Econ Test 2

The rate of return of a stock held for one-year equals

the dividend yield plus the rate of capital gain.
the dividend yield minus the rate of capital gain.
The rate of capital gain minus the dividend yield.
the change in the price of the stock.
Click the card to flip 👆
1 / 68
Terms in this set (68)
The rate of return of a stock held for one-year equals

the dividend yield plus the rate of capital gain.
the dividend yield minus the rate of capital gain.
The rate of capital gain minus the dividend yield.
the change in the price of the stock.
the dividend yield plus the rate of capital gain.
When the exchange rate for the euro changes from $1.23 per euro to $1.14 per euro, everything else held constant, the euro has ______ and _______ expensive.

depreciated; American computers sold in Europe become less
appreciated; European cars sold in the U.S. become more
depreciated; American computers sold in Europe become more
appreciated; European cars sold in the U.S. become less
depreciated; American computers sold in Europe become more
Suppose that the U.S. government enacts an across-the-board decrease in income tax rates. Everything else held constant, this would cause the yields on U.S Treasury bonds to________ and the yields on municipal bonds to________.

increase; increase
decrease; decrease
decrease; increase
increase; decrease
decrease; increase
Yields on corporate bonds tend to _______ during business cycle expansions and ______ during recessions, everything else held constant.

decrease; increase
increase; increase
decrease; decrease
increase; decrease
decrease; increase
Suppose TJ Maxx Co. announces that its earnings for the fourth quarter of 2020 fall to $10.94 billion. As a result of this announcement, the price of TJ Maxx Co.'s stock declines. The best explanation of this is:

market participants expected TJ Maxx Co.'s earnings to be less than $10.94 billion.
market participants expected TJ Maxx Co.'s earnings to be $10.94 billion.
market participants expected TJ Maxx Co.'s earnings to be greater than $10.94 billion.
market participants have adaptive expectations.
market participants expected TJ Maxx Co.'s earnings to be greater than $10.94 billion.
According to the Segmented markets theory of the term structure, which of the following statements is TRUE?

the interest rate for each maturity bond is determined by supply and demand for that maturity bond
bonds of one maturity are perfect substitutes for bonds of other maturities.
investors' strong preference for short-term relative to long-term bonds explains why the yield curve typically slopes downward.
all of the above
the interest rate for each maturity bond is determined by supply and demand for that maturity bond
A decrease in interest rates causes _______ in the required return on equity, thereby ______ the value of a stock, everything else held constant.

a decrease; reducing
an increase; reducing
a decrease; increasing
an increase; increasing
a decrease; increasing
Suppose that the current yields on municipal bonds are equal to Treasury bonds with the same maturity. Municipal bonds also have a higher default-risk than Treasury bonds. What is the explanation for this?

The benefit from the tax-exempt status of the municipal bonds equals the default risk.
There is no tax exemption on municipal bonds at this moment.
The benefit from the tax-exempt status of the municipal bonds is less than the default risk.
The benefit from the tax-exempt status of the municipal bonds exceeds the default risk.
The benefit from the tax-exempt status of the municipal bonds equals the default risk.
If the price level in Japan increases more rapidly than the price level in Britain, we would expect

the Japanese yen to depreciate against the British pound.
Japanese productivity to have increased more rapidly than British productivity.
the British pound to depreciate against the Japanese yen.
interest rates in Japan to be lower than interest rates in Britain.
the Japanese yen to depreciate against the British pound.
A tariff refers to
Select one:

the range within which an exchange rate is allowed to fluctuate
A limit on the amount of goods that can be imported
a limit on the size of a trade deficit
A tax on imported goods.
A tax on imported goods.
If market participants have rational expectations, then the best forecast of the price of a stock in the next period is equal to an average of the prices of the stock in previous periods. dependent on past trends and cycles in stock prices. provided by financial analysts. equal to the price of the stock in the current period.equal to the price of the stock in the current period.The Expectations theory of term structure holds that investors are not willing to buy a long-term bond if it offers the same yield as an average expected on a sequence of short-term bonds over the lifetime of the long-term bond. Select one: T/FFalseAn implication of the efficient markets hypothesis is that: above-normal profits will be eliminated in the trading process above-normal profits are available only to elite traders only sophisticated investors will be able to earn above-normal profits from financial investments unless he or she acts recklessly, the average investor should be able to make above-normal profitsabove-normal profits will be eliminated in the trading processAll of the followings can result in a violation of PPP theory except: Select one: governments impose barriers to trade products are differentiated the law of one price products cannot be traded internationallythe law of one priceEverything else held constant, which of the following changes would shift the demand curve for U.S dollars to the right? Select one: A decrease in the liquidity of U.S. financial assets. The value of the dollar is expected to decrease relative to the value of foreign currency in the future. An increase in the information costs of U.S. financial assets. An increase in the foreign demand for U.S. goods.An increase in the foreign demand for U.S. goods.Suppose a tube of Colgate costs 250 Yen in Tokyo and $5 in San Francisco. If the nominal exchange is Yen200=$1, how many tubes of Colgate in Tokyo can one tube of Colgate in the U.S. be exchanged for? Select one: 0.25 4 5 1/34Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Everything else held constant, this will ________ demand for dollars, causing the dollar to _____ against the euro. Select one: increase; appreciate increase; depreciate decrease; depreciate decrease; appreciatedecrease; depreciateAccording to the Gordon growth model, which of the following can cause the value of a stock to increase? Select one: higher expected growth rate of dividends higher risk-free interest rate increased required return on equity increased idiosyncratic riskhigher expected growth rate of dividendsAn investment grade bond is more likely to have a higher price than that of a junk bond of the same maturity. T/FTrueAccording to the liquidity premium theory of the term structure, a downward-sloping yield curve indicates that: Select one: short-term interest rates are expected to decline sharply in the future. short-term interest rates are expected to remain unchanged in the future. short-term interest rates are expected to decline moderately in the future. short-term interest rates are expected to rise in the future.short-term interest rates are expected to decline sharply in the future.The adaptive expectation assumes that people forecast future values of a variable using only past values of that variable. T/FTrue_______ is an example of an over-the-counter stock market. Select one: Japan Stock Exchange Shanghai Stock Exchange NASDAQ NYSENASDAQA flight to quality refers to a shift by savers from: Select one: bonds and into stocks. stocks and into gold or other precious metals. low-quality bonds and into high-quality bonds. bonds and into real assets, such as real estate.low-quality bonds and into high-quality bonds.The risk structure of interest rates refers to the relationship among the interest rates on bonds that have the same characteristics but different maturities. Select one: True FalseFalseThe ______ theory of term structure can explain why the yield curve is typically upward sloping, but it cannot explain why interest rates on bonds of different maturities tend to move together. On the other hand, the ______ theory of term structure can explain why interest rates on bonds of different maturities tend to move together, but it cannot explain why the yield curve is typically upward sloping. Select one: segmented markets; expectations expectations; liquidity premium liquidity premium; segmented markets expectations; segmented marketssegmented markets; expectationsStocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to Select one: compensation for the higher risk of small firms. lower liquidity of stocks of small firms. higher information costs of stocks of small firms. all of the above.all of the above.The interest rate parity condition holds that if the interest rate on a German one-year bond is 3% and the interest rate on a U.S. one-year bond is 1%, the dollar is expected to depreciate by 2% against the euro. Select one: False. True.FalseSuppose that the average price of a fixed basket of goods and services is $50 in the U.S. and 150 pesos in Mexico. The theory of PPP predicts that the exchange rate in the long run is ____ Mexican pesos per one U.S dollar. If the exchange rate is one Mexican peso per one U.S. dollar, in the long run, the U.S. dollar will _____ against the Mexican peso so that PPP holds. Select one: 1/3, depreciate 1/3, appreciate 3, depreciate 3, appreciate3, appreciateWhich of the following statements about the supply of dollars in the foreign exchange market is TRUE? Select one: It is equal to the money supply. It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency. It represents the demand for U.S. goods and financial assets by firms and households outside the United States. It represents the supply of U.S. goods and financial assets by firms and households within the United States.It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency.Falling stock prices ________ household wealth, which ________ consumption spending. Select one: increases; increases decreases; decreases decreases; increases increases; decreasesdecreases; decreasesThe yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence: Select one: is largely explained by the favorable tax treatment of Treasury notes. indicates that the bond market is anticipating that inflation will fall. is well explained by the segmented markets theory. indicates that the yield curve is downward sloping.is well explained by the segmented markets theory.Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Everything else held constant, this will ________ demand for dollars, causing the dollar to _____ against the euro. Select one: increase; appreciate decrease; depreciate increase; depreciate decrease; appreciate FeedbackThe correct answer is: decrease; depreciateAn implication of the efficient markets hypothesis is that Select one: unless he or she acts recklessly, the average investor should be able to make above-normal profits above-normal profits are available only to elite traders above-normal profits will be eliminated in the trading process only sophisticated investors will be able to earn above-normal profits from financial investments Feedbackabove-normal profits will be eliminated in the trading processThe Expectations theory of term structure holds that investors are not willing to buy a long-term bond if it offers the same yield as an average expected on a sequence of short-term bonds over the lifetime of the long-term bond. Select one: True False FeedbackFalseSuppose TJ Maxx Co. announces that its earnings for the fourth quarter of 2020 fall to $10.94 billion. As a result of this announcement, the price of TJ Maxx Co.'s stock does not change. The best explanation of this is: Select one: market participants expected TJ Maxx Co.'s earnings to be greater than $10.94 billion. market participants have adaptive expectations. market participants expected TJ Maxx Co.'s earnings to be $10.94 billion. market participants expected TJ Maxx Co.'s earnings to be less than $10.94 billion. Feedbackmarket participants expected TJ Maxx Co.'s earnings to be $10.94 billion.When the exchange rate for the euro changes from $1.14 per euro to $1.23 per euro, everything else held constant, the euro has ______ and _______ expensive. ppreciated; European cars sold in the U.S. become less depreciated; American computers sold in Europe become more appreciated; European cars sold in the U.S. become more depreciated; American computers sold in Europe become lessappreciated; European cars sold in the U.S. become moreSuppose that the U.S. government enacts an across-the-board increase in income tax rates. Everything else held constant, this would cause the yields on U.S Treasury bonds to________ and the yields on municipal bonds to________. Select one: increase; increase increase; decrease decrease; decrease decrease; increaseincrease; decreaseThe fundamental value of a stock equals Select one: the present value of all future dividends the present value of all future capital gains. the future value of all future dividendsthe present value of all future dividendsSuppose that the average price of a fixed basket of goods and services is $50 in the U.S. and 150 pesos in Mexico. The theory of PPP predicts that the exchange rate in the long run is ____ Mexican pesos per one U.S dollar. If the exchange rate is five Mexican pesos per one U.S. dollar, in the long run, the U.S. dollar will _____ against the Mexican peso so that PPP holds. 3, depreciate 3, appreciate 1/3, appreciate 1/3, depreciate3, depreciateSuppose a tube of Colgate costs 250 Yen in Tokyo and $5 in San Francisco. If the real exchange rate is one-fourth of a tube of Colgate in the U.S. for one tube of Colgate in Tokyo, how many yen should you receive in exchange for $1? 200 100 50 12.5200The efficient markets hypothesis holds that the equilibrium price of stock should equal its fundamental value and follows a random walk. Select one: True. False.TrueThe small-firm effect Select one: is the tendency for stocks with high returns today to experience low returns in the future, and vice versa. may be the result of the low liquidity and high information costs of small-firm stock. refers to the larger movements in market prices of stock than in their fundamental values. is the tendency for stocks of large firms to outperform those of small firms.The correct answer is: may be the result of the low liquidity and high information costs of small-firm stock.According to the liquidity premium theory of the term structure, a downward-sloping yield curve indicates that Select one: short-term interest rates are expected to decline moderately in the future. short-term interest rates are expected to remain unchanged in the future. short-term interest rates are expected to rise in the future. short-term interest rates are expected to decline sharply in the future.short-term interest rates are expected to decline sharply in the future.The interest rate parity condition holds that if the interest rate on a German one-year bond is 3% and the interest rate on a U.S. one-year bond is 1%, the dollar is expected to appreciate by 2% against the euro. Select one: True. False.TrueAccording to the Gordon growth model, which of the following can cause the value of a stock to increase? Select one: increased idiosyncratic risk higher risk-free interest rate higher expected growth rate of dividends increased required return on equityhigher expected growth rate of dividendsThe risk structure of interest rates refers to the relationship among the interest rates on bonds that have the same characteristics but different maturities.FalseAn increase in interest rates causes _______ in the required return on equity, thereby ______ the value of a stock, everything else held constant.an increase; reducingEverything else held constant, which of the following changes would shift the demand curve for U.S dollars to the right? A decrease in the liquidity of U.S. financial assets. An increase in the information costs of U.S. financial assets. An increase in the foreign demand for U.S. goods. The value of the dollar is expected to decrease relative to the value of foreign currency in the future.An increase in the foreign demand for U.S. goods.If the price level in Japan increases more rapidly than the price level in Britain, we would expect interest rates in Japan to be lower than interest rates in Britain. the British pound to depreciate against the Japanese yen. the Japanese yen to depreciate against the British pound. Japanese productivity to have increased more rapidly than British productivity.the Japanese yen to depreciate against the British pound.Suppose that the current yields on municipal bonds are lower than Treasury bonds with the same maturity. Municipal bonds also have a higher default-risk than Treasury bonds. What is the explanation for this? The benefit from the tax-exempt status of the municipal bonds exceeds the default risk. The benefit from the tax-exempt status of the municipal bonds is less than the default risk. There is no tax exemption on municipal bonds at this moment. The benefit from the tax-exempt status of the municipal bonds equals the default risk.The benefit from the tax-exempt status of the municipal bonds exceeds the default risk.An investment grade bond is more likely to have a higher interest rate than a junk bond of the same maturity. False TrueFalseWhich of the following statements about the supply of dollars in the foreign exchange market is TRUE? Select one: It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency. It represents the supply of U.S. goods and financial assets by firms and households within the United States. It is equal to the money supply. It represents the demand for U.S. goods and financial assets by firms and households outside the United States.It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency.The ______ theory of term structure fails to explain why the yield curve is typically upward sloping. On the other hand, the ______ theory of term structure can explain this observation but fails to explain the inverted yield curve. Select one: liquidity premium; segmented markets segmented markets; expectations expectations; segmented markets expectations; liquidity premiumexpectations; segmented marketsFalling stock prices ________ household wealth, which ________ consumption spending. Select one: increases; decreases increases; increases decreases; decreases decreases; increasesdecreases; decreasesIf the prices of financial assets follow a random walk, then Select one: major traders in the market must not be making use of all available information about the assets. the change in price from one trading period to the next is not predictable. they should be easy to forecast, provided market participants have adaptive expectations. they should be easy to forecast, provided market participants have rational expectations.the change in price from one trading period to the next is not predictable.During a "flight to quality" Select one: the yield spread between Baa corporate bonds and Treasury bonds increases. the yield spread between Baa corporate bonds and Treasury bonds is not affected. the change in the yield spread between Baa corporate bonds and Treasury bonds cannot be predicted. the yield spread between Baa corporate bonds and Treasury bonds decreases.the yield spread between Baa corporate bonds and Treasury bonds increases.All of the followings can result in a violation of the interest-rate parity condition except ____ exchange-rate risk the law of one price transaction costs differences in default risk and liquiditythe law of one priceA quota refers to Select one: the range within which an exchange rate is allowed to fluctuate a limit on the size of a trade deficit A limit on the amount of goods that can be imported A tax on imported goods.A limit on the amount of goods that can be importedRisk premiums on corporate bonds tend to _______ during business cycle expansions and ______ during recessions, everything else held constant. increase; decrease decrease; increase increase; increase decrease; decreasedecrease; increaseThe term structure of interest rates refers to the relationship among the interest rates on bonds that have the same characteristics but different maturities. Select one: True FalseTrueSuppose the Federal Reserve raises interest rates while interest rates in Europe do not change. Everything else held constant, this will ________ demand for dollars, causing the dollar to _____ against the euro. increase; appreciate decrease; depreciate decrease; appreciate increase; depreciateincrease; appreciateRising stock prices ________ household wealth, which ________ consumption spending. Select one: decreases; decreases increases; decreases decreases; increases increases; increasesincreases; increasesThe fundamental value of a stock equals Select one: the future value of all future dividends the present value of all future capital gains. the present value of all future dividendsthe present value of all future dividendsThe demand for U.S. dollars represents Select one: the demand for U.S. goods and financial assets by households and firms within the United States. the demand for foreign goods and financial assets by households and firms within the United States. the willingness of households and firms that own dollars to exchange them for foreign currency. the demand for U.S. goods and financial assets by households and firms outside the United States.the demand for U.S. goods and financial assets by households and firms outside the United States.According to the Gordon growth model, which of the following can cause the value of a stock to decline? decreased required return on equity increased idiosyncratic risk higher expected growth rate of dividends lower risk-free interest rateincreased idiosyncratic riskEverything else held constant, which of the following changes would shift the demand curve for U.S dollars to the left? A decrease in the information costs of U.S. financial assets. The value of the dollar is expected to increase relative to the value of foreign currency in the future. An increase in the liquidity of U.S. financial assets. A decrease in the foreign demand for U.S. goods.A decrease in the foreign demand for U.S. goods.If the price level in the United States increases more slowly than the price level in Canada, we would expect Select one: the Canadian dollar to depreciate against the U.S. dollar. the U.S. dollar to depreciate against the Canadian dollar. U.S. productivity to have increased more slowly than Canadian productivity. interest rates in the United States to be higher than interest rates in Canada.the Canadian dollar to depreciate against the U.S. dollar.The ______ theory of term structure can explain why the yield curve is typically upward sloping, but it cannot explain why interest rates on bonds of different maturities tend to move together. On the other hand, the ______ theory of term structure can explain why interest rates on bonds of different maturities tend to move together, but it cannot explain why the yield curve is typically upward sloping. Select one: segmented markets; expectations liquidity premium; segmented markets expectations; segmented markets expectations; liquidity premiumsegmented markets; expectations