Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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For one person to be willing to lend money to another person, the interest rate
must be high enough to compensate the lender for
a. | the risk of deflation and bearing the risk of default. | b. | the time value of
money and bearing the risk of default. | c. | the opportunity cost of risk and the
principal. | d. | the certainty of default and the certainty of
inflation. |
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2.
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Which of the following best describes inflation risk?
a. | The chance that a borrower will fail to repay a loan on time or default on the
loan. | b. | The chance that a major destructive event will reduce the rate of return on an
investment. | c. | The chance that the Federal Reserve will reduce the money supply, causing the
borrower to have difficulty repaying the loan. | d. | The danger that the overall price level will
rise faster than the lender expected, so that the lender is paid back in dollars that are worth less
than expected. |
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3.
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In a well-functioning financial market, the only way to get consistently higher
returns over the long run is to take more risks. This is known as the
a. | risk-return principle. | b. | diversification principle. | c. | fixed income
principle. | d. | price appreciation principle. |
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4.
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Banks generally do NOT provide
a. | Mortgages to individuals. | b. | Consumer loans. | c. | Venture capital
funding. | d. | Loans to well-established businesses. |
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5.
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When a tariff is removed from an imported product, which of the following will
occur?
a. | The demand curve for the imported product will shift to the
right. | b. | The supply curve for the imported product will shift to the left. | c. | The price paid by
consumers will fall. | d. | The level of imports will
fall. |
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6.
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If the United States were to grow all of its own flowers rather than importing
them from other nations, the effect of this would be to
a. | improve consumer well-being. | b. | lower flower prices because they would not have
to be transported as far. | c. | improve the well-being of foreign flower
producers because they would not have to ship flowers all the way to the United
States. | d. | draw resources necessary to grow flowers away from the rest of the
economy. |
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7.
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A nation has a comparative advantage in producing a good, if
a. | it has a higher standard of living than its trading partners. | b. | more people in the
country are employed in the production of the good than its trading partners. | c. | it also has an
absolute advantage in producing the good. | d. | it has either a greater productivity advantage
or a smaller productivity disadvantage. |
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8.
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Protectionism is best defined as
a. | using tariffs, quotas, or other barriers to trade to protect domestic
jobs. | b. | reducing barriers to trade in order to protect firms that export to other
nations. | c. | using low-cost loans from the government to encourage industries to offshore their
operations to other nations. | d. | protecting workers from layoffs by subsidizing
industries in danger of reducing their workforces. |
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9.
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Which of the following best defines the exchange rate?
a. | The difference between the inflation rate in one country and the inflation rate in
another country. | b. | The rate at which the goods of one country can be exchanged for the goods of
another. | c. | The rate at which one currency can be exchanged for another. | d. | The ratio of the
number of units of one currency in circulation to the number of units of another currency in
circulation. |
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10.
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When an exchange rate changes so that one currency can buy more of another, we
say the first currency is ___________ and the second currency is ___________.
a. | depreciating; appreciating | b. | appreciating; depreciating | c. | pegged;
floating | d. | floating; pegged |
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