SECTION ONE (Compulsory)：Answer all ten questions in this section. Each question carries 1 mark.
　　1. Multiple-choice questions: from the following four options, select a correct and fill in its labeling the brackets. (A total of 10 points)
　　1. The law of diminishing returns: ()
　　A. Assumes that there are changes taking place in production techniques.
　　B. Will always result in a positive figure.
　　C. Results in average product equaling marginal product when the average product is at its maximum.
　　D. Shows that the average product rises more rapidly than the marginal product.
　　2. Income elasticity of demand for a particular product: ()
　　A. Will always have a positive measurement.
　　B. Will be of value to the Government in setting the coming year’s direct tax rates.
　　C. Will be unrelated to the possibility of changes in design of the product.
　　D. Could be affected by changes in levels of discretionary spending power.
　　3. For a profit-maximizing firm, the price level equals its marginal revenue (MR) when: ()
　　A. In an oligopolistic market.
　　B. In a monopolistic situation.
　　C. In a perfectly competitive market.
　　D. Sales rise with the increase in price level.
　　4. When one country’s potential GDP is higher than its real GDP, this means: ()
　　A. Its exports are higher than its imports.
　　B. Inflation is getting worse.
　　C. There exists some unemployment.
　　D. None of the above.
　　5. Cutting taxes can lower investment through its impact on interest rates. This is an example of the: ()
　　A. Income effect.
　　B. Accelerator effect.
　　C. Crowding out effect.
　　D. Multiplier effect.
　　6. The price of petrol increases and sales of tyres decrease. This reflects
　　A. Petrol and tyres are substitutes, and there is a strong income effect.
　　B. The demand for tyres is inelastic.
　　C. Tyres are inferior goods.
　　D. Petrol and tyres are complements, and there is also an income effect.
　　7. The FDIC presently insures deposits up to what amount? ()
　　A. $25,000 per account
　　B. $50,000 per account
　　C. $100,000 per account
　　D. $1,000,000 per account
　　E. Unlimited
　　8. Firms which specialize in helping companies raise capital by selling securities are called ()
　　A. commercial banks
　　B. investment banks
　　C. savings banks
　　D. credit unions
　　E. all of the above
　　9. The most liquid of all assets is ()
　　A. The stock of commercial banks
　　B. M1
　　C. Intelligence
　　D. The debt of major corporations
　　10. Company A and Company B are identical in every way except their capital structure.
　　Each firm can borrow at 10% and each is taxed at 40%.
　　 Company A Company B
　　Assets 1000 1000
　　Equity 600 1000
　　Debt 400 100
　　EBIT 100 100
　　Which firm had the higher Net Income? Which firm had the higher ROE? ()
　　A. Company B had a higher net income but the ROEs were identical.
　　B. Company A had a higher net income; company A had a higher ROE.
　　C. Company B had a higher net income; company B had a higher ROE.
　　D. Company A had a higher net income; company B had a higher ROE.
　　E. Company B had a higher net income; company A had a higher ROE.
　　SECTION TWO(Compulsory)：Answer the questions in this section.
　　Reading Comprehension: (10 points)
　　Renaud Blanc is an analyst in the risk management department of De Luca Corporation, a U.S. company that processes fruit and vegetables bought on the world market. Production and sales of packaged fruit juices and condiments occur in the United States, South America, and Europe. Blanc is responsible for making assessments of the relative strength of the U.S. dollar against other relevant currencies. Blanc knows that relative rates of inflation will influence the dollar value of a currency, so he forecasts inflation for the United States and its trading partners.
　　De Luca buys fruit from Brazil. For the coming year Blanc forecasts annual U.S. inflation of 2% and annual Brazilian inflation of 10%. The current exchange rate is BRL3/USD (BRL = Brazilian real, USD = U.S. dollar). The one-year risk-free interest rates in the United States and Brazil are 2.25% and 18%, respectively.
　　One of Blanc’s colleagues, Paula Smith, makes the following statements:
　　1. "The theory of uncovered interest rate parity allows me to calculate E(S1)/S0 as being equal to the ratio of "one plus the one-year Brazilian interest rate” to "one plus the one-year U.S. interest rate,” when the expected ending exchange rate, E(S1), and the beginning of period exchange rate, S0, are quoted as BRL/USD.”
　　2. "Exchange rate risk reduces to inflation uncertainty if all parity relationships hold perfectly.”
　　Smith questions Blanc about whether forward markets for the Brazilian real give any indication about the expected exchange rate in one year. Blanc responds:
　　"If the forward rate equals the expected spot rate, then using forward currency contracts to hedge exchange risk would be costless (aside from commissions) in terms of the expected dollar price that De Luca would pay for fruit in Brazil.”
　　De Luca also purchases fruit and packaging materials in Europe. Blanc is considering various ways to hedge against the cost of future material purchases in Europe. For the coming year, he forecasts annual inflation of 4% inflation for Europe and 2% for the United States. He believes that uncovered and covered interest parity hold for the United States and Europe.
　　Part 1)
　　If the international Fisher effect holds, based on Blanc’s forecasts, the current one-year risk-free interest rate in Europe should be closest to: ()
　　A. 0.25%.
　　B. 2.25%.
　　C. 4.25%.
　　D. 6.25%.
　　Part 2)
　　Based on Exhibit 1, funded status of Duban’s pension plan under U.S. GAAP for 2007 ($ millions) would be closest to: ()
　　A. 1,256 liability.
　　B. 681 liability.
　　C. 681 asset.
　　D. 1,256 asset.
　　Part 3)
　　Based on Exhibit 1, the pension expense ($ millions) that would be reported on Duban’s 2007 income statement under U.S. GAAP would be closest to: ()
　　A. 187.
　　B. 225.
　　C. 230.
　　D. 317.
　　Part 4)
　　Based on Exhibit 1, the underlying economic pension expense ($ millions) for Duban for 2007 would be closest to: ()
　　A. 187.
　　B. 192.
　　C. 233.
　　D. 274.
　　Part 5)
　　Based on Exhibit 2, under U.S. GAAP Duban’s 2007 translation gain on Kerwin’s identifiable assets resulting from exchange rate changes ($ millions) was closest to: ()
　　A. 133.
　　B. 165.
　　C. 197.
　　D. 216.
　　Explanations of terms：(10 points)
　　1. Liquidity preference
　　2. Moral suasion
　　3. J-curve effect
　　4. Capital asset pricing model (CAPM)
　　5. Interest rate risk
　　Question3: What is The Targets of China’s Monetary Policy?
　　Question4: List the Basic Features of a Corporate Bond Issue
　　Question5: How does the inflation affect Wealth and Redistribution of Income?
　　Question6: What is The Purpose of Holding Foreign Reserve?