11. In Country X, the effect of a one-unit increase in income is to increase consumption by
0.70 and to decrease net exports by 0.10 . Changes in income do not affect tax payments.
What is the government expenditure multiplier in Country X?
(A) 0.91
(B) 1.43
(C) 2.50
(D) 3.33
(E) 5.00
Course 2, November 2001 13
12. To accumulate 8000 at the end of 3n years, deposits of 98 are made at the end of each of
the first n years and 196 at the end of each of the next 2n years.
The annual effective rate of interest is i . You are given (l + i)n = 2.0 .
Determine i .
(A) 11.25%
(B) 11.75%
(C) 12.25%
(D) 12.75%
(E) 13.25%
Course 2, November 2001 14
13. Marvin has the following newspaper excerpt of option listings:
Strike January April Closing
Price Vol Last Vol Last Price
Pfizer
Pfizer
Philip Morris
Philip Morris
Call
Call
Put
Put
25
30
50
80
18
5
77
75
2
0.50
14
18
392
459
41
15
22
26
26
63
63
Assuming an option contract is for 100 shares, and no transaction costs, which of the
following is worth the most at market closing?
(A) Selling his holding of 2 Philip Morris January put contracts at a strike price of 80
(B) Selling his holding of 50 shares of Philip Morris stock
(C) Selling his holding of 30 Pfizer April call contracts at a strike price of 30
(D) Exercising his 35 Pfizer April call contracts at a strike price of 25 and instantly
selling the stock
(E) Exercising his 5000 Pfizer April call contracts at a strike price of 30 and instantly
selling the stock
Course 2, November 2001 15

15. Which of the following will lead to a decrease in the money supply?
(A) The central bank reduces its bond portfolio.
(B) The central bank reduces reserve requirements.
(C) The central bank reduces the discount rate.
(D) The demand for currency declines.
(E) There is an exogenous increase in market interest rates.
Course 2, November 2001 17
16. Olga buys a 5-year increasing annuity for X .
Olga will receive 2 at the end of the first month, 4 at the end of the second month, and for
each month thereafter the payment increases by 2 .
The nominal interest rate is 9% convertible quarterly.
Calculate X .
(A) 2680
(B) 2730
(C) 2780
(D) 2830
(E) 2880
Course 2, November 2001 18
17. An investor is considering opening one of two equally risky franchises, Shop X or
Shop Y. This investor has collected the following information:
Investment
at time zero
Expected
Sales
Probability of
Expected Sales
Expected Annual Cash
Flow beginning at time 1
high 0.6 perpetuity Shop X 300 low 0.4 perpetuity ooff 41020
Shop Y 200 hloigwh 00..55 ppeerrppeettuuiittyy ooff 51000
The expected net present value of investing in Shop X is 800 .
What is the expected net present value of investing in Shop Y?
(A) 550
(B) 616
(C) 682
(D) 710
(E) 738
Course 2, November 2001 19
18. Preventing market entry is one of the key motivations behind the actions of a monopolist.
Which of the following actions by a monopolist is least likely to prevent entry?
(A) Spending considerable amounts on research and development
(B) Hiring the industry’s best and brightest people
(C) Lobbying policy makers to prevent the removal of tariffs
(D) Advertising to shift the industry demand curve out
(E) Lowering the price below the monopoly price and providing
customers good quality products
Course 2, November 2001 20
19. If there is an imbalance between supply and demand, firms might choose to adjust the
quantity produced rather than the price of the output.
When would firms most likely make this choice?
(A) When the period is short-run
(B) When output is perishable
(C) When price elasticity of demand is known precisely
(D) When consumers are informed quickly of price changes
(E) When all output is homogeneous and markets are perfectly competitive
Course 2, November 2001 21
20. You are given the following information about the activity in two different investment
accounts:
Account K
Fund value Activity
Date before activity Deposit Withdrawal
January 1, 1999 100.0
July 1, 1999 125.0 X
October 1, 1999 110.0 2X
December 31, 1999 125.0
Account L
Fund value Activity
Date before activity Deposit Withdrawal
January 1, 1999 100.0
July 1, 1999 125.0 X
December 31, 1999 105.8
During 1999, the dollar weighted return for investment account K equals the time
weighted return for investment account L, which equals i .
Calculate i .
(A) 10%
(B) 12%
(C) 15%
(D) 18%
(E) 20%
Course 2, November 2001 22