Question;ECO/561 Week 5 Knowledge Check1. The;Classical Theory of Asset Prices assumes which of the following ideas?;A. The interest rate to;use is the nominal rate, assets are the discounted sum of their future;values, and expected income is the best information available.B. Actual past income is;the best information available, assets are the discounted sum of their;future values, and the interest rate is the safe interest rate plus a risk;premium.C. The value of an asset;is the discounted present value of expected cash flows, expected income is;the best information available, and the interest rate is the safe interest;rate plus a risk premium.D. The interest rate to;use is the real rate, expected income is the best information available;and the assets are the discounted sum of their future values.2.;Economists use two principle interest rates: nominal and real. The purpose of;this distinction is to;A. use nominal interest;rates during periods when the economy is growing and real interest rates;during economic down turnsB. adjust for the;influences that inflation may have on business profitsC. account for and;factor the influences that inflation may have on the behavior that;consumers and firms use to determine how much to save out of their incomes;3. During;periods of increasing inflationary pressure, the Federal Reserve should;A. buy member bank's;bonds to encourage increased lending to the publicB. sell bonds to member;banks to discourage lending to the publicC. reduce the discount;rate to make it easier for small businesses to borrow money4. What;is the increased moral hazard associated with the too big to fail (TBTF);bailouts of the largest of financial institutions?;A. Financial;institutions might misuse the bailout funds and continue the same practices;that lead to the original failure.B. Depositors will lose;their deposits.C. Employees of the;financial institutions will lose their jobs.5. The;Federal Reserve?s primary tool for managing the money flow is;A. discount rateB. reserve ratioC. open-market;operationsD. term auction facility6.;Which of the following is a major drawback of a flexible exchange rate?;A. Government;intervention in the form of reservesB. Use of exchange;controlsC. Discouraging the flow;of trade due to risks and uncertainties7. The;major advantage to a flexible exchange-rate policy is;A. automatic adjustments;to balance of paymentsB. relative interest;rates between countries are automatically adjustedC. increased foreign;investmentD. increased overall;wealth8.;suggests that a country will engage in trade and export products;that it can produce at a lower-opportunity cost than a competing nation.;A. Comparative advantageB. Absolute advantageC. ArbitrageD. Heckscher-Ohlin;theory9.;Absolute advantage encourages a country to;A. enact protective;tariffsB. specialize and trade;with other countriesC. export the technology;that gives it an absolute advantage;10. The;explains that long-run trends in exchange rates are based;on a predictable relationship between product price levels and exchange rates.;A. monetary approach to;exchange ratesB. asset market approach;to exchange ratesC. purchasing power;parity;11. A;business traveler to Germany who, upon deplaning in Berlin, uses an airport ATM;to withdraw 100 Euros from her U.S. bank would receive which kind of exchange;rate?;A. SpotB. ForwardC. FixedD. Flexible;12.;Suppose Nation A can produce 2 million pounds of sugar per week OR 1 million;pounds of rice in a week and Nation B can produce 10 million pounds of sugar;per week OR 3 million pounds of rice in a week. If this is a two-good, two;nation model, what would Nation B?s best choice in regards to trade and;specialization?;A. Nation B should;produce both rice and sugar.B. Nation B should;produce only sugar and trade for rice.C. Nation B should;produce sugar, produce rice, and trade some sugar for rice.D. Nation B should;produce sugar, produce rice, and trade some rice for sugar.
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