effective interest is computed considering the principal amount, stated or nominal rate and the compounding period(s). It is, therefore, the equivalent of the true rate of interest on a loan.

45

As the economy is well into the contraction phase of the business cycle, we would expect that:

A. sales of automobiles would decline while sales of capital goods and food products would be little changed.

B. sales of automobiles and food products will decline while sales of capital goods will increase.

C. sales of capital goods and food products will decline while sales of automobiles will increase.

D. sales of automobiles and capital goods will decline while sales of food products are likely to be little changed.

D. sales of automobiles and capital goods will decline while sales of food products are likely to be little changed.

In the contraction phase of the business cycle, demand for consumer and producer durable goods will decline while the demand for consumer nondurables tend to be relatively less sensitive to the state of the economy.

46

Immunizing a portfolio from interest rate risk by matching the duration of assets to the duration of liabilities might be ineffective and/or inappropriate because:

A. conventional duration strategies assume an upward-sloping yield curve.

B. immunization models are highly sensitive to adjustments for inflation.

C. duration matching is effective in immunizing portfolios from parallel shifts in the yield curve.

D. All of the answer choices are correct.

C. duration matching is effective in immunizing portfolios from parallel shifts in the yield curve.时间匹配是有效的免疫组合收益率曲线平行变化。

Duration matching is effective in immunizing portfolios from parallel shifts in the yield curve.

Conventional duration strategies assume a flat yield curve.

Immunization 免疫 only protects the nominal value of the terminal liabilities and does not adjust for inflation.

47

Small companies have additional risk with which larger organizations generally do not have to be concerned. These additional risks would include all of the following except that small firms:

A. are unable to use broader capital markets.

B. are often unable to have diversified operations.

C. often have difficulty dealing with increasing interest rates.

D. usually have few suppliers.

C. often have difficulty dealing with increasing interest rates.

All of the answer choices could potentially provide risk for a small company; however, interest rate risk affects both small and large organizations.

Small firms have problems with various components of the financial risk management process that larger firms can effectively manage. While these problem areas exist for large firms as well, the specific problems facing smaller firms relate to dealing with the problems in a manner consistent with the firm's resource capabilities and include the inability of small firms to:

use broader capital markets because investors in these markets require higher rates of return on what would appear to be riskier investments.
diversify their operations.
have numerous suppliers and/or the clout for logistical ability to purchase from a large number of vendors.

48

Technology is constantly changing. An improvement in production techniques that allows for a larger output for a given amount of inputs would result in:

A. a shift of the supply curve to the right resulting in more of the product being offered at each price.

B. movement along the supply curve resulting in a lower equilibrium quantity and price given the current level of demand for that product.

C. a shift of the supply curve to the left resulting in fewer units offered for sale at each price.

D. no change in the supply curve but a decrease in price along with an increase in quantity supplied.

A. a shift of the supply curve to the right resulting in more of the product being offered at each price.

A shift in the supply curve to the right indicates that a larger quantity of the product is supplied at each price. Things that shift the supply curve are technology, prices of resources, expectation of future prices, number of sellers, taxes and other government restriction or subsidies.

49

XYZ Company gets a $100,000 revolving credit agreement from the Last National Bank. The 10% interest is to be paid on a discount basis and XYZ is required to maintain $10,000 more in its non-interest bearing account than it ordinarily would. The effective annual interest cost is:

A. 10.0%.

B. 11.1%.

C. 12.5%.

D. 20.0%.

C. 12.5%.

With a compensating balance of $10,000 for a loan of $100,000 at 10%, discounted:

Effective interest = Interest paid / Usable funds
= (10% x $100,000) / ($100,000 - $10,000 - $10,000)
= $10,000 / $80,000
= .125 or 12.5%

Usable funds = Loan amount - discounted interest - compensating balance

50

The rate of unemployment caused by changes in the composition of employment opportunities over time is referred to as the:

A. frictional unemployment rate.

B. cyclical unemployment rate.

C. structural unemployment rate.

D. full employment unemployment rate.

C. structural unemployment rate.

Changes over time in consumer demand, and technology that alters the structure or composition 合成 of the demand for labor, both in terms of occupation and geographic opportunities, are referred to as structural unemployment.

Frictional unemployment is due to imperfections in the labor market and relates to workers searching for jobs or waiting to take jobs in the near future. Cyclical unemployment is caused by the recession phase of the business cycle, that is, by a decline in aggregate spending. The full employment unemployment rate is the sum of frictional and structural unemployment. Full employment does not mean zero unemployment.

51

The economy appears to be poised to enter into the recovery phase of the business cycle. For firms in the capital goods sector, in terms of the inventory cycle, you would expect that:

A. inventory levels are high as the firms have intentionally increased inventory to meet the increased demand that would be expected to occur when the recovery begins.

B. inventory levels are high as firms saw unintended inventory accumulate throughout the economic contraction.

C. inventory levels are low as there was an unanticipated decline in inventory during the preceding contraction phase of the business cycle.

D. inventory levels are low as firms have intentionally sold off inventories as the economic contraction continued to bring inventories to their desired level.

D. inventory levels are low as firms have intentionally sold off inventories as the economic contraction continued to bring inventories to their desired level.

Inventory levels tend to be high as the economy begins the contraction phase of the business cycle and firms cut orders and use their unanticipated inventory to meet demand, attempting to bring inventory levels back to their desired level as contraction continues. Thus, inventory levels tend to be low at the end of the contraction phase due to deliberate management actions.

52

Aggregate demand is defined as:

A. net investment in plant and equipment designed to move the economy out of a recession.

B. total expenditure on consumption, investment, government spending, and net exports during a given year.

C. a schedule or curve that shows the amount of real GDP or output that buyers collectively desire to buy at every price level.

D. the schedule or curve that shows consumers' willingness and ability to purchase a particular product at various alternative prices at a given moment in time.

C. a schedule or curve that shows the amount of real GDP or output that buyers collectively desire to buy at every price level.

Aggregate demand is the amount of goods and services—the amount of real national income—that will be purchased at each possible price level. There is an inverse relationship between the price level and real GDP (gross domestic product). There are three different price effects that explain this inverse relationship. The real balance effect reduces the purchasing power effectiveness of accumulated public savings balances. Since consumers are now poorer in real terms, they will need to reduce their spending. The interest-rate effect causes consumers to need more money for their purchases as prices increase. The increase in demand for money will drive up interest rates which would reduce business investment and interest-related consumption spending, thus reducing demand. Finally, we have the foreign purchases effect. When prices of domestic goods rise relative to foreign prices, foreign consumers would buy fewer of our goods, and our consumers would buy more foreign goods.

53

Joan quit her job where she earned $50,000. She started a business by using $100,000 that she had just inherited instead of investing the money that could have earned 10% a year. The business had sales that equaled $250,000 the first year and expenses equal to $160,000. The economic profit for business for the first year was:

A. $90,000.

B. $30,000.

C. $40,000.

D. $80,000.

B. $30,000=250,000-160,000-50,000-10,000

Economic profit equals revenue minus both explicit and implicit costs. $250,000 - $160,000 - $50,000 - ($100,000 × 10%) = $30,000.

54

Product demand increases and product supply decreases. Which of the following statements is correct regarding resulting market changes?

A. Price decreases and quantity increases.

B. Price is uncertain and quantity increases.

C. Price increases and quantity decreases.

D. Price increases and quantity is uncertain.

D. Price increases and quantity is uncertain.

Demand is the quantity of goods or services that buyers are willing and able to purchase at various prices at a given moment in time. Supply is the quantity that producers are willing and able to offer for sale at alternative prices at a given moment in time.

A change in demand or a change in supply creates a surplus or a shortage of goods at the current equilibrium price. If the market is allowed to function, there will be a tendency for a new equilibrium to be created. Product demand increases and product supply decreases occurring at the same time will result in an increase in the equilibrium price; the effect on equilibrium quantity is indeterminate (i.e., uncertain).