Chap005Questions

CHAPTER 5THE FINANCIAL STATEMENTS OF BANKS AND THEIR PRINCIPALCOMPETITORSGoal of This Chapter: The purpose of this chapter is to acquaint the reader with the content, structure and purpose of bank financial statements and to help managers understand how information from bank financial statements can be used as tools to reveal how well their banks are performing.Key Topics in this Chapter•An Overview of the Balance Sheets and Income Statements of Banks and Other Financial Firms•The Balance Sheet or Report of Condition•Asset Items•Liability Items•Recent Expansion of Off-Balance Sheet Items•The Problem of Book-Value Accounting and 〞Window Dressing〞•Components of the Income Statement: Revenues and Expenses•Appendix: Sources of Information on theFinancial-Services IndustryChapter OutlineI. Introduction: The Statements Reviewed in This ChapterII An Overview of Balance Sheets and Income StatementsIII The Balance Sheet (Report of Condition)A. The Principal Types of AccountsB. Assets of the Banking Firm1. Cash and Due from Depository Institutions2. Investment Securities: The Liquid Portion3. Investment Securities: The Income-Generating Portion4. Trading Account Assets5. Federal Funds Sold and Reverse Repurchase Agreements6. Loans and Leases7. Loan Losses8. Specific and General Reserves9. International Loan Reserves10.Unearned Income11.Nonperforming (noncurrent) Loans12.Bank Premises and Fixed Assets13.Other Real Estate Owned (OREO)14.Goodwill and Other Intangible Assets15.All Other AssetsC. Liabilities of the Banking Firm1. Deposits2. Borrowings from Nondeposit Sources3. Equity Capital for the Banking Firma. Preferred Stockb. Common EquityD. Comparative Balance Sheet Ratios for Different Size BanksE. Recent Expansion of Off-Balance-Sheet Items in BankingF. The Problem of Book-Value AccountingG. Auditing: Assuring Reliability of Financial StatementsIV. Components of the Income Statement (Report of Income)A. Financial Flows and Stocks1. Interest Income2. Interest Expenses3. Net Interest Income4. Loan Loss Expense5. Noninterest Income6. Noninterest Expenses7. Net Operating Income and Net IncomeB. Comparative Income Statement Ratios for Different-Size Financial FirmsV. The Financial Statements of Leading Nonbank Financial Firms: A Comparison to Bank StatementsVI. An Overview of Key features of Financial Statements and Their ConsequencesVII. Summary of the ChapterConcept Checks5-1. What are the principal accounts that appear on a bank's balance sheet (Report of Condition)The principal asset items on a bank's Report of Condition are loans, investments in marketable securities, cash, and miscellaneous assets. The principal liability items are deposits and nondeposit borrowings in the money market. Equity capital supplied by the stockholders rounds out the total sources of funds for a bank.5-2. Which accounts are most important and which are least important on the asset side of a bank's balance sheetThe principal bank asset items from most important to least important are::Rank Order Assets1 Cash2 Investment Securities3 Loans4 Miscellaneous Assets5-3. What accounts are most important on the liability side of a balance sheetThe principal bank liability items from most important to least important are:Rank Order Liabilities and Equity Capital1 Deposits2 Nondeposit Borrowings3 Equity Capital4 Miscellaneous Liabilities5-4. What are the essential differences among demand deposits, savings deposits, and time depositsDemand deposits are regular checking accounts against which a customer can write checks or make any number of personalwithdrawals. Regular checking accounts do not bear interest under current U.S. law and regulation.Savings deposits bear interest (normally, they carry the lowest rate paid on bank deposits) but may be withdrawn at will (though a bank usually will reserve the right to require advance notice of a planned withdrawal).Time deposits carry a fixed maturity and the bank may impose a penalty if the customer withdraws funds before the maturity date is reached. The interest rate posted on time deposits is negotiated between the bank and its deposit customer and may be either fixed or floating.A NOW account combines features of a savings account and a checking account, while a money market deposit account encompasses transactional powers similar to a regular checking account (though usually with limitations on the number of checks or drafts that may be written against the account) but also resembles a time deposit with an interest rate fixed for a brief period (such as weekly) but then becomes changeable over longer periods to reflect current market conditions.5-5. What are primary reserves, and secondary reserves and what are they supposed to doPrimary reserves consist of cash, including a bank's vault cash and checkable deposits held with other banks or any other funds such as reserves with the Federal Reserve that are accessible immediately to meet demands for liquidity made against the bank.Secondary reserves consist of assets that pay some interest (though usually pay returns that are much lower than earned on other assets, such as loans) but their principal feature is ready marketability. Most Secondary reserves are marketable securities such as short term government securities and private securities such as commercial paper.Both primary and secondary reserves are held to keep the bank in readiness to meet demands for cash (liquidity) from whatever source those demands may arise.5-6. Suppose that a bank holds cash in its vault of $1.4 million, short-term government securities of $12.4 million, privately issued money market instruments of $5.2 million, deposits at the Federal Reserve banks of $20.1 million, cash items in the process of collection of $0.6 million, and deposits placed with other banks of $16.4 million. How much in primary reserves does this bank hold In secondary reservesThe bank holds primary reserves of:Vault Cash + Deposits at the Fed + Cash Items in Collection +Deposits With Other Banks= $1.4 mill. + $20.1 mill. + $0.6 mill. + $16.4 mill.= $38.5 millionThe bank has secondary reserves of:Short-term Government Securities + Private Money-Market Instruments= $12.4 mill. + $5.2 mill.= $17.6 million5-7. What are off-balance-sheet items and why are they important to some financial firmsOff-balance-sheet items are usually transactions that generate fee income for a bank (such as standby credit guarantees) or help hedge against risk (such as financial futures contracts). They are importantas a supplement to income from loans and to help a bank reduce its exposure to interest-rate and other types of risk.5-8. Why are bank accounting practices under attack right now In what ways could financial institutions improve their accounting methodsThe traditional practice of banks has been to record the value of assets and liabilities at their value on the day the accounts were originally created and not change those values over the life of the account. The SEC and FASB started questioning this practice in the 1980’s because they were concerned that investors in bank securities would be misled about the true value of the bank. Using this historical value accounting method may in fact conceal a bank that insolvent in a current market value sense.The biggest controversy centered on the banks’ investment portfolio which would appear to be easy to value at its current market price. At a minimum, banks could help themselves by marking their investment portfolio to market. This would give investors an indication of the true value of the bank’s investment portfolio. Banks could also consider using the lower of historical or market value for other accounts on the balance sheet.5-9. What accounts make up the Report of Income (income statement of a bank)The Report of Income includes all sources of bank revenue (loan income, investment security income, revenue from deposit service fees, trust fees, and miscellaneous service income) and all bank expenses (including interest on all borrowed funds, salaries, wages, and employee benefits, overhead costs, loan loss expense, taxes, and miscellaneous operating costs.) The difference between operating revenues and expenses (including tax obligations) is referred to as net income.5-10. In rank order, what are the most important revenue and expense items on a Report of IncomeBy dollar volume in most recent years the rank order of the revenue and expense items on a bank's Report of Income is:Rank Order Revenue Items Expense Items1 Loan Income Deposit Interest2 Security Income Interest on Nondeposit Borrowings3 Service Charges on Deposits Salaries, Wages, andand Other Deposit Fees Employee Benefits4 Other Operating Revenues Miscellaneous Expenses5-11. What is the relationship between the provision for loan losses on a bank's Report of Income and the allowance for loan losses on its Report of ConditionGross loans equal the total of all loans currently outstanding that are recorded on the bank's books. Net loans are equal to gross loans less any interest income on loans already collected by the bank but not yet earned and also less the allowance for loan-loss account (orbad-debt reserve).The allowance for loan losses is built up gradually over time by an annual noncash expense item that is charged against the bank's current income, known as the Provision for Loan Losses. The dollar amount of the annual loan-loss provision plus the amount of recovered funds from any loans previously declared worthless (charged off) less any loans charged off as worthless in the current period is added to the allowance-for-loan-losses account.If current charge-offs of worthless loans exceed the annual loan-loss provision plus any recoveries on previously charged-off loans the annual net figure becomes negative and is subtracted from the allowance-for-loan-losses account.5-12. Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the year, charges current income for a $250,000 provision for loan losses, charges off worthless loans of $150,000, and recovers $50,000 on loans previously charged off. What will be the balance in the allowance for loan losses at year-endThe balance in the allowance for loan loss (ALL) account at year end will be:Beginning ALL = $1.25 millionPlus: Annual ProvisionRecoveries onCharged OffMinus: ChargeOffs of Worthless =LoansEnding ALL = $1.40 million5-13. Who are banking’s chief com petitors in the financial servicesThe closest competitors of banks in recent years (at least in terms of the similarity of their financial statements) are the thrift institutions. These include credit unions and savings associations. If we move a little further away from banks both in terms of what they do and the way their financial statements look, banks also compete with finance companies, life and property casualty insurance companies and security brokers and dealers.5-14. How do the financial statements of major nonbank financial firms resemble or differ from bank financial statements Why do these differences or similarities existBanks have very similar financial statements to credit union and savings associations. The only difference may be in the structure of their loan portfolio. Credit unions probably have more loans to individuals and savings associations may have more real estate loans as well as loans to individuals.More differences exist between banks and other major competitors. These diff erences exist because of each company’s unique function. Finance companies have loans but on their balance sheet they are called accounts receivables. In addition, they show heavy reliance on money market borrowings instead of deposits. Insurance companies are different in that loans they make to businesses show up on the balance sheet as bonds, stocks, mortgages and other securities. On the liability side, insurance companies receive the majority of their funds from insurance premiums paid by customers for insurance protection.Mutual funds hold primarily corporate stocks, bonds, asset-backed securities and money market instruments and their liabilities consist primarily of units of the mutual fund sold to the public. Security brokers and dealers tend to hold a similar range of securities funded by borrowings in the money and capital markets.5-15. What major trends are changing the content of the financial statements prepared by financial firmsThe content of the financial statements of financial firms is changing for several reasons. One trend that has affected the financial statements of financial firms is the call for those statements to reflect the true market value of the assets held by the financial firm. More accounts are being listed at the lower of historical or market value so that investors can get a better understanding of the true value of the firm.Another trend that is affecting financial firms is the increased use of off-balance sheet items. The notional amount of these items issometimes surpassing the value of the items on the balance sheet, especially for larger financial institutions. This has led regulators to change their reporting requirements for financial firms and there are likely to be additional requirements in the future.Another trend that is affecting financial firms is the convergence of the various types of financial firms. In addition, financial firms are becoming larger and more complex and more financial holding companies are formed. These are also leading to changes in the content and structure of the financial statements of financial firms. 5-16. What are the key features or characteristics of the financial statements of banks and similar financial firms What are the consequences of these statement features for managers of financial-service providers and for the publicThe financial statements of financial-service firms exhibit three main characteristics that have important consequences for managers of these firms and the public.The first characteristic of these firms is that they have lower operating leverage. They have small amounts of buildings, equipment and other fixed assets. Operating leverage adds risk to the firm and firms with large amount of operating leverage can face large fluctuations in net income and earnings per share for small changes in revenues.Financial-service firms do not have this problem. However, financial service firms have large amounts of financial leverage. Financial leverage comes from how the firm finances their assets. If a firm borrows a lot, they face have larger financial leverage and have a larger amount of risk as a result. Financial service firms finance approximately 90% of their assets with debt and therefore face significant financial leverage.Small changes in revenues can lead to large changes in net income and earnings per share as a result. In addition, changes in interest rates can have significant effects on the net income and capital position of financial firms. Finally, most of the liabilities of financial firms are short term. This means that financial firms can face significant liquidity problems. A sudden demand by depositors for funds can lead to large problems for financial firms.Problems5-1. Jasper National Bank has just submitted its Report of Condition to the FDIC. Please fill in the missing items from itsstatement shown below (all figures in millions of dollars): Report of ConditionTotal assets $2,50Cash and due from Depository Institutions 87 Securities233 Federal Funds Sold andReverse Repurch.45Gross Loans and Leases 1,90* Gross Loans and Leases = Net Loansand Leases+Loan Loss Allowance200Loan Loss Allowance Net Loans and Leases1700Trading Account Assets20Bank Premises and FixedAssets25*This is the only asset missing and so is total assetsless all of the rest of the assets listed hereOther Real Estate Owned15 Goodwill and Other Intangibles200 All Other Assets175Total Liabilities and Capital 2,50*Total Liabilities and Capital = TotalassetsTotal Liabilities 2,26* Total Liabilities = Total Liabilitiesand Capital-Total Equity CapitalTotal Deposits 1,60*Total Deposits = Total Liabilities LessAll of theOther LiabilitiesFederal Funds Purchased and Repurchase Agreements.80 Trading Liabilities10 Other Borrowed Funds50 Subordinated Debt480 All Other Liabilities40Total Equity Capital240Total Equity Capital = Perpetual Preferred Stock +Common Stock+Surplus+Undivided ProfitPerpetual Preferred Stock2 Common Stock24 Surplus144 Undivided Profit705-2. Along with the Report of Condition submitted above, Jasper has also prepared a Report of Income for the FDIC. Please fill in the missing items from its statement shown below (all figures in millions of dollars):Report of IncomeTotal Interest Income$120Total Interest Expense80* Total Interest Expense = Total Interest Income - Net Interest IncomeNet Interest Income40Provision for Loan and Lease Losses4* Provision for Loan and Lease Losses = Net Interest Income + Total Noninterest Income - Total Noninterest Expense - Pretax Net Operating IncomeTotal Noninterest Income58 Fiduciary Activities8 Service Charges on Deposit Accounts6Trading Account Gains and Fees14* There are four areas of Total NoninterestIncome and only one is missing and the totalis givenAdditional Noninterest Income30 Total Noninterest Expense77Salaries and Benefits47*There are three areas of Total NoninterestExpense and only one is missing and the totalis givenPremises and Equipment Expense10 Additional Noninterest Expense20 Pretax Net Operating Income17 Securities Gains (Losses)1 Applicable Income Taxes5Income Before Extraordinary Income13*Pretax Income Plus Security Gains LessTaxes is income before extraordinary incomeExtraordinary Gains – Net2Net Income15* Net Income = Income Before Extraordinary Income + Extraordinary Gains – Net5-3. If you know the following figures:Total Interest Income$140Provision for Loan Loss$5 Total Interest Expenses100Income Taxes5Total Noninterest Income15Increases in bank’s undivided profits6Total Noninterest Expenses35 Please calculate these items:Net Interest Income40*Total Interest Income Less Total Interest ExpenseNet Noninterest Income -2*Total Noninterest Income Less Total Noninterest ExpensePretax net operating income15*Net Interest Income Plus Net Noninterest Income Less PLLNet Income After Taxes10*Pretax net operating income less PLL less TaxesTotal Operating Revenues 155*Interest Income Plus Noninterest IncomeTotal Operating Expenses 14*Interest Expenses Plus Noninterest Expenses Plus PLLDividends paid to Common Stockholders4Net Income After Taxes Less Increases in bank’s undivided profits5-4. If you know the following figures:Gross Loans$275Trading Account Securities Allowance for Loan Losses5Other Real Estate Owned Investment Securities36Goodwill and other Intangibles Common Stock5Total LiabilitiesSurplus19Preferred StockTotal Equity Capital39Nondeposit BorrowingsCash and Due from Banks9Bank Premises and Equipment, Ne Miscellaneous Assets38Bank Premises and Equipment, Gross34Please calculate these items:Total Assets414*Total Liabilities Plus Total Equity CapitalNet Loans270*Gross Loans Less ALLUndivided Profit12*Total Equity Capital less PS less CS Less Surpl Fed funds sold23*This is the only asset missing so subtract all otassets from total assetsDepreciation5* Bank Premises and Equipment, Gross less Ban Total Deposits355*Total Liabilities less Nondeposit Borrowings5-5. The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45 million. Two years ago the bank made a loan for $10 million to finance the Mountain View Hotel. Two million in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Mountain High Bank believes the hotel will sell at auction for $7 million and they want to charge off the remainder immediately.a. The dollar figure for Net Loans before the charge-off isNet Loans = Gross Loans –ALL = $750 - $45 = $705b. After the charge-off, what are the dollar figures for GrossLoans, ALL and Net Loans assuming no other transactions.Gross Loans = $750 - $1 = $749 The gross loans nowreflect the realizable value.ALL = $45 - $1 = $44 *The amount of the loan that is badNet Loans = $749 -$44 = $705c. If the Mountain View Hotel sells at auction for $8 million, thebank recovers full principal on the loan.Gross Loans = $750 - $8 = $742ALL = $45 ALL is restored to original amountNet Loans = $742 -$45 = $6975-6. For each of the following transactions, which items on a bank’s statement of income and expenses (Report of Income) would be affecteda. Office supplies are purchased so the bank will have enoughdeposit slips and other necessary forms for customer andemployee use next week.This would be part of Additional noninterest expense and part of Total Noninterest Expense.b. The bank sets aside funds to be contributed through itsmonthly payroll to the employee pension plan in the name of all its eligible employees.This would be part of Salaries and Benefits and part of Total Noninterest Expenses.c. The bank posts the amount of interest earned on the savings account of one of its customers.This would be part of Total Interest Expenses.d. Management expects that among a series of real estate loans recently granted the default rate will probably be close to 3 percent.This would be part of PLL to go into reserves for future bad debts.e. Mr. And Mrs. Harold Jones just purchased a safety deposit box to hold their stock certificates and wills.This would be part of Additional Noninterest Income and part of Total Noninterest Incomef. The bank colleges $1 million in interest payments from loans it made earlier this year to Intel Composition Corp.This would be part of Total Interest Incomeg. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned for insufficient funds.This would be part of Service Charges on Deposit Accounts and then part of Total Noninterest Incomeh. The bank earns $5 million in interest on government securities it has held since the middle of last year.This would be part of Total Interest Income.i. The bank has to pay its $5,000 monthly utility bill today to the local electric company.This would be part of Premises and Equipment Expenses and part of Total Noninterest Expensesj. A sale of government securities has just netted the bank a $290,000 capital gain (net of taxes).This would be part of Security Gains (Losses)5-7. For each of the transactions described here, which of at least two accounts on a bank’s balance sheet (Report of Condition) would be affected by each transactiona. Sally Mayfield has just opened a time deposit in the amountof $6,000 and these funds are immediately loaned to RobertJones to purchase a used car.Gross Loans +$6,000Total Deposits +$6,000b. Arthur Blode deposits his payroll check for $1000 in the bank and the bank invests the funds in a government security.Securities + $1,000Total Deposits +$1,000c. The bank sells a new issue of common stock for $100,000 to investors living in its community, and the proceeds of that sale are spent on the installation of new ATMs,Bank Premises & Equipment, Gross +$100,000Common Stock /Surplus +$100,000d. Jane Gavel withdraws her checking account balance of $2,500 from the bank and moves her deposit to a credit union; the bank employs the funds received from Mr. Alan James, who just paid off his home equity loan, to provide Ms. Gavel with the funds she withdrew.Gross Loans -$2,500Total Deposits -$2,500e. The bank purchases a bulldozer from Ace Manufacturing Company for $750,000 and leases it to Cespan Construction Company.Cash and Due from Bank-$750,000Gross Loans and Leases+750,000f. Signet National Bank makes a loan of reserves in the amount of $5 million to Quesan State Bank and the funds are returned the next day.On the day the funds are loaned the accounts are affected in the following manner:Cash and Due from Bank-$5,000,000Federal Funds Sold+$5,000,000and when the finds are returned the next day, the process is reversed.g. The bank declares its outstanding loan of $1 million from theDeprina Corp. to be uncollectible.Gross Loans -$1,000,000ALL -$1,000,0005-8. The Nitty Gritty Bank is developing a list of off-balance-sheet items for its call report. Please fill in the missing items from its statement shown below. Using Table 5-5, describe how Nitty Gritty compares with other banks in the same size category regarding its off-balance sheet activities.Off-balance-sheet items for Nitty Gritty Bank (in millions of $)Total unused commitments$7,000Standby letters of credit andforeign office guarantees$1,350(Amount conveyed to others)($50)Commercial Letters of Credit$48Securities Lent$2,200Derivatives (total)$97,000Notional Amount of CreditDerivatives$22,000Interest Rate Contracts54000Foreign Exchange Rate Contracts 19,800Total Derivatives LessAll Other DerivativesContracts on other commoditiesand equities$1,200 All other off - balance -sheetliabilities$49Total off-balance-sheet Items$107,597 The sum of all of the off-balance sheet itemTotal Assets (on-balance sheet)$10,500Off-balance-sheet assets ÷1025%on-balance-sheet assetsThis looks very similar to other banks of the same size.5-9. See if you can determine the amount of Cardinal State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.)Total Interest IncomeInterest on Loans$86Int earned on Govt. Bonds andNotes$9Total$95Total Interest ExpenseInterest Paid on Fed FundsPurchased$5Interest Paid to Customers Timeand Savings Deposits$34Total$39Net Interest Income$56Provision for Loan Loss$2Total Noninterest IncomeService Charges Paid byDepositors$3Trust Department Fees$3Total$6Total Noninterest ExpensesEmployee Wages, Salaries andBenefits$13Overhead Expenses$3Total$16 Net Noninterest Income($10) Pretax Income$44 Taxes Paid (28%)$12 Securities Gains/(Losses)$(7) Net Income$25 Less Dividends$4 Retained Earnings from CurrentIncome$215-10. Which of these account items or entries would normally occur on a ba nk’s balance sheet (Report of Condition) and which on a bank’s income and expense statement (Report of Income)The items which would normally appear on a bank's balance sheet are:Federal funds sold Deposits due to BankCredit card loans Leases of BusinessEquipment ToCustomersVault cash Savings DepositAllowance for loanlossesUndivided profitsCommercial and Industrial Loans Mortgage Owed on the Bank’s BuildingsRepayment of Credit Card Loan Other Real Estate OwnedCommon Stock Additions toUndivided profitsFederal fundspurchasedThe items which would normally appear on a bank’s income statement are:Interest Receivedon Credit CardLoansDepreciation on Plantand EquipmentInterest Paid on Money Market Deposits Provision for Loan LossesSecurity Gains or Losses Service Charges on。

AP® Physics C2005 Free response QuestionsThese materials were produced by Educational Testing Service® (ETS®), which develops and administers the examinations of the Advanced Placement Program for the College Board. The College Board and Educational Testing Service (ETS) are dedicated to the principle of equal opportunity, and theirprograms, services, and employment policies are guided by that principle.The College Board is a national nonprofit membership association dedicated to preparing, inspiring, and connecting students to college and opportunity.Founded in 1900, the association is composed of more than 4,200 schools, colleges, universities, and other educational organizations. Each year, theCollege Board serves over three million students and their parents, 22,000 high schools, and 3,500 colleges, through major programs and services incollege admission, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of equity andexcellence, and that commitment is embodied in all of its programs, services, activities, and concerns.Copyright © 2005 by College Entrance Examination Board. All rights reserved. College Board, Advanced Placement Program, AP, SAT, and the acorn logo are registered trademarks of the College Entrance Examination Board. APIEL is a trademark owned by the College Entrance Examination Board. PSAT/NMSQT is a registered trademark jointly owned by the College Entrance Examination Board and the National Merit Scholarship Corporation.Educational Testing Service and ETS are registered trademarks of Educational Testing Service.2005M1. A ball of mass M is thrown vertically upward with an initial speed of v o. It experiences a force of air resistance given by F = -kv, where k is a positive constant. The positive direction for all vector quantities is upward. Express all algebraic answers in terms of M, k, v o, and fundamental constants.a. Does the magnitude of the acceleration of the ball increase, decrease, or remain the same as the ball movesupward?increases decreases remains the sameJustify your answer.b. Write, but do NOT solve, a differential equation for the instantaneous speed v of the ball in terms of time t as theball moves upward.c. Determine the terminal speed of the ball as it moves downward.d. Does it take longer for the ball to rise to its maximum height or to fall from its maximum height back to theheight from which it was thrown?longer to rise longer to fallJustify your answer.e. On the axes below, sketch a graph of velocity versus time for the upward and downward parts of the ball's flight,where t f is the time at which the ball returns to the height from which it was thrown.2005M2. A student is given the set of orbital data for some of the moons of Saturn shown below and is asked to use the data to determine the mass M S of Saturn. Assume the orbits of these moons are circular.a. Write an algebraic expression for the gravitational force between Saturn and one of its moons.b. Use your expression from part (a) and the assumption of circular orbits to derive an equation for the orbitalperiod T of a moon as a function of its orbital radius R.c. Which quantities should be graphed to yield a straight line whose slope could be used to determine Saturn'smass?d. Complete the data table by calculating the two quantities to be graphed. Label the top of each column, includingunits.e. Plot the graph on the axes below. Label the axes with the variables used and appropriate numbers to indicate thescale.f. Using the graph, calculate a value for the mass of Saturn.2005M3. A system consists of a ball of mass M 2 and a uniform rod of mass M 1 and length d. The rod is attached toa horizontal frictionless table by a pivot at point P and initially rotates at an angular speed ω, as shown above left. The rotational inertia of the rod about point P is 31 M 1d2 . The rod strikes the ball, which is initially at rest. As a result of this collision, the rod is stopped and the ball moves in the direction shown above right. Express all answers in terms of M 1, M 2, ω, d, and fundamental constants.a. Derive an expression for the angular momentum of the rod about point P before the collision.b. Derive an expression for the speed v of the ball after the collision.c. Assuming that this collision is elastic, calculate the numerical value of the ratio M 1 / M 2d. A new ball with the same mass M 1 as the rod is now placed a distance x from the pivot, as shown above. Againassuming the collision is elastic, for what value of x will the rod stop moving after hitting the ball?2005E1. Consider the electric field diagram above.a. Points A, B, and C are all located at y = 0.06 m .i. At which of these three points is the magnitude of the electric field the greatest? Justify your answer.ii. At which of these three points is the electric potential the greatest? Justify your answer.b. An electron is released from rest at point B.i. Qualitatively describe the electron's motion in terms of direction, speed, and acceleration.ii. Calculate the electron's speed after it has moved through a potential difference of 10 V.c. Points B and C are separated by a potential difference of 20 V. Estimate the magnitude of the electric fieldmidway between them and state any assumptions that you make.d. On the diagram, draw an equipotential line that passes through point D and intersects at least three electric fieldlines.2005E2. In the circuit shown above, resistors 1 and 2 of resistance R1 and R2 , respectively, and an inductor of inductance L are connected to a battery of emf ε and a switch S. The switch is closed at time t = 0. Express all algebraic answers in terms of the given quantities and fundamental constants.a. Determine the current through resistor 1 immediately after the switch is closed.b. Determine the magnitude of the initial rate of change of current, dI/dt , in the inductor.c. Determine the current through the battery a long time after the switch has been closed.d. On the axes below, sketch a graph of the current through the battery as a function of time.Some time after steady-state has been reached, the switch is opened.e. Determine the voltage across resistor 2 just after the switch has been opened.2005E3. A student performs an experiment to obtain the value of μ0, the magnetic permeability of vacuum. Shemeasures the magnetic field along the axis of the long, 100-turn solenoid PQ shown above. She connects ends P and Q of the solenoid to a variable power supply and an ammeter as shown. End P of the solenoid is taped at the 0 cm mark of a meterstick. The solenoid can be stretched so that the position of end Q can be varied. The student then positions a Hall probe* in the center of the solenoid to measure the magnetic field along its axis. She measures the field for a fixed current of 3.0 A and various positions of the end Q. The data she obtains are shown below.a. Complete the last column of the table above by calculating the number of turns per meter.* A Hall Probe is a device used to measure the magnetic field at a point.b. On the axes below, plot the measured magnetic field B versus n . Draw a best-fit straight line for the data points.c. From the graph, obtain the value of μ0, the magnetic permeability of vacuum.d. Using the theoretical value of μ0 = 4π x 10-7 TM/A, determine the percent error in the experimental value of μ0computed in part (c).。

Chapter 5A Closed-Economy One-PeriodMacroeconomic ModelTeaching GoalsThere are three key points to be learned from this chapter. The first point is that when we allow the consumers and firms that we studied in Chapter 4 to interact with each other and with the government, the economy is able to achieve equilibrium through price adjustment. In this particular case, the “price” is the relative price of leisure, the real wage. The second important point is that the equilibrium that markets settle upon is a favorable one, in the sense of Pareto optimality. This point is in keeping with Adam Smith’s notion that the “invisible hand” of self-interested individuals, meeting in a competitive market, can work for the common good. The third point is that we can directly discover the equilibrium position of a market economy by solving an economic planner problem. Although students may find this point to be somewhat arcane, stress the point that it will be much simpler to solve problems (e.g., exam problems) by working with a planner problem as opposed to directly solving general equilibrium problems. The students, however, need to be aware when this solution method is not applicable. The new section about the Laffer curve is a good way to show when social and private optima do not coincide.Once students have mastered the mechanics of the model, the two problems for which this model is best suited are the analyses of changes in government spending and total factor productivity. In working these problems, stress the applicability of these results to historical applications and as a guide to understanding current events.A key tactic of the textbook’s approach is the critical assessment of the usefulness and credibility of competing models. Therefore, it is important to stress the extent to which models fit the facts. Does this model fit the facts of long-run growth? Does this model fit the facts of the typical business cycle? These kinds of questions come up again and again in the course of macroeconomic study. Stress again and again that scientific study needs to relate to observations, in our case the stylized facts of Chapter 2.Classroom Discussion TopicsAn alternative approach to this material is to start with the example of Robinson Crusoe (or Castaway, Gilligan’s Island, etc.). Does an isolated individual have any economic choices? What would guide these choices? Would you rather be on an island with a more plentiful food supply? A pure income effect can then be presented in the form of extra food (or a volleyball) washing up on shore, or in the form of “pirates” (government?) demanding tribute. An increase in total factor productivity can be in the form of obtaining a fishing net or a ladder to climb coconut trees. A change in capital can be the consequence of a hurricane, etc.The next step would be to ask the students about the likely consequences of additional individuals on the island. If they are all identical, and there are no economies to team production, will there be any reason for markets to exist? Could a market improve things? How and why? Typically, markets improve things only to the extent that people are different. However, these types of differences are what we are willing to ignore when we adopt the fiction of a representative consumer.Chapter 5 A Closed-Economy One-Period Macroeconomic Model 43OutlineI. Com p etitive EquilibriumA. A One-Period Model1. No Borrowing or Lending2. G = TB. Equilibrium M odeling1. Endogenous Variables2. Exogenous Variables3. Hypothetical ExperimentsC. Properties of a Competitive Equilibrium1. Representative Consumer Maximizes Utility Subject to Budget Constraint2. Representative Firm Maximizes Profits3. M arkets Clear4. Government Budget Constraint Satisfied5. ,,l C l C N w MRS MRT MP ===II. O p timalityA. Pareto OptimalityB. Welfare Theorems1. 1st Theorem: A Competitive Equilibrium Can Be Pareto Optimal2. 2nd Theorem: A Pareto Optimum Can Be a Competitive EquilibriumC. Inefficiencies1. Externalities2. Distorting Taxes3. M onopoly PowerD. Using the Second Theorem1. Pareto Optima Are Easier to Identify2. Effects of Disturbances on Pareto OptimaIII. Effects of an Increase in Government SpendingA. Impact Effect1. Parallel Downward Shift in PPF2. Pure Income EffectB. Equilibrium Effects1. Reduced Consumption2. Reduced Leisure and Increased Hours of Work3. Increased Output4. Lower Real WageC. Crowding-OutD. Government Spending a Source of Business Cycles?1. Government Spending Shocks Wrongly Predict Countercyclical Consumption2. Government Spending Shocks Wrongly Predict Countercyclical Real Wages44 Williamson • Macroeconomics, Third EditionIV. Effects of an Increase in Total Factor ProductivityA. Impact Effect1. Upward Shift in PPF2. Steeper PPF3. Income and Substitution EffectsB. Equilibrium Effects1. Increased Consumption2. Leisure and Hours Worked May Rise or Fall3. Increased Output4. Higher Real WageC. Productivity and Long-Run Growth1. Consumption Grows over Time2. Hours Worked Remain about Constant3. Output Increases over Time4. Real Wages Rise over TimeD. Productivity as Source of Business Cycles?1. Consumption Is Procyclical2. Cyclical Properties of Hours Workeda. Procyclical Hours Worked Is a Business Cycle Factb. Need Strong Substitution Effect to Predict Procyclical Hoursc. Intertemporal Substitution of Leisure3. Increased Output Defines the Cycle4. Procyclical Real Wage RateV. Income Tax Revenue and the Laffer CurveA. Tax Revenue1. The Tax Base Depends on the Proportional Tax Rate2. The Laffer Curve Measures Tax Revenue as a Function of the Tax Rate3. Unless the Tax Rate Is Optimal, Two Tax Rates Yield the Same Tax Revenue4. Supply-Side Economists Claim the U.S. Economy Is at the Bad Tax Rate5. Empirical Evidence Tends to Prove Supply-Side Economists WrongTextbook Question SolutionsQuestions for Review1. A closed economy is easier to work with. Opening the economy does not change most of theproperties of an economy. The closed economy is the correct model for the world as a whole.2. Government levies taxes and purchases consumption goods.3. In a one-period model, there can be no borrowing or lending. There is therefore no way to finance agovernment deficit.4. Endogenous variables: C, N s, N d, T, Y, and w.5. Exogenous variables: G, z, K.Chapter 5 A Closed-Economy One-Period Macroeconomic Model 456. The representative consumer chooses C and N s to maximize utility.The representative firm chooses N d to maximize profits.M arket-clearing: .s d N N N == Government budget constraint: T = G .7. The slope of the production possibilities frontier is equal to .N MP − The slope of the productionpossibilities frontier is also identified as ,,l C MRT − where ,l C MRT is identified as the marginal rate oftransformation between leisure and consumption.8. The competitive equilibrium is Pareto optimal because it lies at a tangency point between theproduction possibilities frontier and a representative consumer’s indifference curve.9. The first theorem: A competitive equilibrium can be Pareto optimal. This theorem assures us that thecompetitive equilibrium is a good outcome. The second theorem: A Pareto optimum is a competitive equilibrium. This theorem allows us to directly analyze Pareto optima with the assurance that these points are also competitive equilibriums. The second theorem is useful because Pareto Optima are often easier to work with than competitive equilibriums.10. Externalities, noncompetitive behavior, and distorting taxes.11. , ,, , and .G Y C N l w ↑⇒↑↓↑↓↓ 12. Government competes with the private sector in buying goods. An increase in government spendingimplies a negative wealth effect, which results in lower consumption.13. , , and .z Y C w ↑⇒↑↑↑ The sign of the effects on N and l are ambiguous.14. The substitution effect of an increase in z is that the representative consumer works more hours. Theincome effect of an increase in z is that the representative household works more hours. The sign of the net effect is ambiguous.15. A distorting tax makes that households equalize their marginal rate of substitution between leisureand consumption to the after tax wage, which is different from the before tax wage that firms equalize their marginal rate of transformation to. Thus, one cannot achieve the Pareto optimum where the same wage (before tax) is equal to both marginal rates above.16. The Laffer curve takes into account that higher proportional tax rates give incentives to households towork less. While tax revenue increases with the tax rate for a given tax base, that tax base is reduced by the tax rate.17. When the income tax rate falls, households are willing to supply additional labor more in suchquantities that the tax base increases more than what the tax rate decreases, thus increasing taxrevenue.46 Williamson • Macroeconomics, Third EditionProblems1. Although we often think about the negative externalities of congestion and pollution in cities, theremay also be some positive externalities. A concentrated population is better able to support the arts and professional sports; cities typically have a greater variety of good restaurants, etc. Perhaps a more basic issue is that there may be some increasing returns to scale at low output levels that makeindustrial production more costly in small towns. There may also be externalities in production in being located close to other producers. One example would be the financial industry in financial centers like New York, London, Tokyo, etc. Another example would be large city medical centers that enhance coordination between primary physicians and specialists.One market test of whether productivity is higher in cities would be to look at the wages in cities versus the wages in smaller towns and rural areas. Wages are often higher in cities for individuals of comparable skills. Market efficiency suggests that the higher wages be reflective of a higher marginal product of labor, and that the higher wages compensate those choosing to live in cities for thenegative externalities that they face.2. In a one period model, taxes must be exactly equal to government spending. A reduction in taxes istherefore equivalent to a reduction in government spending. The result is exactly opposite of the case of an increase in government spending that is presented in the text. A reduction in governmentspending induces a pure income effect that induces the consumer to consume more and work less. At lower employment, the equilibrium real wage is higher because the marginal product of labor rises when employment falls. Output falls, consumption rises, employment falls and the real wage rises.3. The only impact effect of this disturbance is to lower the capital stock. Therefore, the productionpossibility frontier shifts down and the marginal product of labor falls (PPF is flatter).(a) The reduction in the capital stock is depicted in the figure below. The economy starts at point Aon PPF1. The reduction in the capital stock shifts the production possibilities frontier to PPF2.Because PPF2 is flatter, there is a substitution effect that moves the consumer to point D. Theconsumer consumes less of the consumption good and consumes more leisure. Less leisure also means that the consumer works more. Because the production possibilities frontier shifts down, there is also an income effect. The income effect implies less consumption and less leisure (more work). On net, consumption must fall, but leisure could decrease, remain the same, or increase, depending on the relative strengths of the income and substitution effect. The real wage must also fall. To see this, we must remember that, in equilibrium, the real wage must equal the marginal rate of substitution. The substitution effect implies a lower marginal rate of substitution. The income effect is a parallel shift in the production possibilities frontier. As the income effect increases the amount of employment, marginal product of labor must fall from point D topoint B. This reinforces the reduction in the marginal rate of substitution from point A to point D.Chapter 5 A Closed-Economy One-Period Macroeconomic Model 47(b) Changes in the capital stock are not likely candidates for the source of the typical business cycle.While it is easy to construct examples of precipitous declines in capital, it is more difficult toimagine sudden increases in the capital stock. The capital stock usually trends upward, and thisupward trend is important for economic growth. However, the amount of new capital generatedby a higher level of investment over the course of a few quarters, of a few years, is very small in comparison to the existing stock of capital. On the other hand, a natural disaster that decreasesthe stock of capital implies lower output and consumption, and also implies lower real wages,which are all features of the typical business cycle contraction.4. Government Productivity. First consider the benchmark case in which 1,z= and there is no effect of changes in z on government activities. Now suppose that z increases. This case of an increase in z isdepicted in the figure below. The original production possibilities frontier is labeled PPF1 and thecompetitive equilibrium is at point A. If the increase in z only affects the economy through thechange in (,),zF K N then the new production possibilities frontier is PPF2. The diagram shows acase in which the income and substitution effects on leisure exactly cancel out, and the economy moves to point B. The equation for the production possibilities frontier is (,).C zF K h l T=−− In the benchmark case, T G= and so we have (,).C zF K h l G=−− For this problem, /T G z=, and so the production possibilities frontier is given by (,)/.C zF K h l G z=−− When 1,z= the two PPFs coincide. When z increases, the vertical intercept of the PPF increases by /.G zΔ Therefore, the newPPF is PPF3 in the figure below. The competitive equilibrium is at point C. There is an additionalincome effect that provides an additional increase in equilibrium consumption, and a reinforced income effect that tend to make leisure increase. Therefore, relative to the benchmark case, there is a larger increase in consumption, and either a smaller decrease in leisure or a larger increase in leisure.48 Williamson • Macroeconomics, Third Edition5. Change in preferences.(a) At the margin, the consumer decides that leisure is more preferred to consumption. That is, theconsumer now requires a bigger increase in consumption to willingly work more (consume lessleisure). In more intuitive language, the consumer is lazier.(b) To work out the effects of this change in tastes, we refer to the figure below. The productionpossibility frontier in this example is unchanged. The consumer now picks a new point at which one of the flatter indifference curves is tangent to the production possibilities frontier. That is,equilibrium will shift from point A to point B. Consumption falls and leisure rises. Therefore, the consumer works less and produces less. Because employment has fallen, it also must be the case that the real wage increases.(c) This disturbance, which some might characterize as a contagious outbreak of laziness, wouldhave the appearance of a recession, as output and employment both fall. The consequentreduction in consumption is also consistent with a typical recession. However, in this case thereal wage would rise, which is inconsistent with the business cycle facts. Therefore, this type ofpreference change is not a cause of recessions.Chapter 5 A Closed-Economy One-Period Macroeconomic Model 496. Production-enhancing aspects of government spending.(a) The increase in government spending in this example has two separate effects on the productionpossibilities frontier. First, the increase in government spending from G1 to G2implies a paralleldownward shift in the production possibilities frontier. Second, the productive nature of government spending is equivalent to an increase in total factor productivity that shifts the production possibilities frontier upward and increases its slope. The figure below draws theoriginal production possibilities frontier as PPF1 and the new production possibilities frontier asPPF2. If the production-enhancing aspects of the increase in government spending are largeenough, representative consumer utility could rise, as in this figure.(b) There are three effects at work in this example. First, there is a negative income effect from theincrease in taxes needed to pay for the increased government spending. This effect tends to lower both consumption and leisure. Second, there is a substitution effect due to the productive effect of the increase in G, which is drawn as the movement from point A to point D. This effect tends to increase both consumption and leisure. Third, there is a positive income effect from theincrease in G on productivity. This effect tends to increase both consumption and leisure. In the figure above, the movement from point D to point B is the net effect of the two income effects. In general, consumption may rise or fall, and leisure may rise or fall. The overall effect on output is the same as in any increase in total factor productivity. Output surely rises.50 Williamson • Macroeconomics, Third Edition7. The fact that government spending make firms more productive is similar to adding G to theproduction function. There are now two effects to an increase in government expenses: the standard crowding out of consumption, and now also an efficiency effect on production.(a) The figure below illustrates a particular situation where the welfare of the household is improved,as illustrated by a shift to the north-east of the indifference curve. The equilibrium shifts fromA toB as the PPF is lowered by the additional government expenses but is also getting steeperthanks to the same government expenses.(b) From previous results, we know that output increases with the increase in government expenses.This is now reinforced as G increases production efficiency. Regarding consumption and leisure, without this new effect, we obtained that an increase in G lead to a negative income effect andthus to decreases in both consumption and leisure. But as the real wage went down, there wasalso a substitution effect leading to an additional decrease in consumption and increase in leisure.The new effect on the production function adds opposite effects: a positive income effect and awage increase, thus possibly reversing, or not, anything that was concluded without the impact ofG on production.Chapter 5 A Closed-Economy One-Period Macroeconomic Model 51 8. We need to analyze each case separately. Start with the good equilibrium. As government expensesincrease, more tax revenue needs to be raised, and thus the tax rate needs to be increased. As shown in the figure below, this tilts down the linear PPF. The new equilibrium leads to a lower indifferencecurve. This leads to a negative income effect and a lower wage (remember, it is z(1 − t)), thus a substitution effect. The income effect lowers consumption and leisure, the substitution effectdecreases consumption and increases leisure. All in all, consumption is lower and leisure is higher, as we know that the substitution effect dominates the income effect. This means that the labor supply is reduced, and thus equilibrium labor and output.The story is different in the bad equilibrium. To increase tax revenue, one needs to reduce the tax rate. Then all the changes discussed above are exactly in the opposite direction.9. We know from previous analysis that an improvement in total factor productivity pushes up the PPF,and thus leads to an increase in consumption, a decrease in leisure, and thus an increase in thequantity of labor supplied. This increases the tax base, and thus allows to reduce the tax rate toachieve the same tax revenue, or in other words, it pushes the left portion of the Laffer curve to the left. The reduction in the tax rate has then a further impact on the variables of interest: as we saw in question 7, first part with a reversal of all signs: consumption increases even more and leisure decrease yet more, leading to an even higher quantity of labor. All in all, as both labor and total factor productivity increase, output increases.。

HAPTER 5THE STANDARD TRADE MODELChapter OrganizationA Standard Model of a Trading EconomyProduction Possibilities and Relative SupplyRelative Prices and DemandThe Welfare Effect of Changes in the Terms of TradeDetermining Relative PricesEconomic Growth: A Shift of the RS CurveGrowth and the Production Possibility FrontierRelative Supply and the Terms of TradeInternational Effects of GrowthCase Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations? International Transfers of Income: Shifting the RD CurveThe Transfer ProblemEffects of a Transfer on the Terms of TradePresumptions about the Terms of Trade Effects of TransfersCase Study: The Transfer Problem and the Asian CrisisTariffs and Export Subsidies: Simultaneous Shifts in RS and RDRelative Demand and Supply Effects of a TariffEffects of an Export SubsidyImplications of Terms of Trade Effects: Who Gains and Who Loses?SummaryAppendix: Representing International Equilibrium With Offer CurvesDeriving a Country's Offer CurveInternational EquilibriumCHAPTER OVERVIEWPrevious chapters have highlighted specific sources of comparative advantage which give rise to international trade. This chapter presents a general model which admits previous models as special cases. This "standard trade model" is the workhorse of international trade theory and can be used to address a wide range of issues. Some of these issues, such as the welfare and distributional effects of economic growth, transfers between nations, and tariffs and subsidies on traded goods are considered in this chapter.The standard trade model is based upon four relationships. First, an economy will produce at the point where the production possibilities curve is tangent to the relative price line (called the isovalue line). Second, indifference curves describe the tastes of an economy and the consumption point for that economy is found at the tangency of the budget line and the highest indifference curve. These two relationships yield the familiar general equilibrium trade diagram for a small economy (one which takes as given the terms of trade) where the consumption point and production point are the tangencies of the isovalue line with the highest indifference curve and the production possibilities frontier, respectively.You may want to work with this standard diagram to demonstrate a number of basic points. First, an autarkic economy must produce what it consumes, which determines the equilibrium price ratio; and second, opening an economy to trade shifts the price ratio line and unambiguously increases welfare. Third, an improvement in the terms of trade increases welfare in the economy. Fourth, it is straightforward to move from a small country analysis to a two country analysis by introducing a structure of world relative demand and supply curves which determine relative prices.These relationships can be used in conjunction with the Rybczynski and the Stolper-Samuelson Theorems from the previous chapter to address a range of issues. For example, you can consider whether the dramatic economic growth of countries like Japan and Korea has helped or hurt the United States as a whole, and also identify the classes of individuals within the United States who have been hurt by the particular growth biases of these countries. In teaching these points, it might be interesting and useful to relate them to current events. For example, you can lead a class discussion of the implications for the United States of the provision of forms of technical and economic assistance to the emerging economies around the world or the ways in which a world recession can lead to a fall in demand for U.S. export goods.The example provided in the text considers the popular arguments in the media that growth in Japan or Korea hurts the United States. The analysis presented in this chapter demonstrates that the bias of growth is important in determining welfare effects rather than the country in which growth occurs. The existence of biased growth, and the possibility of immiserizing growth is discussed. The Relative Supply (RS) and Relative Demand (RD) curves illustrate the effect of biased growth on the terms of trade. The new terms of trade line can be used with the general equilibrium analysis to find the welfare effects of growth. A general principle which emerges is that a country which experiences export-biased growth will have a deterioration in its terms of trade while a country which experiences import-biased growth has an improvement in its terms of trade. A case study points out that growth in the rest of the world has made other countries more like the United States. This import-biased growth has worsened the terms of trade for the United States.The second issue addressed in the context of the standard trade model is the effects of international transfers. The salient point here is the direction, if any, in which the relative demand curve shifts in response to the redistribution of income from a transfer. A transfer worsens the donor's terms of trade if it has a higher marginal propensity to consume its export good than the recipient. The presence of non-traded goods tends to reinforce the deterioration of terms of trade for the donor country. The case study attendant to this issue involves the deterioratio n of many Asian countries’ terms of trade due to the large capital withdrawals at the end of the 1990s.The third area to which the standard trade model is applied are the effects of tariffs and export subsidies on welfare and terms of trade. The analysis proceeds by recognizing that tariffs or subsidies shift both the relative supply and relative demand curves. A tariff on imports improves the terms of trade, expressed in external prices, while a subsidy on exports worsens terms of trade. The size of the effect depends upon the size of the country in the world. Tariffs and subsidies also impose distortionary costs upon the economy. Thus, if a country is large enough, there may be an optimum, non-zero tariff. Export subsidies, however, only impose costs upon an economy. Intranationally, tariffs aid import-competing sectors and hurt export sectors while subsidies have the opposite effect. An appendix presents offer curve diagrams and explains this mode of analysis.ANSWERS TO TEXTBOOK PROBLEMS1. An increase in the terms of trade increases welfare when the PPF is right-angled. Theproduction point is the corner of the PPF. The consumption point is the tangency of the relative price line and the highest indifference curve. An improvement in the terms of trade rotates the relative price line about its intercept with the PPF rectangle (since there is no substitution of immobile factors, the production point stays fixed). The economy can then reach a higher indifference curve. Intuitively, although there is no supply response, the economy receives more for the exports it supplies and pays less for the imports it purchases.2. The difference from the standard diagram is that the indifference curves are right angles ratherthan smooth curves. Here, a terms of trade increase enables an economy to move to a higher indifference curve. The income expansion path for this economy is a ray from the origin. A terms of trade improvement moves the consumption point further out along the ray.3. The terms of trade of Japan, a manufactures (M) exporter and a raw materials (R) importer, isthe world relative price of manufactures in terms of raw materials (p M/p R). The terms of trade change can be determined by the shifts in the world relative supply and demand (manufactures relative to raw materials) curves. Note that in the following answers, world relative supply (RS) and relative demand (RD) are always M relative to R. We consider all countries to be large, such that changes affect the world relative price.a. Oil supply disruption from the Middle East decreases the supply of raw materials, whichincreases the world relative supply. The world relative supply curve shifts out, decreasing the world relative price of manufactured goods and deteriorating Japan's terms of trade.b. Korea’s increased automobile production increases the supply of manufactures, whichincreases the world RS. The world relative supply curve shifts out, decreasing the world relative price of manufactured goods and deteriorating Japan's terms of trade.c. U.S. development of a substitute for fossil fuel decreases the demand for raw materials. Thisincreases world RD and the world relative demand curve shifts out, increasing the world relative price of manufactured goods and improving Japan's terms of trade. This occurs even if no fusion reactors are installed in Japan since world demand for raw materials falls.d. A harvest failure in Russia decreases the supply of raw materials, which increases the worldRS. The world relative supply c urve shifts out. Also, Russia’s demand for manufactures decreases, which reduces world demand so that the world relative demand curve shifts in.These forces decrease the world relative price of manufactured goods and deteriorate Japan's terms of trade.e. A reduction in Japan’s tariff on raw materials will raise its internal relative price ofmanufactures. This price change will increase Japan’s RS and decrease Japan’s RD, which increases the world RS and decreases the world RD (i.e., world RS shifts out and world RD shifts in). The world relative price of manufactures declines and Japan’s terms of trade deteriorate.4. These results acknowledge the biased growth which occurs when there is an increase in onefactor of production. An increase in the capital stock of either country favors production of good X while an increase in the labor supply favors production of good Y. Also, recognize the Heckscher-Ohlin result that an economy will export that good which uses intensively the factor which hat economy has in relative abundance. Country A exports good X to countryB and imports good Y from country B. The possibility of immiserizing growth makes thewelfare effects of a terms of trade improvement due to export-biased growth ambiguous.Import-biased growth unambiguously improves welfare for the growing country.a. A's terms of trade worsen, A's welfare may increase or, less likely, decrease, and B'swelfare increases.b. A's terms of trade improve, A's welfare increases and B's welfare decreases.c. B's terms of trade improve, B's welfare increases and A's welfare decreases.d. B's terms of trade worsen, B's welfare may increase or, less likely, decrease, and A's welfareincreases.5. Immiserizing growth occurs when the welfare deteriorating effects of a worsening in aneconomy's terms of trade swamp the welfare improving effects of growth. For this to occur, an economy must undergo very biased growth and the economy must be a large enough actor in the world economy such that its actions spill over to adversely alter the terms of trade to a large degree. This combination of events is unlikely to occur in practice.6. Aid which must be spent on exports increases the demand for those export goods and raisestheir price relative to other goods. There will be a terms of trade deterioration for the recipient country. This can be viewed as a polar case of the effect of a transfer on the terms of trade. Here, the marginal propensity to consume the export good by the recipient country is 1. The donor benefits from a terms of trade improvement. As with immiserizing growth, it is theoretically possible that a transfer actually worsens the welfare of the recipient.7. Given the difference in technological development between most Eastern European countriesand the United States and Japan, the effects on Western European prices will depend, in theshort run, on transfer problem issues and, in the long run, on the likely biases in Eastern Europe's growth. The transfer problem point is concerned with the consumption demands of countries which receive available international credit supplies. If loans to developing countries shift from availability to Latin American countries, which have a relatively high propensity to consume U.S. goods, to availability to Eastern European countries, which have a lower propensity to consume U.S. goods and a higher propensity to consume German goods, the price of German exports will rise relative to the price of U.S. exports. This would lead to an improvement in the terms of trade of Germany and a worsening of the terms of trade of the United States. Note, however, that in the long term, the analysis of terms of trade effects should also consider whether the biases in economic growth in Eastern Europe will be in sectors of the economy more closely aligned with the export industries of Germany or of the United States. The greater the similarity of the export-oriented industrial push in Eastern European with the existing industries in Germany, the greater the supply side reversal of the favorable German terms of trade movement which had arisen from the demand side forces of the transfer problem.8. When a country subsidizes its exports, the world relative supply and relative demandschedules shift such that the terms of trade for the country worsen. A countervailing import tariff in a second country exacerbates this effect, moving the terms of trade even further against the first country. The first country is worse off both because of the deterioration of the terms of trade and the distortions introduced by the new internal relative prices. The second country definitely gains from the first country's export subsidy, and may gain further from its own tariff. If the second country retaliated with an export subsidy then this would offset the initial improvement in the terms of trade; the "retaliatory" export subsidy definitely helps the first country and hurts the second.FURTHER READINGSRudiger Dornbusch, Stanley Fischer, and Paul Samuelson. "Comparative Advantage, Trade and Payments in a Ricardian Model with a Continuum of Goods." American Economic Review67 (December 1977) pp.823-839.J.R. Hicks. "The Long Run Dollar Problem." Oxford Economic Papers 2 (1953) pp.117-135. Harry G. Johnson. "Economic Expansion and International Trade." Manchester School of Social and Economic Studies 23 (1955) pp.95-112.Paul Krugman, “Does Third World Growth Hurt First World Prosperity?” Harvard Business Review, July-August 1994, pp. 113-121.Paul Samuelson. "The Transfer Problem and Transport Costs." Economic Journal62 (1952) pp.278-304.John Whalley. Trade Liberalization Among Major World Trading Areas. Cambridge: MIT Press.。

International Economics, 8e (Krugman)Chapter 5 The Standard Trade Model5.1 A Standard Model of a Trading Economy1) The concept "terms of trade" meansA) the amount of exports sold by a country.B) the price conditions bargained for in international markets.C) the price of a country's exports divided by the price of its imports.D) the quantities of imports received in free trade.E) None of the above.Answer: CQuestion Status: Previous Edition2) A country cannot produce a mix of products with a higher value than whereA) the isovalue line intersects the production possibility frontier.B) the isovalue line is tangent to the production possibility frontier.C) the isovalue line is above the production possibility frontier.D) the isovalue line is below the production possibility frontier.E) the isovalue line is tangent with the indifference curve.Answer: BQuestion Status: Previous Edition3) Tastes of individuals are represented byA) the production possibility frontier.B) the isovalue line.C) the indifference curve.D) the production function.E) None of the above.Answer: CQuestion Status: Previous Edition4) If P C/P F were to increase in the international marketplace, thenA) all countries would be better off.B) the terms of trade of cloth exporters improve.C) the terms of trade of food exporters improve.D) the terms of trade of all countries improve.E) None of the above.Answer: BQuestion Status: Previous Edition5) If P C/P F were to increase,A) the cloth exporter would increase the quantity of cloth exports.B) the cloth exporter would increase the quantity of cloth produced.C) the food exporter would increase the quantity of food exports.D) Both A and C.E) None of the above.Answer: BQuestion Status: Previous Edition6) If P C/P F were to increase,A) world relative quantity of cloth supplied and demanded would increase.B) world relative quantity of cloth supplied and demanded would decrease.C) world relative quantity of cloth supplied would increase.D) world relative quantity of cloth demanded would decrease.E) None of the above.Answer: CQuestion Status: Previous Edition7) A country will be able to consume a bundle which is not attainable solely from domestic production only ifA) the world terms of trade differ from its domestic relative costs.B) the country specializes in one product.C) the country avoids international trade.D) the world terms of trade equal the domestic relative costs.E) None of the above.Answer: AQuestion Status: Previous Edition8) Terms of trade refers toA) what goods are imported.B) what goods are exported.C) the volume of trade.D) the prices at which trade occurs.E) None of the above.Answer: DQuestion Status: Previous Edition9) If points A and B are both on the production possibility frontier of a country, thenA) consumers are indifferent between the two bundles.B) producers are indifferent between the two bundles.C) at any point in time, the country could produce both.D) Both cost the same.E) The country could produce either of the two bundles.Answer: EQuestion Status: Previous Edition10) If the economy is producing at point a on its production possibility frontier, thenA) all of the country's workers are specialized in one product.B) all of the county's capital is used for one product.C) all of the county's workers are employed.D) all of its capital is used, but not efficiently.E) None of the above.Answer: CQuestion Status: Previous Edition11) If at point A on the production possibility frontier, and the community indifference curve cuts through pointa from northwest to southeast, then the optimal autarky production bundle isA) at point A.B) to the right of point A.C) to the left of point A.D) to the northeast of point A.E) to the southwest of point A.Answer: BQuestion Status: Previous Edition12) If two countries with diminishing returns and different marginal rates of substitution between two productswere to engage in trade, thenA) the shapes of their respective production possibility frontiers would change.B) the marginal rates of substitution of both would become equal.C) the larger of the two countries would dominate their trade.D) the country with relatively elastic supplies would export more.E) None of the above.Answer: BQuestion Status: Previous Edition13) If a country began exporting product A and importing product B, then, as compared to the autarky (no-trade)situation, the marginal cost of product A willA) increase.B) decrease.C) shift outward.D) shift inward.E) None of the above.Answer: AQuestion Status: Previous Edition14) If a small country were to levy a tariff on its imports then this wouldA) have no effect on that country's economic welfare.B) increase the country's economic welfare.C) decrease the country's economic welfare.D) change the terms of trade.E) None of the above.Answer: CQuestion Status: Previous Edition15) An increase in a country's net commodity terms of trade will alwaysA) increase the country's economic welfare.B) increase the country's real income.C) increase the country's quantity of exports.D) increase the country's production of its import competing good.E) None of the above.Answer: EQuestion Status: Previous Edition16) If the United States exports skilled-labor intensive products and services, then we should expect unionsrepresenting skilled labor toA) lobby in favor of tariffs.B) lobby against the imposition of tariffs.C) be indifferent to the issue of tariffs.D) lobby in favor of improved terms of trade.E) Not enough information.Answer: EQuestion Status: Previous Edition17) Suppose now that Home experiences growth strongly biased toward its export, cloth,A) this will tend to worsen Home's terms of trade.B) this will tend to improve Home's terms of trade.C) this will tend to worsen Foreign's terms of trade.D) this will have no effect on Foreign's terms of trade.E) None of the above.Answer: AQuestion Status: New18) Suppose that Home is a "small country," and it experiences growth strongly biased toward its export, clothA) this will tend to worsen Home's terms of tradeB) this will tend to improve Home's terms of tradeC) this will tend to worsen Foreign's terms of tradeD) this will have no effect on Foreign's terms of tradeE) None of the aboveAnswer: DQuestion Status: New19) Other things being equal, a rise in a country's terms of trade increases its welfare. What would happen if werelax the ceteris paribus assumption, and allow for the law of demand to operate internationally?Answer: Let us assume that the terms of trade (or technically the net commodity terms of trade) improve, thus the relative price of a country's exports increase. This would, logically, lead to a shift away by worldconsumers to substitute goods. If the demand for a country's exports is elastic, the quantity decreasewould be proportionally larger than the per unit price increase. This term of trade effect wouldactually lower the country's real income and economic welfare.Question Status: Previous Edition20) Refer to above figure. Albania refused to engage in international trade for ideological reasons. To maximizeits economic welfare it would choose to produce at which point in the diagram above? Suppose the P A/P B atpoint a was equal to 1. Given this information, in which good (A or B) does Albania enjoy a comparativeadvantage?Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. Therelevant international relative price is P A/P B= 2. Albania would therefore choose to produce at whichpoint (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparativeadvantage?Answer: Albania would choose to produce at point a. With no reference to world terms of trade, one cannot establish Albania's comparative advantage.Later, when Albania discovers that the relative price of A equals twice the price of B, it knows that ithas a comparative advantage in A. Therefore Albania would produce at production point b.Question Status: Previous Edition21) Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania's autarkiclevel of 1, but quite the opposite (e.g. P A/P B= 0.5). Would Albania still be able to gain from trade? If so,where would be its production point? Given the information in this question, where is Albania's comparative advantage?Answer: Yes. As long as the world's terms of trade differed from those of Albania, that country stands to gain from international trade. In this particular case, its point of production with trade would be at point c.Question Status: Previous Edition5.2 International Transfers of Income: Shifting of the RD Curve1) When the production possibility frontier shifts out relatively more in one direction, we haveA) biased growth.B) unbiased growth.C) immiserizing growth.D) balanced growth.E) imbalanced growth.Answer: AQuestion Status: Previous Edition2) Export-biased growth in Country H willA) improve the terms of trade of Country H.B) trigger anti-bias regulations of the WTO.C) worsen the terms of trade of Country F (the trade partner).D) improve the terms of trade of Country F.E) decrease economic welfare in Country H.Answer: DQuestion Status: Previous Edition3) Immiserizing growth isA) likely to occur if the exporting country is poor.B) likely to occur if the exporting country is rich.C) likely to occur when terms of trade change.D) likely to occur if relative supplies are elastic.E) None of the above.Answer: EQuestion Status: Previous Edition4) If the poor USAID recipient countries have a higher marginal propensity to consume each and every productthan does the United States, then such aid willA) worsen the U.S. terms of trade.B) improve the U.S. terms of trade.C) leave the world terms of trade unaffected.D) worsen the terms of trade of both donor and recipient countries.E) None of the above.Answer: BQuestion Status: Previous Edition5) If the U.S. has a higher marginal propensity to consume (MPC) imports as compared to both its MPC forexportables and nontradables, then such aid willA) worsen the U.S. terms of trade.B) improve the U.S. terms of trade.C) leave the world terms of trade unaffected.D) worsen the terms of trade of both donor and recipient countries.E) None of the above.Answer: BQuestion Status: Previous Edition6) If, beginning from a free trade equilibrium, the (net barter) terms of trade improve for a country, then it willA) increase production of its import competing good.B) increase consumption of its export good.C) increase the quantity of its imports.D) experience an export-biased shift in its production possibility frontier.E) None of the above.Answer: CQuestion Status: Previous Edition7) After WWI, Germany was forced to make large reparations-transfers of real income- to France. If themarginal propensity to consume was equal in both countries, and if France's demand was biased toward food (relative to Germany's demand pattern) then we would expect to findA) the world's relative price for food remains unchanged.B) the world's relative price for food increase.C) the world's relative price for food decrease.D) the world relative price for both food and non-food rise.E) None of the above.Answer: BQuestion Status: Previous Edition8) If France exported manufactures, whereas Germany exported food, then the reparations from Germany toFrance wouldA) improve France's international terms of trade.B) cause France' terms of trade to deteriorate.C) cause both France' and Germany's terms of trade to deteriorate.D) cause both France' and Germany's terms of trade to improve.E) None of the above.Answer: BQuestion Status: Previous Edition9) If a country lent money to another, this mustA) lower the terms of trade of the recipient country.B) lower the terms of trade of both countries.C) improve the terms of trade of the recipient country.D) improve the terms of trade of the donor country.E) None of the above.Answer: EQuestion Status: Previous Edition10) During the 19th Century, economic growth of the major trading countries was biased toward manufacturesand away from food. The less developed countries of that time were net exporters of food. From this information, we would expect to have observedA) falling terms of trade for the less developed countries.B) improving (rising) terms of trade for the less developed countries.C) no change at all in the terms of trade of the less developed countries.D) a decrease in the relative price of food.E) None of the above.Answer: BQuestion Status: Previous Edition11) Immiserizing growth could occur toA) a poor country experiencing export-biased economic growth.B) a poor country experiencing import-biased economic growth.C) a poor country experiencing growth in its non-traded sector.D) a poor country experiencing capital-intensive biased growth.E) None of the above.Answer: AQuestion Status: Previous Edition12) A large country experiencing import-biased economic growth will tend to experienceA) positive terms of trade.B) deteriorating terms of trade.C) improving terms of trade.D) immiserizing terms of trade.E) None of the above.Answer: CQuestion Status: Previous Edition13) In the period preceding the recent Financial Crisis in Asia, the South East Asian countries were receivinglarge inflows of financial capital. Following John Maynard Keynes' theory, this should have causedA) a glut in their banking asset situation.B) an improvement in their terms of trade.C) deterioration in their terms of trade.D) a fluctuation upward and then downward in their terms of trade.E) None of the above.Answer: BQuestion Status: Previous Edition14) If a there are no international loans or capital flows, then if a country's terms of trade improve, we wouldfind thatA) the value of its exports exceeds the value of its imports.B) the value of its exports becomes less than that of its imports.C) the value of its exports exactly equals that of its imports.D) the quantity of its exports equals that of its imports.E) None of the above.Answer: CQuestion Status: Previous Edition15) If the U.S. Agency for International Development transfers funds to poor countries in Sub-Saharan Africa,the conventional assumption, following Keynes' analysis would presume that this would tend toA) worsen the U.S. terms of trade.B) improve the U.S. terms of trade.C) worsen the terms of trade of the African aid recipients.D) improve the terms of trade of the African aid recipients.E) None of the above.Answer: AQuestion Status: Previous Edition16) If a country's growth is biased in favor of its import, this should unequivocally improve its terms of tradeand its economic welfare. Discuss.Answer: Suppose Japan experiences economic growth biased in favor of its import substitutes. For example, assume that Japan imports components and exports final goods, but that it experiences a major growthin its components manufacture sector. Since Japan is internationally a large country in these markets,this would tend to hurt its component supplier's terms of trade (and help Japan's). However, such abias in economic growth may tend to lessen the volume of international trade. At an extreme, Japanmay become an exporter of components and an importer of final goods. If the result is a lessening ofspecialization and of the volume of trade, then this effect will lower Japan's welfare associated withgains from trade. If an actual change in the pattern of comparative advantage occurs (a possibility) thismay cause dynamic dislocations whose harm overpowers static gains for a relatively long period oftime.Question Status: Previous Editionof the bias of the growth. Explain.Answer: This is a true statement. The reason economic growth may hurt a country is if the terms of trade effect counters and dominates the growth effect. In the case of the small country there is no terms of tradeeffect.Question Status: Previous Edition18) At the conclusion of World War I, Germany, as a punishment, was obliged to make a large transfer to Francein the form of reparations. Is it possible that the actual reparations may have improved Germany's economicwelfare?Answer: Such a result is not likely. However, theoretically, if France's income elasticity of demand for Germany's exports was higher than Germany's income elasticity of demand for its own exportable,then the real income transfer associated with these reparations may have improved Germany's termsof trade, and improved its balance of payments, thus helping Germany in manner unanticipated in theTreaty of Verssaille. Explain.Question Status: Previous Edition19) If a country's net barter terms of trade improve (increase), it is possible that this could decrease the value ofits exports demanded, and hence harm its economic welfare. Discuss this possibility. What alternativemeasure for "terms of trade" does this suggest?Answer: An "improvement" in the terms of trade occurs when the price of a country's exports rises by more than the price of its imports. If demand for this country's exports is inelastic, then this could decreasedemand for its exports in the world. This is treated under the topics of the Marshal-Lerner conditionsfor the effects of a depreciation on the balance of payments. This suggests that we may wish to usesome kind of "income terms of trade," the would explicitly consider both changes in relative tradablesprices, and also quantities of export (the latter not dealt with by the net barter terms of trade).Question Status: Previous Edition5.3 Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD1) If the U.S. (a large country) imposes a tariff on its imported good, this will tend toA) have no effect on terms of trade.B) improve the terms of trade of all countries.C) improve the terms of trade of the United States.D) cause a deterioration of U.S. terms of trade.E) raise the world price of the good imported by the United States.Answer: CQuestion Status: Previous Edition2) If Slovenia is a small country in world trade terms, then if it imposes a large series of tariffs on many of itsimports, this wouldA) have no effect on its terms of trade.B) improve its terms of trade.C) deteriorate its terms of trade.D) decrease its marginal propensity to consume.E) None of the above.Answer: AQuestion Status: Previous Editionthis wouldA) have no effect on its terms of trade.B) improve its terms of trade.C) deteriorate its terms of trade.D) decrease its marginal propensity to consume.E) None of the above.Answer: BQuestion Status: Previous Edition4) If Slovenia were a large country in world trade, then if it imposes a large set of tariffs on its imports, thismustA) cause retaliation on the part of its trade partners.B) harm Slovenia's real income.C) improve Slovenia's real income.D) improve the real income of its trade partners.E) None of the above.Answer: EQuestion Status: Previous Edition5) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, thismustA) have no effect on its terms of trade.B) improve its terms of trade.C) deteriorate its terms of trade.D) decrease its marginal propensity to consume.E) None of the above.Answer: CQuestion Status: Previous Edition6) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, thismustA) cause retaliation on the part of its trade partners.B) harm Slovenia's real income.C) improve Slovenia's real income.D) improve the real income of its trade partners.E) None of the above.Answer: DQuestion Status: Previous Edition7) An export subsidy has the opposite effect on terms of trade to the effect of an import tariff. Domestically atariff will raise the price of the import good, deteriorating the domestic terms of trade. A production subsidy for the export product will lower the local price of the export good, lowering the domestic terms of trade for the country. Hence the export subsidy and the import tariff have the same effect. This analysis seems to contradict the first sentence in this paragraph. Discuss this paradox.Answer: While this (Lerner) equivalence may well occur domestically, internationally the tariff will improve a country's terms of trade. An export subsidy on the other hand will in fact lower the international priceof the (now readily available) export good, hence hurting a country's terms of trade.Question Status: Previous Edition8) Suppose, as a result of various dynamic factors associated with exposure to international competition,Albania's economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point c, would you consider this growth to beexport-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade? Its real income?Answer: If point c is the production point with trade, then Albania has a comparative advantage in good B.Therefore, from the shape of the new production possibility frontier (as compared to the original one),this is clearly an export-biased growth. This ceteris paribus would tend to worsen Albania's terms oftrade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, thegrowth itself acts in the opposite direction.Question Status: Previous Edition9) Suppose, as a result of various dynamic factors associated with exposure to international competition,Albania's economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point b, would you consider this growth to beexport-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade? Its real income? What if Albania were a small country?Answer: If the production with trade point was point b, then the observed growth is a case of import-biased growth, and would improve Albania's terms of trade. If Albania were a small country, the world'sterms of trade would not change at all. In such a case, economic growth (with no induced change inincome distributions) would always increase its real income.Question Status: Previous Edition10) Suppose Albania is exporting product B, and experienced economic growth biased in favor of product B asseen in the figure above. We are also told that Albania's new consumption point is at point d. Would you still consider the economic growth, which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?Answer: This is a relatively difficult case. On the one hand, the growth is still technically export biased.However, Albania's consumption clearly shifted in favor of its import product, A. In this case, thedeterioration in the terms of trade would be much more pronounced than before, and may lead to acase of immiserizing growth. However, for this to occur, there must have been a major shift in thetaste patterns (the old community indifference map is not longer applicable). Therefore, when we tryto judge the direction and magnitude of the welfare change, we are comparing the old versus newtaste preferences, which raises the classic index number problem.Question Status: Previous Edition5.4 Appendix to Chapter 5: Representing International Equilibrium with Other Curves1) Home's offer curve showsA) how Home's desired exports vary with biased growth in Foreign.B) how Foreign's desired imports vary with Home’s level of exports.C) how Home's desired exports vary with the terms of trade.D) how Foreign's desired imports vary with the relative price.E) None of the above.Answer: CQuestion Status: New2) As one moves from the origin up Home's offer curve, Foreign's terms of tradeA) remain constant.B) worsen.C) improve.D) may improve or worsen.E) None of the above.Answer: BQuestion Status: New3) If a straight line (a ray) from the origin does not cross through the point where the offer curves of the twotrading countries intersect thenA) there will be an excess demand for both products.B) there will be an excess supply of both products.C) there will be an excess demand for one of the traded products.D) the terms of trade represented by the slope of the ray will represent the equilibrium terms of trade.E) None of the above.Answer: CQuestion Status: New。

Chapter FiveThe Financial Services Industry: Mutual FundsChapter OutlineIntroductionSize, Structure, and Composition of the Industry∙Historical Trends∙Different Types of Mutual Funds∙Mutual Fund Objectives∙Investor Returns from Mutual Fund Ownership∙Mutual Fund CostsBalance Sheet and Recent Trends∙Money Market Funds∙Long-Term FundsRegulationGlobal IssuesSummaryAppendix 5A – Hedge FundsSolutions for End-of-Chapter Questions and Problems: Chapter Five1.What is a mutual fund? In what sense is it a financial intermediary?A mutual fund represents a pool of financial resources obtained from individuals and companies, which is invested in the money and capital markets. This process represents another method for economic savers to channel funds to companies and government units that need extra funds.2.What are money market mutual funds? In what assets do these funds typically invest?What factors have caused the strong growth in this type of fund since the late 1970s? Money market mutual funds (MMMFs) invest in assets that have maturities of less than one year. These assets primarily are Treasury bills, negotiable certificates of deposit, repurchase agreements, and commercial paper. The growth in MMMFs since the late 1970s initially occurred because of rising interest rates in the money markets, while Reg Q restricted interest rates on accounts in depository institutions. Many investors moved their short-term savings from the depository institutions to the MMMFs as the spread in the earnings rate reached double digits.A result of this activity was to introduce many investors to the capital markets for the first time.3.What are long-term mutual funds? In what assets do these funds usually invest? Whatfactors caused the strong growth in this type of fund during the 1990s?Long-term mutual funds primarily invest in assets that have maturities of more than one year. The most common assets include long-term fixed-income bonds, common stock, and preferred stocks. Some money market assets are included for liquidity purposes. The growth in these funds in the 1990s reflected the dramatic increase in equity returns, the reduction in transaction costs, and the recognition of diversification benefits achievable through mutual funds.ing the data in Table 5-3, discuss the growth and ownership holding over the last twentyyears of long-term funds versus short-term funds.The dollar investment in the money market mutual funds (MMMF) exceeded the investment in the long-term funds (LTF) in 1980. However, by 2001, the LTFs had more than a two to one advantage on the MMMFs, $4,135 billion to $2,241 billion. The LTF grew at an annualized rate of 22.2 percent, and the MMMF grew at an annualized rate of 17.5 percent. In each type of fund, the largest investment source was the household sector, with growth of 21.8 percent annual rate for the LTF and 14.7 percent for the MMMF.5. Why did the proportion of equities in long-term funds increase from 38.3 percent in 1990to over 70 percent by 2000, and then decrease to 62 percent in 2002? How might aninvestor’s preference for a mutual funds objectives change over time?The primary reason for the increased proportion of funds in equities during the 1990s was the strength of the equity market that was driven by the underlying strength of the economy during this period. Contrarily, as the economy softened in the early 2000s, investors retreated somewhat from equities as preferred investments.The pattern of investor preferences may change over the life of an investor for reasons other than changes in economic activity. Aggressive high growth funds may be preferred during the early career years of the 20s, 30s, and into the 40s. As investors mature and retirement becomes a closer reality, investors may switch to a balance of growth and income funds. Finally, at retirement investors may try to protect their investment savings by switching to high yield stock and bond funds.6. How does the risk of short-term funds differ from the risk of long-term funds?The principal type of risk for short-term funds is interest rate risk, because of the predominance of fixed-income securities. Because of the shortness of maturity of the assets, which often is less than 60 days, this risk is mitigated to a large extent. Short-term funds have virtually no liquidity or default risk because of the types of assets held. Long-term equity funds typically are well diversified, and the risk is more systematic or market based. Bond funds have extensive interest rate risk because of their long-term, fixed-rate nature. Sector, or industry-specific, funds have systematic (market) and unsystematic risk, regardless of whether they are equity or bond funds.7. What are the economic reasons for the existence of mutual funds; that is, what benefits domutual funds provide for investors? Why do individuals rather than corporations hold most mutual funds?One major economic reason for the existence of mutual funds is the ability to achieve diversification through risk pooling for small investors. By pooling investments from a large number of small investors, fund managers are able to hold well-diversified portfolios of assets. In addition, managers can obtain lower transaction costs because of the volume of transactions, both in dollars and numbers, and they benefit from research, information, and monitoring activities at reduced costs.Many small investors are able to gain the benefits of the money and capital markets by using mutual funds. Once an account is opened in a fund, a small amount of money can be invested on a periodic basis. In many cases the amount of the investment would be insufficient for direct access to the money and capital markets. On the other hand, corporations are more likely to be able to diversify by holding a large bundle of individual securities and assets, and money and capital markets are easily accessible by direct investment. Further, an argument can be made that the goal of corporations should be to maximize shareholder wealth, not to be diversified. 8. What are the principal demographics of household owners who own mutual funds? Whatare the primary reasons why household owners invest in mutual funds?Investors tend to be in their primary income generating years, are married with college degrees, have other retirement plans, and prefer equity funds as opposed to bond, hybrid, or money market funds. Most individuals are using the funds as vehicles for retirement savings, while many households are using the funds as savings vehicles for children’s education.9. What change in regulatory guidelines occurred in 1998 that had the primary purpose ofgiving investors a better understanding of the risks and objectives of a fund?The SEC recommended that the original lengthy prospectuses, which described the objectives and investments of a fund, should be replaced by a two-page profile written in plain English. The profile should be designed to increase the ability of investors to understand the risks and objectives of the fund.10. What are the three possible components reflected in the return an investor receives from amutual fund?The investor receives the income and dividends paid by the companies, the capital gains from the sale of securities by the mutual fund, and the capital appreciation of the underlying assets.11. An investor purchases a mutual fund for $60. The fund pays dividends of $1.75, distributesa capital gain of $3, and charges a fee of $3 when the fund is sold one year later for $67.50.What is the net rate of return from this investment?The dollar return is $1.75 + $3 + $7.50 - $3 = $9.25. The rate of return is $9.25/$60 = 15.42%.12. How is the net asset value (NAV) of a mutual fund determined? What is meant by the termmarked-to-market?Net Asset Value (NAV) is the average market value of each ownership share of the mutual fund. The total market value of the fund is determined by summing the total value of each asset in the fund. The value of each asset can be found by multiplying the number of shares of the asset by the corresponding price of the asset. Dividing this total fund value by the number of shares in the mutual fund will give the NAV for the fund.The NAV is calculated at the end of each daily trading session, and thus reflects any adjustments in value caused by (a) changes in value of the underlying assets, (b) dividend distributions of the companies held, or (c) changes in ownership of the fund. This process of daily recalculation of the NAV is called marking-to-market.13. A mutual fund owns 400 shares of Fiat, Inc., currently trading at $7, and 400 shares ofMicrosoft, Inc., currently trading at $70. The fund has 100 shares outstanding.a.What is the net asset value (NAV) of the fund?NAV = (400 x $7 + 400 x $70)/100 = $30,800/100 = $308.00.b.If investors expect the price of Fiat shares to increase to $9 and the price of Microsoftshares to decrease to $55 by the end of the year, what is the expected NAV at the end of the year?Expected NAV = (400 x $9 + 400 x $55)/100 = $25,600/100 = $256.00, or a decline of16.88 percent.c.Assume that the expected price of the Fiat shares is realized at $9. What is themaximum price decrease that can occur to the Microsoft shares to realize an end-of-year NAV equal to the NAV estimated in (a)?(400 x $9)/100 + (400 x P M)/100 = $308.00, implies that P M = $68.00, a decrease of $2.00. 14. What is the difference between open-end and closed-end mutual funds? Which type offund tends to be more specialized in asset selection? How does a closed-end fund provide another source of return from which an investor may either gain or lose?Open-end funds allow shares to be purchased and redeemed according to investor demand. The NAV of open-ended funds is determined only by changes in the value of the assets owned. In closed-end funds, the number of shares of the fund is fixed. If investors need to redeem their shares, they sell them to another investor. Thus the demand for the fund shares can provide another source of return for the investors as the market price of the fund may exceed the NAV of the fund. Closed-end funds, such as real estate investment trusts, tend to be more specialized. 15. Open-end Fund A owns 100 shares of ATT valued at $100 each and 50 shares of Torovalued at $50 each. Closed-end Fund B owns 75 shares of ATT and 100 shares of Toro.Each fund has 100 shares of stock outstanding.a.What are the NAVs of both funds using these prices?NAV open-end = (100 x $100 + 50 x $50)/100 = $125.00.NAV closed-end = (75 x $100 + 100 x $50)/100 = $125.00.b.Assume that in one month the price of ATT stock has increased to $105 and the price ofToro stock has decreased to $45. How do these changes impact the NAV of both funds?If the funds were purchased at the NAV prices in (a) and sold at month-end, whatwould be the realized returns on the investments?NAV open-end = (100 x $105 + 50 x $45)/100 = $127.50.Percentage change in NAV = ($127.50 - $125.00)/$125.00 = 2.00%.NAV closed-end = (75 x $105 + 100 x $45)/100 = $123.75.Percentage change in NAV = ($123.75 - $125.00)/$125.00 = -1.00%.c.Assume that another 100 shares of ATT are added to Fund A. What is the effect on A’sNAV if the stock prices remain unchanged from the original prices?NAV open-end = (200 x $100 + 50 x $50)/100 = $225.00.16. What is the difference between a load fund and a no-load fund? Is the argument that loadfunds are more closely managed and therefore have higher returns supported by theevidence presented in Table 5-7?A load fund charges an up-front fee that often is called a sales charge and is used as a commission payment for sales representatives. These fees can be as high as 8.5 percent. A no-load fund does not charge a sales fee, although a small annual fee can be charged to cover certain administrative expenses. This small fee, which is called a 12b-1 fee, usually ranges between0.25 and 0.35 percent of assets. According to the data in Table 5-7, the load funds have adjusted returns that are decreased after the fee is removed. In each case the relative performance ranking of the fund decreases after the load is subtracted.17. What is a 12b-1 fee? Suppose you have a choice between a load fund with no annual 12b-1fee and a no-load fund with a maximum 12b-1 fee. How would the length of your expected investment horizon, or holding period, influence your choice between these two funds? The 12b-1 fee is allowed by the SEC to provide assistance in covering administrative expenses for no-load funds. Thus, in terms of fees and without consideration of time value issues, a 4.00 percent load would be equivalent to the 12b-1 fee for 16 years. This comparison would have to be adjusted for change in the value of the funds assets over time, since the 12b-1 fee is administered on an annual basis against the fund value at that time.18. Suppose an individual invests $10,000 in a load mutual fund for two years. The load feeentails an up-front commission charge of 4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.85 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 5percent each year paid on the last day of the year. If the investor reinvests the annualreturns paid on the investment, calculate the annual return on the mutual fund over the two year investment period.Annual Return Calculation Based on Text Example 5-4:Annualized load fee = 4% ÷ 2 years = 2.00%Annual fund operating expense = 0.85%Total annual cost = 2.85% ⇒ Annual return = 5.00% - 2.85% = 2.15% Annual Return Calculation Based on Present Value of Investment:Initial investment in the fund = $10,000Front-end load of 4.00% = $400Total investable funds = $9,600Investment value at end of year one = $9,600 x 1.05 = $10,080.00Operating expenses based on average NAV = $9,840 x .0085 = $83.64Net investable funds for year two = $9,996.36Investment value at end of year two = $9,996.36 x 1.05 = $10,496.18Operating expenses based on average NAV = $10,246.27 x .0085 = $87.09Net investment at end of year two = $10,409.09Average annual compound return:$10,409.09 = $10,000(1 + g)2 g = 2.025%19. Who are the primary regulators of the mutual fund industry? How do their regulatory goalsdiffer from those of other financial institution?The Securities and Exchange Commission (SEC) is the primary regulator of the mutual fund industry. The SEC is not concerned with the administration of sound economic monetary policy, which is part of the goal of the Federal Reserve System, but rather is primarily concerned with the protection of investors from possible abuses by managers of mutual funds.Several pieces of legislation have been enacted to clarify and assist this regulatory process. Under the Securities Act of 1933, mutual funds must file a registration statement with the SEC and abide by the rules established under the act for the distribution of prospectuses to investors. The Securities Exchange Act of 1934 establishes antifraud provisions aimed at the accurate transmission of information to prospective investors. The 1934 act also appointed the National Association of Securities Dealers to supervise the distribution of mutual fund shares. The Investment Advisors Act of 1940 regulates the activities of mutual fund advisors, and the Investment Company Act establishes rules involving fees and charges. The Insider Trading and Securities Fraud Enforcement Act of 1988 addresses issues of insider trading, and the Market Reform Act of 1990 provides for the establishment of circuit breakers to halt trading in case of severe market downturns. Finally, the National Securities Markets Improvement Act of 1996 exempts mutual funds from the regulatory burden of state securities regulators.。

Chapter 5The Financial Statements of Banks and Their Principal CompetitorsFill in the Blank Questions1.Fed funds purchased is an example of _______________________ along with Eurodollarborrowings.Answer: nondeposit borrowings2.The short term securities of the bank, including T-Bills and commercial paper, are often called__________________________ because they are the second line of defense to meet demands for cash.Answer: secondary reserves3.__________________________ is a noncash expense on the bank's income statement whichallows the bank to account for future bad loans.Answer: Provision for loan losses4.__________________________ is the difference between interest income and interest expensesfor a financial institution.Answer: Net interest income5.__________________________ are the primary long term liabilities of the bank. Theseliabilities are paid only after deposits have been paid in the event of bankruptcy.Answer: Subordinated notes and debentures6.A(n)__________________________ is where the financial institution agrees to guaranteerepayment of a customer's loan received from a third party.Answer: standby credit agreement7.A(n)__________________________ is a short term collateralized loan. The collateral that isused generally consists of T-Bills.Answer: repurchase agreement8.A(n)__________________________ is a deposit account which pays an interest rate competitivewith money market mutual funds and which generally has limited check writing ability.Answer: money market deposit account9._____________________ is the sum of all outstanding IOU's owed to the bank in the form ofconsumer, real estate, commercial and agriculture loans as well as other types of creditextensions.Answer: gross loans10. A financial institution often records the value of its assets and liabilities at _______________which is the original or historical cost of the asset.Answer: book value11.The principal types of__________________________ include fee income, income from fiduciaryactivities and services charges on deposits.Answer: noninterest income12.The__________________________ shows the amount of revenues received and expensesincurred over a specific time period.Answer: Report of Income (income statement)13.The__________________________ lists the assets, liabilities and equity capital held by the bankon a given date.Answer: Report of Condition (balance sheet)14.______________ is labeled "Accounting for Derivative Instruments and Hedging Activities."Answer: FASB 13315.________________ labeled “Accounting for Derivative Instruments and Hedging Activities” andits recent amendments, FASB 138, are designed to make derivatives more publicly visible on corporate financial statements.Answer: FASB 13316.Under _____________ banks must account for the expected loss of interest income onnonperforming loans when calculating their loan-loss provision.Answer: FASB 11417.Temporarily buying and selling securities by a securities firm in a thinly traded market so as toinfluence the price is known as _________________.Answer: painting the tape18.The activity of manipulating the financial statements to artificially enhance the banks financialstrength is known as ___________________.Answer: window dressing or ‘creative accounting’19. is direct and indirect investment in real estate. These areproperties obtained for compensations for nonperforming loans.Answer: Other Real Estate Owned (OREO)20. consists of interest income received on loans from customers thathas not yet been earned by the bank under accrual accounting methods.Answer: Unearned discount income21. can be held by individuals and nonprofit institutions, bear interest andpermit drafts from being written against the account to pay third parties.Answer: Now accounts22.In the worldwide banking system, represent transferable time depositsin a variety of currencies and are often the principal source of short term borrows by banks.Answer: Eurocurrency Borrowings23.One part of arises from fees charged for ATM and POS transactions.Answer: Other Noninterest Income24.Fees that arise from a financial firm’s trust activities, fees for managing a corporations’ interestand dividend payments and fees for managing corporate or individual retirement plans are allincluded in the category of fees arising from .Answer: fiduciary activities25.Checking account maintenance fees and overdraft fees are included in the noninterest incomeaccount under .Answer: service charges on deposit accountsTrue/False QuestionsT F26.On a bank's income statement (Report of Income) deposit costs are financial inputs.Answer: TrueT F27.Loans and leases are financial outputs on a financial institution's balance sheet or Report of Condition.Answer: TrueT F28.Nondeposit borrowings are a financial input on a bank's balance sheet or Report of Condition.Answer: TrueT F29.The cost of nondeposit borrowings is a financial input on a bank's income statement or Report of Income.Answer: TrueT F30.Securities income is a financial output listed on a financial institution's Report of Condition.Answer: FalseT loans on a bank's balance sheet are derived by deducting the allowance for loan losses and unearned discounts from gross loans.Answer: TrueT F32.When a loan is classified as nonperforming any accrued interest recorded on the bank's books, but not actually received, must be deducted from a bank's loan revenues.Answer: TrueT F33.In U.S. banking, securities gains are treated as ordinary income.Answer: TrueT F34.Most banks report securities gains as a component of their total noninterest income.Answer: FalseT F35. A bank displaying trading account securities on its balance sheet is serving as a security dealer and plans to sell those securities before they reach maturity.Answer: TrueT F36.Bad loans normally do not affect a bank's current income.Answer: TrueT F37.The expensing of a worthless loan usually must occur in the year that loan become worthless.Answer: TrueT F38.Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL) account on a bank's income statement.Answer: FalseT F39.Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or present the bank with above-average risk are known as specific reserves.Answer: TrueT F40.U.S. banks (especially those with $500 million or more in total assets) are required to file financial statements audited by an independent public accountant with their principalfederal regulatory agency.Answer: TrueT F41.Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their balance sheet.Answer: TrueT F42.The experience method of accounting for future loan loss reserves allows a bank to deduct from their income statement up to .6 percent of their eligible loans.Answer: FalseT F43.After the Tax Reform Act of 1986, large banks (>$500 million in assets) were required to use the reserve method of accounting for future loan loss reserves.Answer: FalseT F44.The number one source of revenue for a bank based on dollar volume is loan income.Answer: TrueT F45.In looking at comparative balance sheets, it can be seen that large banks rely more heavily on nondeposit borrowings while small banks rely more heavily on deposits.Answer: TrueT F46.The Pension Fund industry is now larger than the Mutual Fund industry.Answer: FalseT F47.Off-balance-sheet items for banks have declined in recent years.Answer: FalseT F48.Except for banks, Savings & Loans and Savings Banks hold the most deposits.Answer: TrueT F49."Painting the tape" refers to the practice whereby banks understate their nonperforming loans.Answer: FalseT F50.Financial statements issued by banks and nonblank financial service firms are looking increasingly similar today.Answer: TrueMultiple Choice Questions51.Bank assets fall into each of the following categories except:A)Loans.B)Investment securities.C)Demand deposits.D)Noninterest cash and due from banks.E)Other assets.Answer: C52.Banks generate their largest portion of income from:A)Loans.B)Short-term investment.C)Demand deposits.D)Long-term investments.E)Certificates of deposit.Answer: A53.Loans typically fall into each of the following categories except:A)Real estate.B)Consumer.C)Commercial and Industrial (business).D)Agricultural.E)Municipal.Answer: E54.Which of the following adjustments are made to gross loans and leases to obtain net loans andleases?A)The loan and lease loss allowance is subtracted from gross loansB)Unearned income is subtracted from gross interest receivedC)Investment income is added to gross interest receivedD) A and B.E) A. and C.Answer: D55.An example of a contra-asset account is:A)The loan and lease loss allowance.B)Unearned income.C)Buildings and equipment.D)Revenue bonds.E)The provision for loan loss.Answer: A56.The noncash expense item on a bank's Report of Income designed to shelter a bank's currentearnings from taxes and to help prepare for bad loans is called:A)Short-term debt interestB)Noninterest expenseC)Provision for taxesD)Provision for possible loan lossesE)None of the above.Answer: D57.A financial institution's bad-debt reserve, as reported on its balance sheet, is called:A)Unearned income or discountB)Allowance for possible loan lossesC)Intangible assetsD)Customer liability on acceptancesE)None of the aboveAnswer: B58.When a bank serves as a security dealer for certain kinds of securities (mainly federal, state, andlocal government obligations) the value of these securities is usually recorded in what account ona bank's Report of Condition?A)Investment SecuritiesB)Taxable and Tax-Exempt SecuritiesC)Trading Account SecuritiesD)Secondary ReservesE)None of the aboveAnswer: C59.The difference between noninterest income and noninterest expenses on a bank's Report ofIncome is called:A)Net Profit MarginB)Net Interest IncomeC)Net Income After Provision for Possible Loan LossesD)Income or Loss Before Income TaxesE)Net Noninterest IncomeAnswer: E60.The account that is built up by annual noncash expense deductions and is subtracted from GrossLoans on the Report of Condition is:A)Unearned incomeB)Nonperforming loansC)Allocated loan risk deductionsD)Allowance for possible loan lossesE)None of the above.Answer: D61.Nonperforming loans are credits on which any scheduled loan repayments and interest paymentsare past due for more than:A)30 daysB)60 daysC)90 daysD)180 daysE)None of the above.Answer: C62.One-time only transactions that often involve financial assets or real property pledged ascollateral behind a loan and upon which the bank has foreclosed affect a bank's account known as:A)Allowance for loan lossesB)Nonrecurring sales of assetsC)Asset gains or lossesD)Provision for loan and security lossesE)None of the above.Answer: B63.The use of fixed assets, rather than financial assets, in order to increase earnings flowing to abank's stockholders is known as:A)Plant and equipment investmentB)Financial leverageC)Operating leverageD)Nondeposit capitalE)None of the above.Answer: C64.Banks depend heavily upon borrowed funds supplied by customers with little owners' capitalinvested. This means that banks make heavy use of:A)Financial leverageB)Capital restructuringC)Operating LeverageD)Margin borrowingE)None of the above.Answer: A65.When a loan is considered uncollectible, the bank's accounting department will write (charge) itoff the books by reducing the ______ and the accounts. Which choice belowcorrectly fills in the blank in the preceding sentence?A)PLL and Gross LoansB)ALL and Net LoansC)ALL and Gross LoansD)PLL and Net LoansE)None of the above.Answer: C66.The common banking practice of selling those investment securities that have appreciated inorder to reap a capital gain and holding onto those securities whose prices have declined is known as:A)Gains tradingB)Performance bankingC)Loss control tradingD)Selective portfolio managementE)None of the above.Answer: A67.Noninterest revenue sources for a bank are called:A)Commitment fees on loansB)Fee incomeC)Supplemental incomeD)Noninterest marginE)None of the above.Answer: Brge U.S. banks must use which of the methods listed below to determine their provision forloan loss expense?A)Experience methodB)Reserve methodC)Specific charge-off methodD)Historical cost methodE)None of the above.Answer: C69.A bank's temporary lending of excess reserves to other banks is labeled on the balance sheet as:A)Fed Funds PurchasedB)Fed Funds SoldC)Money Market DepositsD)Securities Purchased for ResaleE)None of the aboveAnswer: B70.A bank sells shares of its common stock with a par value of $100 for $200 in the market. Whichtwo accounts on the bank's balance sheet are going to be affected?A)Retained earnings and capital surplus accountsB)Subordinated notes and debentures and commons stock outstanding accountsC)Retained earnings and common stock outstanding accountsD)Common stock outstanding and capital surplus accountsE)Only the common stock outstanding account is affectedAnswer: D71.A type of letter of credit which is widely used in international trade is known as:A)Banker's acceptanceB)Commercial paperC)Repurchase agreementD)Fed funds purchasedE)None of the aboveAnswer: A72.A bank which starts with ALL of $1.48 million at the beginning of the year, charges off worthlessloans of $.94 million during the year, recovers $.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses will have an ALL at the end of the year of:A)$.66 millionB)$3.32 millionC)$1.68 millionD)$1.28 millionE)The same amount as at the beginning of the yearAnswer: C73.A bank that has total interest income of $67 million and total noninterest income of $14 million.This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net interest income?A)$7B)-$14C)$18D)$32E)None of the aboveAnswer: D74.A bank that has total interest income of $67 million and total noninterest income of $14 million.This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net noninterest income?A)$7B)-$14C)$18D)$32E)None of the aboveAnswer: B75.A bank that has total interest income of $67 million and total noninterest income of $14 million.This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net income?A)$7C)$18D)$32E)None of the aboveAnswer: A76.Which of the following financial statements shows the revenues and expense of a bank over a setperiod of time?A)The statement of stockholders equityB)The funds-flow statementC)The report of financial conditionD)The report of incomeE)None of the aboveAnswer: D77.Which of the following accounts is sometimes called the bank's primary reserves?A)Cash and deposits due from bankB)Investment securitiesC)Trading account securitiesD)Fed funds soldE)None of the aboveAnswer: A78.Which of the following assets is the largest asset item on the bank's balance sheet?A)SecuritiesB)CashC)LoansD)Bank PremisesE)None of the aboveAnswer: C79.What financial service industry category is second to the banking industry in total assets held:A)Mutual fundsB)ThriftsC)Investment banksD)Insurance companiesE)Pension fundsAnswer: A80.FASB Rule 115 focuses primarily on bank:A)Deposit sourcesB)Investments in marketable securitiesC)Derivatives tradingD)Loan-loss reservesE)Federal funds81.Which of the following most accurately describes the principal type(s) of bank noninterestincome:A)Fees from fiduciary transactionsB)Fees from deposit transactionsC)Fees from securities transactionsD)Fees from additional noninterest incomeE)All of the aboveAnswer: E82.Fee income arising from fiduciary transactions include all of the following except:A)Checking account maintenance feesB)Fees for managing and protecting a customer’s propertyC)Fees for recordkeeping for corporate securityD)Fees for dispersing interest and dividend payments for a corporationE)Fees for managing corporate and individual retirement plansAnswer: A83.You know the following information about the Miller State Bank:Gross Loans$300Miscellaneous Assets$50Deposits$390Total Equity$50Common Stock Par$5Non-Deposit Borrowings$60Investment Securities$150Net Premises$40Surplus$5Allowance for Loan Losses$50Deposits$390Total Assets$500Gross Premises $70Given this information, what is this firm’s Net Loans?A) $250B) $350C) $500D) $50E) $150Answer: A84.You know the following information about the Miller State BankGross Loans$300Miscellaneous Assets$50Deposits$390Total Equity$50Common Stock Par$5Non-Deposit Borrowings$60Investment Securities$150Net Premises$40Surplus$5Allowance for Loan Losses$50Deposits$390Total Assets$500Gross Premises $70Given this information, what is this firm’s Depreciation?A) $250B) $30C) $70D) $40E) $110Answer: B85.You know the following information about the Miller State BankGross Loans$300Miscellaneous Assets$50Deposits$390Total Equity$50Common Stock Par$5Non-Deposit Borrowings$60Investment Securities$150Net Premises$40Surplus$5Allowance for Loan Losses$50Deposits$390Total Assets$500Gross Premises $70Given this information, what is this firm’s Total Liabilities?A) $390B) $60C) $450D) $500E) $50Answer: C86.You know the following information about the Miller State BankGross Loans$300Miscellaneous Assets$50Deposits$390Total Equity$50Common Stock Par$5Non-Deposit Borrowings$60Investment Securities$150Net Premises$40Surplus$5Allowance for Loan Losses$50Deposits$390Total Assets$500Gross Premises $70Given this information, what is this firm’s Undivided Profits?A) $50B) $5C) $10D) $40E) $450Answer: D87.You know the following information about the Miller State BankGross Loans$300Miscellaneous Assets$50Deposits$390Total Equity$50Common Stock Par$5Non-Deposit Borrowings$60Investment Securities$150Net Premises$40Surplus$5Allowance for Loan Losses$50Deposits$390Total Assets$500Gross Premises $70Given this information, what is this firm’s Total Liabilities Plus Equity?A) $250B) $450C) $150D) $50E) $500Answer: E88.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Net Interest Income?A) $300B) $150C) ($50)D) $120E) $80Answer: A89.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Net Non Interest Income?A) $300B) $150C) ($50)D) $120E) $80Answer: C90.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Pretax Net Operating Income (or Net Income before Extraordinary Items)?A) $300B) $150C) ($50)D) $120E) $80Answer: B91.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Net Income?A) $300B) $150C) ($50)D) $120E) $80Answer: D92.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Increase in Undivided Profits?A) $300B) $150C) ($50)D) $120E) $80Answer: E93.You know the following information about the Davis National BankTotal Interest Expenses($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes($ 80)Dividends to Stockholders($ 40)Total Interest Income $800Total Non Interest Expenses($150)Provision for Loan Losses($100)Given this information, what is this firm’s Total Revenues?A) $800C) $150D) $950Answer: D94.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Allowance for Loan Losses?A) $1300B) $1000C) $50D) $200E) $100Answer: E95.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Net Premises?A) $130B) $1000D) $200E) $100Answer: C96.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Total Non Deposit Borrowings?A) $1000B) $300C) $800D) $200E) $500Answer: B97.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Total Liabilities?A) $1000B) $300D) $200E) $500Answer: C98.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Total Equity?A) $1000B) $300C) $800D) $200E) $500Answer: D99.You know the following information about the Webb State BankAccumulated Depreciation$40Net Loans$600Fed Funds Purchased and Repurchase Agreements$200Cash and Due from Banks$50Trading Account Securities$40Miscellaneous Assets$100Deposits$500Undivided Profits$140Gross Premises$90Surplus$40Subordinated Debt$100Investment Securities$160Common Stock Par$20Gross Loans$700 Given this information, what is this firm’s Total Assets?A) $1000B) $300C) $800E) $500Answer: A100.You know the following information about the Taylor National Bank Provision for Loan Losses($100)Income Taxes($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750 Given this information, what is this firm’s Net Interest Income?A) $150B) $210C) $400D) ($250)E) $750Answer: E101.You know the following information about the Taylor National Bank Provision for Loan Losses($100)Income Taxes($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750 Given this information, what is this firm’s Net Non Interest Income?A) $150B) $210C) $400D) ($250)E) $750Answer: D102.You know the following information about the Taylor National Bank Provision for Loan Losses($100)Income Taxes($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is this firm’s Net Operating Income or Net Income BeforeExtraordinary Income?A) $150B) $210C) $400D) ($250)E) $750Answer: C103.You know the following information about the Taylor National BankProvision for Loan Losses($100)Income Taxes($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is this firm’s Net Income?A) $150B) $210C) $400D) ($250)E) $750Answer: B104.You know the following information about the Taylor National BankProvision for Loan Losses($100)Income Taxes($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is this firm’s Increase in Undivided Profits?A) $150B) $210C) $400D) ($250)E) $750Answer: ARose/Hudgins, Bank Management and Financial Services, 8/e77。

Chapter 05Net Present Value and Other Investment CriteriaEssay Questions1. A survey of managers in the EU reveals that many managers use the payback method to appraise investments. What is the payback method and what are the advantages of using it?2. What are some of the disadvantages of using the IRR method?Multiple Choice Questions3.Which of the following investment rules does not use the concept of time value of money?A. Net present valueB. Internal rate of returnC. The payback periodD. All of the above use the time value concept4. Recent surveys of CFOs in the US indicate that the NPV method is always, or almost always, used for evaluating investment projects by:A. 12% of firmsB. 20% of firmsC. 57% of firmsD. 75% of firms5. Which of the following investment rules may not use all possible cash flows in its calculations?A. NPVB. Payback periodC. IRRD. All of the above6. Given the following cash flows for project A: C0 = -1000, C1 = +600, C2 = +400, and C3 =+1500, calculate the payback period.A. One yearB. Two yearsC. Three yearsD. None of the above7. The quickest way to calculate the internal rate of return (IRR) of a project is by:A. Trial and errorB. Graphing the NPV–cost-of-capital relationshipC. Using a financial calculatorD. Guessing8. Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.A. 23%B. 21%C. 19%D. None of the above9. Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project.A. 14.5%B. 18.6%C. 20.2%D. 23.4%10. If the sign of the cash flows for a project changes two times then the project has:A. one IRRB. two IRRsC. three IRRsD. None of the above11. The Storey Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).A. 2.4 millionB. 1.2. millionC. 0.80 millionD. 0.20 million12. Given the following cash flow for project A: C0 = -3,000, C1 = +500, C2 = +1,500, and C3 = +5,000, calculate the NPV of the project using a 15% discount rate.A. $5,000B. $2,352C. $3,201D. $1,85713. The profitability index is the ratio of:A. Future value of cash flows to investmentB. Net present value of cash flows to investmentC. Net present value of cash flows to IRRD. Present value of cash flows to IRR14. What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest?Project A: Cost = $120, NPV = 80Project B: Cost = $100, NPV = 75A. 0.62B. 0.67C. 0.75D. 0.79True / False Questions15. A positive NPV will always generate a profitability index above 0.16. The payback rule ignores all cash flows after the cutoff date.17. There can never be more than one value of IRR for any cash flow.。

Assignment5 题库True/FalseIndicate whether the statement is true or false.__T__ 1. An emerging characteristic of purchasing, logistics, and support activities is that they nee d to be flexible.__F__ 2. Direct materials that companies buy on a recurring basis are MRO supplies.__T__ 3. FedEx and UPS have freight-tracking Web pages available to their customers.__T__ 4. Online Benefits is a firm that duplicates its clients' human resource functions on a passw ord-protected Web site that is accessible to clients' employees.__T__ 5. In 1999, Ericsson launched a Web site to facilitate knowledge management.__F__ 6. Most B2C electronic commerce is an adaptation of EDI.__T__ 7. The ASC X12 organization and the UN/EDIFACT group agreed in late 2000 to develop one common set of international standards.__F__ 8. One of the major advantages of V ANs is cost.__T__ 9. GPAS and IBM Global Services are companies that provide V AN services.__F__ 10. The up-front cost of implementing indirect connection EDI, including software, V AN e nrollment fee, and hardware, typically exceeds $500,000.__F__ 11. Ventro opened its first industry marketplace, Chemdex, in early 1987.__T__ 12. A purchasing or logistics strategy that works this year may not work next year.__T__ 13. Businesses make a distinction between direct and indirect materials.__T__ 14. Governments perform many functions for their stakeholders.__F__ 15. Because of advances in computer technology, most businesses do not need to buy office supplies or the services of freight and transportation companies.__T__ 16. By coordinating the efforts of supply chain participants, firms that engage in supply cha in management are reaching beyond the limits of their own organization's hierarchical structure an d creating a new network form of organization among the members of the supply chain.__F__ 17. By engaging competitors in cooperative, long-term relationships, companies have foun d that they can work together with these competitors to identify new ways to provide their own cu stomers with faster, cheaper, and better services.__F__ 18. In many companies, procurement staff need not have high levels of product knowledge to identify and evaluate appropriate suppliers.__T__ 19. A passive RFID tag does not need a power source.__T__ 20. Many industry value chains no longer consist of a single sequence of companies linked in a single line but include many parallel lines that are interconnected in a web or network configu ration.__F__ 21. Large companies usually assign responsibility for purchasing direct and indirect materi als to the same department.__T__ 22. EDI was the first form of electronic commerce to be widely used in business.__F__ 23. EDI increases the paper flow and streamlines the interchange of information among dep artments within a company.__F__ 24. Most V ANs do not require an enrollment fee.__T__ 25. Using V ANs can become cumbersome and expensive for companies that want to do bus iness with a number of trading partners, each using different V ANs.__T__ 26. EDI and XML are both used in many businesses to handle the electronic exchange of tr ansaction information.__F__ 27. Many companies are willing to use the Internet to transmit FEDI transaction sets.__T__ 28. The ultimate goal of supply chain management is to achieve a higher-quality or lower c ost product at the end of the chain.__F__ 29. FEDI transaction sets are not negotiable instruments.__F__ 30. When EFTs involve two banks, they are executed using a VAN.Multiple ChoiceIdentify the choice that best completes the statement or answers the question.__a__ 31. The term ____ generally includes all purchasing activities, plus the monitoring of all ele ments of purchase transactions.a. procurement c. distributionb. logistics d. sales__b__ 32. W.W. Grainger is a(n) ____.a. Music store c. computer supplierb. MRO supplier d. book wholesaler__b__ 33. ____ activities include managing the inbound movements of materials and supplies and the outbound movements of finished goods and services.a. Procurement c. Transactionb. Logistics d. Production__b__ 34. The classic objective of ____ has always been to provide the right goods in the right qu antities in the right place at the right time.a. procurement c. transaction processingb. logistics d. production__c__ 35. One common support activity that underlies multiple primary activities is ____.a. record-keeping c. trainingb. auditing d. regulation__b__ 36. ____ is the intentional collection, classification, and dissemination of information about a company, its products, and its processes.a. Database management c. Data warehousingb. Knowledge management d. Data mining__c__ 37. One trend in purchasing, logistics, and support activities is the shift away from hierarchi cal structures toward ____ structures.a. vertical c. networkb. horizontal d. matrix__a__ 38. The ____ is enabling the shift from hierarchical forms of economic organization to netw ork forms.a. Web c. LANb. computer d. client/server__d__ 39. The roots of Web technology for B2B transactions lie in a very hierarchically structured approach to interfirm information transfer called ____.a. client/server c. Object technologyb. TCP/IP d. electronic data interchange__c__ 40. EDI is the acronym for ____.a. Education Interchange c. Electronic Data Interchangeb. Elementary Decision Implementation d. Electronic Distance Interface__c__ 41. ____ is a computer-to-computer transfer of business information between two businesse s that uses a standard format of some kind.a. TCP/IP c. EDIb. LAN d. SST__c__ 42. With respect to EDIs, the two businesses that exchange information are called ____.a. traders c. trading partnersb. hand-shakers d. collaborators__b__ 43. Firms that exchange data in specific standard formats are said to be ____.a. standard codes c. commonb. EDI compatible d. protocol__c__ 44. The ____ has been the coordinating body for standards in the U.S. since 1918.a. ACM c. ANSIb. IEEE d. DPMA__a__ 45. In 1979, ANSI chartered a new committee to develop uniform EDI standards. This com mittee is called the ____.a. ASC X12 c. IEEE 2321b. ACM X15 d. ASE A23__a__ 46. In 1987, the United Nations published its first EDI standards under the title ____.a. EDIFACT c. EDI-UNb. UN-ANSI d. ANSI X12__b__ 47. ____ requires each business in the network to operate its own on-site EDI translator co mputer.a. Indirect connection EDI c. Repeated EDIb. Direct connection EDI d. Wired EDI__a__ 48. A(n) ____ is a company that provides communications equipment, software, and skills needed to receive, store, and forward electronic messages that contain EDI transaction sets.a. V AN c. APIb. EDI provider d. LAN__c__ 49. To use the services of a V AN, a company must install ____ software that is compatible with the VAN.a. network compiler c. EDI translatorb. LAN interpreter d. V AN router__a__ 50. ____ allows trading partners to pass messages through the V AN instead of connecting t heir computers directly to each other.a. Indirect connection EDI c. Loop EDIb. Direct connection EDI d. V AN EDI__c__ 51. Because EDI transactions are business contracts and often involve large amounts of mo ney, the issue of ____ is significant.a. secrecy c. nonrepudiationb. integrity d. privacy__a__ 52. EDI on the Internet is also called ____.a. open EDI c. online EDIb. closed EDI d. digital EDI__c__ 53. New tools, such as ____, are helping trading partners be even more flexible in exchangi ng detailed information.a. HTML c. XMLb. T-HTML d. SGML__b__ 54. The EDI transaction sets that provide instructions to a trading partner's bank are called ____.a. BEDI c. XEDIb. FEDI d. ACH__a__ 55. ____ banks offer V AN services for nonfinancial transactions.a. Value-added c. Virtualb. Financial d. Online__a__ 56. When companies integrate their supply management and logistics activities across multi ple participants in a particular product’s supply chain, the job of managing that integration is calle d ____.a. supply chain management c. enterprise resource planningb. procurement management d. total quality management__c__ 57. Supply chain management was originally developed as a way to ____.a. attract customers c. reduce costsb. negotiate with suppliers d. improve manufacturing quality__c__ 58. The long-term relationships that are created among participants in the supply chain are c alled ____.a. quality partners c. supply alliancesb. JIT alliances d. joint suppliers__a__ 59. Businesses that engage in supply chain management work to establish long-term relatio nships with a small number of very capable suppliers called ____.a. tier-one suppliers c. secondary suppliersb. primary suppliers d. supply alliances__d__ 60. The major issue that most companies must deal with in forming supply chain alliances i s developing ____.a. standard procedures c. network relationshipsb. open communication channels d. trust__c__ 61. A(n) ____ has a password-protected entrance and offers negotiated price reductions on a limited selection of products.a. customer portals marketplace c. private storeb. private marketplace d. independent exchange__d__ 62. A(n) ____ is a marketplace that provides auctions, request for quote postings, and other features to companies that want to operate their own marketplace.a. private store c. private exchangeb. customer portals marketplace d. private company marketplace__c__ 63. A(n) ____ is a marketplace formed by several large buyers in a particular industry.a. private company marketplaceb. private storec. industry consortia-sponsored marketplaced. customer portals marketplace__b__ 64. The part of procurement activity devoted to identifying suppliers and determining the q ualifications of those suppliers is called ____.a. purchasing c. vendor selectionb. sourcing d. supplier selection__c__ 65. ____ materials are those materials that become part of the finished product in a manufac turing process.a. Product c. Directb. Operating d. Indirect__a__ 66. The ____ is the agency responsible for receiving the government's tax, license, and othe r fee revenue.a. FMS c. KMWorldb. e-government d. TaxWorld__a__ 67. In 1968, a number of freight and shipping companies joined together to form the ____, which was charged with exploring ways to reduce the paperwork burden that shippers and carriers faced.a. TDCC c. ANSIb. EDI d. ASC X12__b__ 68. Trading partners that use different ____ protocols can make either of the direct connecti on methods difficult to implement.a. network c. TCPb. communications d. IP__c__ 69. The part of an industry value chain that precedes a particular strategic business unit is of ten called a(n) ____.a. customer portal c. supply chainb. FEDI d. private store__b__ 70. One term used to describe procurement activities is ____.a. customer portal c. replenishment purchasingb. supply management d. independent exchangeCompletionComplete each statement.71. MRO is the acronym for maintenance, repair, and __________operating__________.72. Finance and __________administration__________ includes activities such as making payme nts, processing payments received from customers, planning capital expenditures, and budgeting a nd planning to ensure that sufficient funds will be available to meet the organization's obligations as they come due.73. __________Human resource__________ activities include hiring, training, and evaluating em ployees, administrating benefits, and complying with government record-keeping regulations.74. A(n) _____________automated clearing house / ACH____________ is a service that banks use to manage their accounts with each other.75. __________EDI-capable / EDI capable__________ banks are those banks that are equipped to exchange payment and remittance data through V ANs.76. __________________Radio frequency identification devices / RFIDs__________________ are small chips that use radio transmissions to track inventory.77. __________Transaction sets__________ are the names of the formats for specific business data interchanges.78. Instead of connecting directly to each of its trading partners, a company might decide to use the services of a(n) ____________value added network / value-added network / V AN / value-added network (V AN)_____________.79. __________Nonrepudiation__________ is the ability to establish that a particular transaction actually occurred.80. A(n) ____________Electronic funds transfer / EFT_____________ is the movement of money from one bank account to another.81. Nonbank V ANs that can translate financial transaction sets into ACH formats and transmit the m to banks that are not EDI capable are sometimes called _________financial V ANs (FV ANs)___ ________.82. Vertical trade portals consisting of Industry marketplaces, independent exchanges, and public marketplaces are known collectively as __________independent__________ industry marketplace s.83. One way that Procurement Departments control MRO spending is by issuing __________p-cards / purchasing cards__________.84. The use of Internet technologies in procurement activities is called __________e-procurement __________.85. The total dollar amount of the goods and services that a company buys during a year is called i ts __________spend__________.86. In __________contract / replenishment__________ purchasing, the company negotiates long-term contracts for most of the materials it will need.87. __________Independent__________ exchanges are not controlled by a company that is an est ablished buyer or seller in the industry.88. __________Public__________ marketplaces are open to new buyers and sellers entering the i ndustry.89. Companies in industries that have long supply chains have, in the past, often found it difficult t o maintain customer focus, which is often called a(n) ____________ultimate consumer orientation ____________.90. __________Nonrepudiation__________ prevents both parties from denying a transaction’s val idity or existence.91. Cisco and Dell offer __________private stores__________ for each of their major customers within their selling Web sites.92. __________Indirect__________ materials include factory supplies, such as sandpaper, hand to ols, and replacement parts.93. __________Covisint__________ is a marketplace that was created in 2000 by a consortium of DaimlerChrysler, Ford, and General Motors.94. _______________RFID / Radio frequency identification______________ tags are small enough to be installed on the face of credit cards or sewn into clothing items.95. One of the main goals of _____________supply chain management____________ is to help e ach company in the chain focus on meeting the needs of the consumer at the end of the supply cha in.Essay96. What are purchasing activities and how are they different from procurement?Purchasing activities include identifying vendors, evaluating vendors, selecting specific prod ucts, placing orders, and resolving any issues that arise after receiving the ordered goods or servic es.Procurement generally includes all purchasing activities, plus the monitoring of all elements of purchase transactions. It also includes the job of managing and developing relationships with key suppliers.97. What is the difference between an indirect connection and a direct connection?Direct connection requires each business in the network to operate its own on-site EDI transla tor computer. These EDI translator computers are then connected directly to each other using mod ems and dial-up telephone lines or dedicated leased lines.With an indirect connection, the trading partners pass messages through the V AN instead of c onnecting their computer directly to each other.98. What are the advantages of using Internet technologies in supply chain management? Suppliers can:Share information about customer demand fluctuations.Receive rapid notification of product design changes and adjustments.Provide specifications and drawings more efficiently.Increase the speed of processing transactions.Reduce the cost of handling transactions.Reduce errors in entering transaction data.Share information about defect rates and types.99. What is the difference between direct and indirect materials?Direct materials are those materials that become part of the finished product in a manufacturi ng process. Indirect materials are all other materials that the company purchases, including factory supplies such as sandpaper, hand tools, and replacement parts for manufacturing machinery.100. What are the advantages of using a value-added network?Advantages of using V ANs are as follows:Users need to support only the V AN’s communications protocol instead of many possible pro tocols used by trading partners.The V AN records message activity in an audit log. This V AN audit log becomes an independe nt record of transactions, and this record can be helpful in resolving disputes between trading partners.The V AN can provide translation between different transaction sets used by trading partners.The V AN can perform automatic compliance checking to ensure that the transaction set is in t he specified EDI format.。

Discussion Questions for Chapter 4Cultural Dynamics in Assessing Global Markets Discussion Questions1. Define:Cultural sensitivity Factual knowledgeCulture Interpretive knowledgeEthnocentrism Cultural valuesStrategy of cultural congruence Cultural borrowingLinguistic distance Material cultureStrategy of unplanned change AestheticsSocial institutions Strategy of planned change2.Which role does the marketer play as a change agent?Whether or not the marketer is aware of it, he assumes the role of a change agent when he introduces into another culture new ideas or new products requiring some form of change in behavior for acceptance and use of the new idea or product. The international marketer must concern himself with the impact of his actions upon the new culture.3.Discuss the three cultural change strategies a foreign marketer can pursue.There are three strategies. (a) Culturally congruent strategy, (b) Strategy of unplanned change, (c) Strategy of planned change. The culturally congruent strategy involves marketing products similar to ones already on the market in a manner as congruent as possible with existing cultural norms, thereby minimizing resistance. A strategy of planned change means deliberately setting out to change those aspects of a culture most likely to offer resistance to predetermined marketing goals. The strategy of unplanned change consists of introducing an innovation and then waiting for an eventful cultural change that will permit the culture to accept the innovation. The essence of unplanned change lies in the fact that the marketer does nothing to accelerate or help to bring about the necessary change where the marketer deliberately sets about to overcome resistance and to cause change that will accelerate the rate of adoption of his product or innovation.4.“Culture is pervasive in all marketing activities.” Discuss.Marketers are constantly in the process of adjusting their efforts to the demands of the culture of their markets. Although in the long run they m ay affect their market’s culture as a result of their efforts, most current activity involves reconciling marketing activity to the immediate culture.5.What is the importance of “cultural empathy” to the foreign marketer? How does he orshe acquire “cultural empathy?”The importance of “cultural empathy” to the foreign marketer is that being culturally sensitive allows him or her to objectively see, evaluate, and appreciate another culture. A marketer can obtain cultural empathy by studying the culture and living with it. The latter is not always possible, and it may be expedient to hire natives who speak your tongue and their own. This procedure will often give you the intuition which is necessary for success.6.Why should a foreign marketer be concerned with the study of culture?A foreign marketer should study culture in order to avoid making blunders which would notbe made if he or she had cultural knowledge. Culture should be studied because it affects the consumer’s desire and ability to buy.7.What is the popular definition of culture? What is the viewpoint of culturalanthropologists? What is the importance of the difference?The popular definition of culture is that a person is either “cultured” or “uncultured”according to his or her ability in certain specialized fields of knowledge. The cultural anthropologist defines culture as “all the knowledge, beliefs, and skills he or she acquires as a member of society.” The importance to the marketer of the differences between these two definitions is the fact that the anthropologist’s definition includes all parts of life, and all of these parts affect a consumer’s desire and ability to pay for a product.8.It is stated that members of a society borrow from other cultures to solve problems thatthey face in common. What does this mean? What is the significance to marketing?Cultural borrowing entails using the best solutions to a problem that different cultures face.This best solution, borrowed by one culture from another, is incorporated into the borrowing culture’s system, and becomes part of their cultural heritage. This fact is significant to the marketer because although the solutions to the problems are similar they are put together in a unique manner which is strictly American, Chinese, French, etc. In realizing the “similar but different” aspect of culture, the marketer is aided in gaining cultural empathy.9.“For the inexperienced marketer, the “similar but different” feature of culture creates anillusion of similarity which usually does not always exist.” Discuss and give examples.Although some cultures seem similar, they most likely are not. For example, two different countries speaking the same language may use words or phrases which are acceptable to one, but totally unacceptable to the other. Some cultures may have subcultures in which the “similar but different” principle applies.10.Outline the elements of culture as seen by an anthropologist. How can a marketer use this“cultural scheme?”a.Material Culture1.Technology2.Economicsb.Social Institutions1.Social organizationscation3.Political structuresc.Man and the Universe1.Belief systemsd.Aesthetics1.Graphic and plastic arts2.Folklore3.Music, drama, and the dancenguageThe foreign marketer may use the above outline of cultural elements (1) to provide a meaningful framework to use in evaluating a marketing plan or in studying the potential of a foreign market, (2) to point out those things which must be learned about the culture of the people since most of these elements are reacted to automatically in a cultural system, (3) as factors with which the market interacts and which are basic in the understanding of the character of the marketing system of any society.11.What is material culture? What are its implications for marketing? Give examples.12.Material culture consists of technology and economics. Technology is the techniques usedto make material goods; it is the “know-how” possessed by the people of a society.Economics is the manner in which people employ their capabilities and the resultingbenefits. Economics includes the production of goods and services, their distribution, consumption, means of exchange, and the income derived from the creation of utilities.The marketer must remember that material culture affects the level of demand, the quality and type of products demanded, their functional features, and the means of production and distribution of these goods. Examples of material culture would be the availability and cost of gasoline in regulating demand for and size of automobiles. The availability of electricity can regulate demand for any electrical product.13.Social institutions affect marketing in a variety of ways. Discuss, give examples.Social institutions affect marketing because they regulate the consumer’s behavior and attitudes by organizing his activities and teaching him acceptable behavior. Examples of social institutions affecting marketing are the literacy rate as a function of education, the strength of the family unit, and political acceptance or hindrance of marketing activities.14.“Markets are the result of the triune interaction of a marketer’s efforts, economicconditions, and all other elements of the culture.” Comment.This statement emphasizes the point that markets evolve out of the interrelationship of three major f actors. They are a marketer’s efforts, economic conditions and all the other elements of the culture. Marketers are constantly in the process of adjusting their efforts to cultural demands of the market, but they are also agents of change whenever the product or idea being marketed is innovative. Whatever the degree of acceptance and whatever level of culture is, the use of something new is the beginning of cultural change and the marketer becomes a change agent. This statement is important because it emphasizes the fact that the marketer is not a passive influence in a culture and that, while the marketer attempts to react to cultural demands, in so doing the marketer also influences cultural change.15.What are some particularly troublesome problems caused by language in foreignmarketing? Discuss.Language poses some difficult problems in foreign marketing not merely because of the obvious differences in tongues, but because the idiomatic interpretations mean something different than what the marketer had i ntended. Examples of this are “Body by Fisher” which translates to “Corpse by Fisher” and “Let Hertz Put You in the Drivers Seat” which translates to “Let Hertz Make You a Chauffeur.”16.Suppose you were requested to prepare a cultural analysis for a potential market, whatwould you do? Outline the steps and comment briefly on each.The best procedure for making a cultural analysis for a potential market is to go through each of the elements of culture and evaluate each on the basis of how it could possibly affect a proposed marketing program.a.Material Culture1.Technology –the techniques and “know-how” of producing material goods.2.Economics – the employment of capabilities and the results.b.Social Institutions1.Social organizations – family life, status, age.cation – literacy and intelligence and how informed the public is.3.Political structures – control over business.c.Man and the Universe1.Belief systems – how do these affect product and promotional acceptance?d.Aesthetics1.Graphic and plastic arts – degree of modernization.2.Folklore – superstition, tradition, etc.3.Music, drama, and the dance – promotional possibilities.17.Cultures are dynamic. How do they change? Are there cases where change is not resistedbut actually preferred? Explain. What is the relevance to marketing?Cultures change gradually with resistance to changes. The resistance varies inversely with the interest a society has in the change. Culture doesn’t resist change if the product is a status-valued imported item, a fashion item, or is given the advantage of inferior feelings about local products. Marketers can expect resistance to their products, with greater resistance to those products with the greatest deviation from the cultural norm or status quo.18.How can resistance to cultural change influence product introduction. Are there anysimilarities in domestic marketing? Explain, giving examples.Resistance to cultural change will affect new product introduction in the respect that the greatest resistance will confront products which are farthest from the status quo, but this resistance can be lowered by gaining public interest. Lowering resistance in this situation means shortening the duration of the resistance. Domestic marketing is subject to the same resistance to change. Examples of this resistance in the domestic market are the introduction of contact lenses and using motorcycles as an acceptable means of recreation.19.Innovations are described as being either functional or dysfunctional. Explain and giveexamples of each.The consequences of diffusion of an innovation may be functional or dysfunctional depending on whether the effects of the social system are desirable. A dysfunctional innovation is one where the effects within the social system are undesirable. In most instances, the marketer’s concern is with perceived functional consequences, i.e., the positive benefits of product use. For many products, such as the cake mix described in the chapter, there would be no dysfunctional consequences. However, it cannot always be assumed that an innovative product’s consequences will be functional. An example mentioned in the text was the introduction of condensed milk to the diet of babies in underdeveloped countries where protein deficiency is a health problem. On the surface it would appear that the consequences of the addition of condensed milk to the diet would result in better nutrition and health, stronger and faster growth, etc. However, evidence tends to indicate that in at least one situation there were dysfunctional consequences of the innovation. Instead of healthbenefits, a substantial increase in dysentery, diarrhea, and a high infant mortality rate resulted.20.Defend the proposition that a MNC has no responsibility for the consequences of aninnovation beyond the direct effects of the innovations such as the product’s safety, performance, and so forth.It would be difficult to defend this proposition since the dysfunctional consequences of an innovation may not only have negative consequences on the social system but may ultimately impact on the success of the multinational concern. While most multinational companies have not concerned themselves with the consequences of an innovation beyond product safety, it appears that in the future there will be greater concern on the part of host countries in holding companies responsible for the consequences of their marketing activities. It would seem that from an enlightened self-interest viewpoint, companies should attempt to determine the consequences of their innovations, and should they prove to be dysfunctional, include in their marketing strategies attempts to eliminate the negative aspects of the acceptance of diffusion of their product.21.Find a product whose introduction into a foreign culture may cause dysfunctionalconsequences and describe how the consequences might be eliminated and the product still profitably introduced.Library project.。

Chapter Five: Basic Organization DesignsTrue/False1.There is a point at which the diseconomies from division oflabor exceed the economic advantage.2.The early management writers argued that an employeeshould have one and only one superior to whom he or she is directly responsible.3.Responsibility refers to the rights inherent in a managerialposition to give orders and expect the orders to be obeyed.4.In differentiating line managers from staff managers, staffemphasizes managers whose organizational functioncontributes directly to the achievement of organizationalobjectives.5.If an individual is low in the authority hierarchy, he/she isalso not close to the power core.6.Centralization is one of the functions that answers thequestion, “At what level are decisions made?”7.An organic structure has many rules with rigid hierarchicalrelationships and a tall structure.anization structure should always precede organizationstrategy.9.Environment is a major influence on structure.10.An organization's culture can actually substitute for therules and regulations that formally guide employees. Multiple Choice1.Which of the following is not one of the six elements ofstructure?a)w ork specializationb)chain of commandc)s pan of controld)technology2.When five differing workers each do one specific jobpreparing a Big Mac at McDonald's, they are engaging ina)w ork specialization.b)chain of command.c)s pan of control.d)departmentalization.3.Terri must constantly report to the department chair as well asher immediate supervisor. Which of the following is being violated?a)w ork specializationb)chain of commandc)s pan of controld)departmentalization4.Which of the following is not a contingency variable thatdetermines the appropriate span of control for managers?a)e mployee trainingb)task complexityc)m anagement style preferencesd)expenses5.Jack has just been promoted to line manager for theassembling plant. Since Jack is now a manager, which of the following automatically also goes with the title of manager?a)r espectb)span of controlc)a uthorityd)acceptance by the employees6.A purchasing department may be created because the hospitaladministrator cannot effectively handle all purchasing. What type of position authority has been created?a)a ccountabilityb)line authorityc)s taff authorityd)responsibility7.It is not necessary to have authority in order to wield powerbecause an individual can move _____ toward the power core without moving up.a)h orizontally inwardb)directly upwardc)h orizontally downwardd)directly downward8.Harry is the only person who fully understands the newcomputer network in the office area. Whenever someone has questions, he goes to Harry. Harry has _____ power.a)c oerciveb)rewardc)e xpertd)referent9.A manager who organizes his or her plant by separatingengineering, accounting, human resources, and purchasing is using _____ departmentalization.a)f unctionalb)productc)c ustomerd)geographic10.Which of the following is not a contingency variable thataffects the appropriate structure for an organization?a)s trategyb)sizec)t echnologyd)sales11.Frederic works in an organization where a large amount ofcollaboration occurs and decision-making authority isdecentralized. There are few rules, and duties are adaptable.This is an example of which of the following?a)s trategic organizationb)mechanistic organizationc)o rganic organizationd)bureaucracyMedium-length questions1.What is the difference between line authority and staffauthority?pare and contrast authority and power.3.set an example to clarify each of five types ofdepartmentalization that are available.4.What is a matrix structure? What is its primary strength?What are its major disadvantages?pare functional and divisional structure.。

国际管理CHAPTER 5答案CHAPTER 5CHAPTER DISCUSSION QUESTIONS1.Discuss the stages in the negotiation process and how culturally-basedvalue systems influence these stages. Specifically, explain the role and relative importance of relationship building in differentcountries. Discuss the various styles and tactics that can be involved in exchanging task-related information. Describe differences in culturally-based styles of persuasion, and discuss the kinds of concession strategies a negotiator might anticipate in various countries.The five interrelated phases in the negotiation process are:preparation, relationship building, exchange of task information, persuasion, and concessions and agreement. Relationship building, the second stage, is more important in other parts of the world than it is in the U.S. In many countries, the personal relationship forms the basis for the enforcement of contracts.In exchanging task-related information, each side typically makes a presentation and states a position. Then there is a question and answer session and then alternatives are discussed. Americans are generally direct at this stage but many other countries tend to take an indirect approach. Persuasion too has cultural differences in the methods used.Promises, threats, commitments, and commands are some tacticspossible. For instance, the Japanese and Americans tend to be similar on the use of these tactics but quite different from the Brazilians who use fewer promises and commitments. Americans and Japanese are also more likely to use threats than the Brazilians. Exhibit 5-4 provides the complete list of tactics and the variations among these three cultures.Finally, concession strategies will vary too. Russians and Chinese typically start with extreme positions and research suggests that this is associated with better results. However, cultures like the Swedish prefer to start at the level they are prepared to accept. Overall, all stages will vary widely in different cultural settings based on the importance negotiators in a particular culture place on such things as objective information versus emotional appeals; getting down to business versus building relationships; using pressurized means of persuasion; and whether or not a short-term versus long-term perspective is assumed throughout the process.2. Discuss the relative use of non-verbal behaviors, such as silentperiods, interruptions, facial gazing, and touching by people from various cultural backgrounds. How does this affect the negotiation process in a cross-cultural context?Non-verbal behaviors are the most subtle part of the negotiating process and the most difficult for most managers to deal with because of widely varying cultural differences. Negotiators must be aware of their own non-verbal agendas, as well as those of the other party.Particular attention should be placed on determining which non-verbal behaviors make the other party comfortable and uncomfortable.3. Describe what you would expect in negotiations with the Chinese andhow you would handle that situation.The Chinese place much greater emphasis than Americans on respect and friendship, on maintaining face, and on group goals. Two major areas of conflict in negotiating with the Chinese involve the amount of detail the Chinese want about product characteristics and their apparent insincerity about reaching an agreement. Research shows that the Chinese are greatly affected by three cultural norms: their ingrained politeness and emotional restraint, their emphasis on social obligations, and their belief in the interconnection of work, family, and friendships. Appeals to individual members of theChinese negotiating team, rather than to the group as a whole, will probably backfire. Those negotiating with the Chinese should focus on establishing long-term, trusting relationships, even at theexpense of immediate returns.4. What are some of the differences in risk tolerance around the world?What is the role of risk propensity in the decision making process?According to research, people from Belgium, Germany, and Austria havea considerably lower tolerance for risk than people from Japan or theNetherlands. American managers appear to have the highest tolerance of risk. The extent to which negotiators tolerate risk will have a major impact on how bold they are in the negotiating process.5.Explain how objective versus subjective perspectives influence thedecision-making process. What role do you think this variable has played in all of the negotiations and decisions between Iraq and the U.N.?People from Western nations generally take a very rational approach to decision-making, stressing the role of information heavily. This is in contrast with Latin Americans, for example, who are more subjective and emotional. Objectives versus subjective perspectives involve the extent to which information versus emotion are major variables in the decision making process.Iraq, as a Middle Eastern country, likely handles negotiations using expressive-oriented styles. That means that the situation is handled indirectly and implicitly and there is no clear delineation of the situation from the person handling it. In such a case, the negotiators try to avoid confrontations and if they cannot reach agreement through emotional appeals, they will use evasion and avoidance. This has likely been frustrating for the U.N., which must follow a low-context, instrumental-oriented style of basing decisions on factual and logical analysis.6. Explain differences in culturally-based value systems relative to theamount of control a person feels they have over future outcomes. How does this belief influence the decision-making process?Locus of control refers to the extent to which the manager feels that he/she can plan on certain outcomes because he/she is in control of events that will direct the future in the desired way. American managers tend to have a very strong locus of control, in contrast with managers from Muslim nations who believe more in the concept of “fate.”7. How does culture influence the decision-making process? What culturalvariables affect this process?Culture affects decision-making both through the broader context ofa nation’s institutional culture, which produces collective patternsof decision-making, and through culturally-based value systems that affect each individual decision-maker’s perception of a situation.The variables that affect this process include whether a country assumes an objective or subjective approach, the risk tolerance of those making the decision, the locus of control, and the timeorientation.8. List the possible tactics that could be used in negotiations. Are sometactics more appropriate for certain cultures? Which ones?Exhibit 5-4 shows the different tactics commonly used in bargaining.They are promise, threat, recommendation, warning, reward, punishment, positive normative appeals, negative normative appeals, commitment, self-disclosure, question, and command. Some cultures will use some tactics more often than others. For instance, Japanese and Americans will tend to use promise and commitment more than the Brazilians, while the Brazilians will tend to use command more often. All three cultures utilize self-disclosure a great deal.9. What are the key variables in the negotiation process?The variables in the negotiation process are provided in Exhibit 5-3.They are: 1) the basic conception of negotiation; 2) negotiator selection criteria; 3) significance of the issue; 4) concern with protocol; 5) complexity of communicative content; 6) nature ofpersuasive arguments; 7) role of individuals’ aspirations; 8) bases of trust; 9) risk-taking propensity; 10) value of time; 11)decision-making system; and 12) form of satisfactory agreement.10. There are several appeals possible in negotiations. List three anddescribe how they would be used in negotiations.Three appeals that could be used are factua l appeals, affectiveappeals, and axiomatic appeals. Factual appeals are based on objective information and logic. Affective appeals are based on emotions and feeling. Axiomatic appeals are based on the generally accepted ideals of that society. When groups approach negotiations with different appeals, it can complicate the negotiation process because of the incompatibility of reasoning caused by the differences between the appeals.11. How can a manager handle conflict in the negotiation process? How dothe two approaches to conflict relate to the concept of high-context and low-context cultures?The two approaches to conflict are instrumental-oriented andexpressive-oriented. The instrumental-oriented approach tends to be factual and logical in nature. The conflict is handled directly and explicitly. It is most common in low-context cultures. Theexpressive-oriented approach uses an indirect and implicit style. It is more common in high-context cultures.END-OF-CHAPTER CASEMARTINEZ CONSTRUCTION COMPANY IN GERMANYDiscussion Questions1. What was the basis for Martinez’ decision to enter the internationalmarket? Was it proactive or reactive?Martinez’ decision was completely reactive. It was not until after they had experienced difficulty in their home market that they began to consider the possibility of offsetting local economic conditions through geographic diversification.2. Were the Spanish prepared for the problems faced in the negotiations?If not, what might the Spanish have done to be better prepared?The Spanish were unprepared on several levels. First, they had not anticipated the cultural differences in the negotiation process and the noise that would induce into the communication process. Second, they seemed naïve as to the business conditions and practices(political and economic) in Germany. As a result, they wereunprepared for the structure of a typical German contractual agreement.In both cases, training would have made a difference. Further, the company would have gained a great deal by finding some Spanish firms that had already successfully acquired German firms. They could have learned a great amount from debriefing their successful local firms.3. How did the Spanish interpret the actions of the Germans?The Spanish thought the Germans were all business. They had nointerest in forming relationships; they just wanted to sell the unit.Further, they were perceived as inflexible in a situation the Spanish believed demanded flexibility.4. Do you think the Germans were aware of the cultural differences thatcame to surface during the negotiations?Not necessarily; while the Germans did make contractual concessions, there were indications they were not culturally prepared for this encounter. For example, they were uncomfortable that thenegotiations had an emotional element. Were they culturally savvy, they would have expected no less. Further, their adherence to the German concept of time (a form of uncertainty avoidance) signaled thatthey were not looking for some culturally neutral negotiationenvironment.5. What might the Spanish have done differently to address the concernsof the employees?First, the Spanish would have done well to learn something about the expectations of the employees prior to the acquisition. This would have helped them in negotiating a fair price for the unit and would have eased the post-acquisition integration.The Spanish needed to invest in training and orientation programs in an intensive and on-going manner. The work culture had beeninfluenced by 40 years of communism, and a quick fix training program was not likely to generate significant results. Further, since employees had a natural distrust of management, it was important to get employee involvement in decisions on staffing, training and other human resource issues.6. What are the diverse problems created by the difference between theSpanish and German cultures? Communist and capitalist cultures?The case highlights several surface issues: the German value of strict adherence to time schedules vs. the Spanish flexibility in regard to time; the German value of rational cognition in business vs. the Spanish value for emotional context; the German value of taskorientation vs. the Spanish value for relationship building. All of these contributed to the problems encountered in the venture.The case could be linked more strongly to the text at this point by asking the students to identify specific examples of how this case illustrates principles and concepts raised in Chapters 3 and 4.Students should be able to identify the high-context vs. low-context cultures, uncertainty avoidance, masculine-feminine culture, etc.In discussing communist vs. capitalist structures, average students should be able to identify the problems of incentives, especially individual incentives in a work culture that has not used monetary incentives. Further, the “command economy” features of top-down management are identified in the case. Students with anunderstanding of economics might note the importance of price systems.In a capitalist system, prices form an important signalingmechanism—that is, we equate value with price. Had East Germany developed as a market economy, the wage rate of the workers would havesignaled the Spanish that they were less productive than their German counterparts.Another issue in comparing communist and capitalist societies that strong students might uncover is the role of women in the workforce.Communist countries are very egalitarian in the distribution of work.It is likely that Martinez had more women managers in East Germany than they had in Spain. Further, it is likely that Martinez had women and minority managers in greater numbers in Germany. All of these could add to the difficulty of post-acquisition integration. Finally, the differences discussed above are often deeply held differences and as a result, will change slowly if at all. Some students will suggest that Martinez should choose a partner or acquisition target in a country other than Germany. This presents a good opportunity to reinforce the value of this class—that if managers limit their activity to only those cultures where they are comfortable, they will miss extraordinary opportunities.。

Chapter 5Discussion Questions5-1. Discuss the various uses for break-even analysis.Such analysis allows the firm to determine at what level of operations it willbreak even and to explore the relationship between volume, costs, and profits. 5-2. What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?A utility is in a stable, predictable industry and therefore can afford to use morefinancial leverage than an automobile company, which is generally subject tothe influences of the business cycle. An automobile manufacturer may not beable to service a large amount of debt when there is a downturn in the economy. 5-3. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).A labor-intensive company will have low fixed costs and a correspondingly lowbreak-even point. However, the impact of operating leverage on the firm issmall and there will be little magnification of profits as volume increases. Acapital-intensive firm, on the other hand, will have a higher break-even pointand enjoy the positive influences of operating leverage as volume increases.5-4. What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?For break-even analysis based on accounting flows, depreciation is consideredpart of fixed costs. For cash flow purposes, it is eliminated from fixed costs.The accounting flows perspective is longer-term in nature because we mustconsider the problems of equipment replacement.5-5. What does risk taking have to do with the use of operating and financial leverage?Both operating and financial leverage imply that the firm will employ a heavycomponent of fixed cost resources. This is inherently risky because theobligation to make payments remains regardless of the condition of thecompany or the economy.5-6. Discuss the limitations of financial leverage.Debt can only be used up to a point. Beyond that, financial leverage tends toincrease the overall costs of financing to the firm as well as encourage creditorsto place restrictions on the firm. The limitations of using financial leverage tendto be greatest in industries that are highly cyclical in nature.5-7. How does the interest rate on new debt influence the use of financial leverage?The higher the interest rate on new debt, the less attractive financial leverage isto the firm.5-8. Explain how combined leverage brings together operating income and earnings per share.Operating leverage primarily affects the operating income of the firm. At thispoint, financial leverage takes over and determines the overall impact onearnings per share. A delineation of the combined effect of operating andfinancial leverage is presented in Table 5-6 and Figure 5-5.5-9. Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.At progressively higher levels of operations than the break-even point, thepercentage change in operating income as a result of a percentage change inunit volume diminishes. The reason is primarily mathematical — as we move toincreasingly higher levels of operating income, the percentage change from thehigher base is likely to be less.5-10. When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you areindifferent as to which plan is selected?The point of equality only measures indifference based on earnings per share.Since our ultimate goal is market value maximization, we must also beconcerned with how these earnings are valued. Two plans that have the sameearnings per share may call for different price-earnings ratios, particularly whenthere is a differential risk component involved because of debt.Problems5-1.Gateway Appliance toasters sell for $20 per unit, and the variable cost to produce them is $15. Gateway estimates that the fixed costs are $80,000.a. Compute the break-even point in units.b. Fill in the table below (in dollars) to illustrate that the break-even point has been achieved. Sales _______________ –Fixed costs _______________ –total variable costs _______________ Net profit (loss) _______________Solution:Gateway Applianceunits 000,165$000,80$15$20$000,80$unitper cost variable - Price costsFixed BE a.==-==b. Sales $320,000 (16,000 units x $20) –Fixed costs 80,000–Total variable costs 240,000 (16,000 units x $15) Net profit (loss) $ 05-2.Hazardous Toys Company produces boomerangs that sell for $8 each and have a variable cost of $7.50. Fixed costs are $15,000.a. Compute the break-even point in units.b. Find the sales (in units) needed to earn a profit of $25,000.Solution:The Hazardous Toys Companya. units 000,3050.7$00.8$000,15$BE =-=()units 000,8050$.000,40$50.7$00.8$000,15$000,25$VC P FC Profit Q b.==-+=-+=5-3.Ensco Lighting Company has fixed costs of $100,000, sells its units for $28 and has variable costs of $15.50 per unit.a. Compute the breakeven point.b. Ms. Watts comes up with a new plan to cut fixed costs to $75,000.However, more labor will now be required, which will increase variable costs per unit to $17. The sales price will remain at $28. What is the new breakeven point?c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?Solution:Ensco Lighting Companya.units 000,850.12$000,100$50.15$28$000,100$unitper cost variable Price costsFixed BE ==-=-=b.units 818,611$000,75$17$28$000,75$unitper cost variable Price costsFixed BE ==-=-=The breakeven level decreases.c. With less operating leverage and a smaller contribution margin, profitability is likely to be less at very high volume levels.5-4.Air Filter, Inc. sells its products for $6 per unit. It has the following costs: Rent $100,000 Factory labor $1.20 per unit Executive salaries $89,000 Raw material $ .60 per unitSeparate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of $6, compute the break-even point.Solution:Air Filter, Inc.Fixed Costs Variable Costs (perunit)Rent $100,000 Factory labor $1.20 Executive salaries $89,000 Raw materials _______ .60 $189,000$1.80units 000,4520.4$000,189$80.1$00.6$000,189$VC P FC BE ==-=-=5-5.Shawn Penn & Pencil Sets, Inc. has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce variable costs per unit to $2.00.As a result of Bic's suggestion, will the break-even point go up or down? Compute the necessary numbers.Solution:Shawn Penn & Pencil Sets, Inc.units000,4000.3$000,120$00.2$00.5$000,120$(after) BE units000,3250.2$000,80$50.2$00.5$000,80$(before) BE ==-===-=The break-even point will go up.5-6.Gibson & Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $1,200,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point?Solution:Gibson & SonsCash related fixed costs = Total Fixed Costs – Depreciation = $1,200,000 – 25% ($1,200,000) = $1,200,000 – $300,000 = $900,000units 000,37540.2$$900,000BE ==5-7.Draw two break-even graphs —one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits.Solution:Labor-Intensive and capital-intensive break-even graphsRevenue and costsRevenue and costsTotal revenueTotal revenueP r o f i t sP r of i t s Total costsTotal costs Variable costVariable costFixed costsUnits produced and sold Units produced and soldBEBELabor-IntensiveCapital-IntensiveThe company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a largercontribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline, the reverse will be true.5-8.The Sosa Company produces baseball gloves. The company’s income statement for 2004 is as follows:Sosa Company Income StatementFor the Year Ended December 31, 2004Sales (20,000 gloves at $60 each) ......................$1,200,000 Less: Variable costs (20,000 gloves at $20) ....................................................................400,000 Fixed costs ...................................................... 600,000 Earnings before interest and taxes (EBIT) .........200,000 Interest expense .................................................. 80,000 Earnings before taxes (EBT) ..............................120,000 Income tax expense (30%) ................................. 36,000 Earnings after taxes (EAT).................................$ 84,000Given this income statement, compute the following:a. Degree of operating leverage.b. Degree of financial leverage.c. Degree of combined leverage.Solution:Sosa CompanyQ = 20,000, P = $60, VC = $20, FC = $600,000, I = $80,000()()()()()()000,600$40$ 000,2040$ 000,20000,600$20$60$ 000,2020$60$00020FCVC P Q VC P Q DOL a.-=---=---=,5-8. Continuedx 00.4000,200$000,800$000,600$000,800$000,800$==-= x 67.1000,120$000,200$000,80$000,200$000,200$I EBIT EBIT DFL b.==-=-=()()()()()()x67.6000,120$000,800$000,680$40$000,20$40$000,200$000,80$000,600$20$60$ 000,2020$60$ 000,20IFC VC P Q VC P Q DCL c.==-=----=----=5-9.The Harmon Company manufactures skates. The company's income statement for 2004 is as follows:Harmon Company Income StatementFor the Year Ended December 31, 2004Sales (30,000 skates @ $25 each) ........................... $750,000 Less: Variable costs (30,000 skates at $7) ............ 210,000 Fixed costs .......................................................... 270,000 Earnings before interest and taxes (EBIT) .............. 270,000 Interest expense ....................................................... 170,000 Earnings before taxes (EBT) ................................... 100,000 Income tax expense (35%) ...................................... 35,000 Earnings after taxes (EAT) .....................................$65,000Given this income statement, compute the following:a. Degree of operating leverage.b. Degree of financial leverage.c. Degree of combined leverage.d. Break-even point in units.Solution:Harmon CompanyQ = 30,000, P = $25, VC = $7, FC = $270,000, I = $170,000()()()()()()000,270$18$ 000,3018$ 000,30000,270$7$25$ 000,307$25$00030FCVC P Q VC P Q DOL a.-=---=---=,5-9. Continuedx 7.2000,100$000,270$000,170$000,270$000,270$I EBIT EBIT DFL b.x 2000,270$000,540$000,270$000,540$000,540$==-=-===-=()()()()()()x4.5000,100$000,540$000,440$18$ 000,3018$ 000,30000,170$000,270$7$25$ 000,307$25$ 000,30IFC VC P Q VC P Q DCL c.==-=----=----=units 000,157$25$000,270$BE d.=-=5-10.University Catering sells 50-pound bags of popcorn to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the popcorn are $.10 per pound.a. What is the break-even point in bags?b. Calculate the profit or loss on 12,000 bags and 25,000 bags.c. What is the degree of operating leverage at 20,000 bags and 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases?d. If University Catering has an annual interest payment of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags.e. What is the degree of combined leverage at both sales levels?Solution:University Catering()bags 000,165$000,80$5010$.10$000,80$BE a.==⨯-=b.()()FCVC P Q VC P Q DOL c.---=()()x00.5000,20$000,100$000,80$$5-$10 000,205$10$ 000,20000,20at DOL ==--=()()x78.2000,45$000,125$000,80$$5-$10 000,255$10$ 000,2500025,at DOL ==--=Leverage goes down because we are further away from the break-even point, thus the firm is operating on a larger profit base and leverage is reduced.IEBIT EBITDFL d.-=First determine the profit or loss (EBIT) at 20,000 bags. As indicated in part b, the profit (EBIT) at 25,000 bags is $45,000:x0.2000,10$000,20$000,20$000,20at DFL =-=x29.1000,10$000,45$000,45$000,25at DFL=-=()()IFC VC P Q VC P Q DCL e.----=()()x 0.10000,10$000,100$000,10$000,80$$5-$10 000,205$10$ 000,20000,20at DCL ==---=()()x 57.3000,35$000,125$000,10$000,80$$5$10 000,255$10$ 000,25000,25at DCL ==----=5-11.Leno’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Leno and Hall are presented below.Leno HallDebt @ 10% ....................... $100,000 Debt @ 10% ........................ $200,000 Common stock, $10 par ..... 200,000 Common stock, $10 par ...... 100,000 Total ................................. $300,000 Total .................................. $300,000Shares ................................. 20,000Common shares ................... 10,0005-11. Continueda. Compute earnings per share if earnings before interest and taxes are $20,000,$30,000, and $120,000 (assume a 30 percent tax rate).b. Explain the relationship between earnings per share and the level of EBIT.c. If the cost of debt went up to 12 percent and all other factors remained equal,what would be the break-even level for EBIT?Solution:Leno Drug Stores and Hall Pharmaceuticalsa.5-11. Continuedb. Before-tax return on assets = 6.67%, 10% and 40% at the respectivelevels of EBIT. When the before-tax return on assets (EBIT/Total Assets) is less than the cost of debt (10%), Leno does better with less debt than Hall. When before-tax return on assets is equal to the cost of debt, both firms have equal EPS. This would be where the method of financing has a neutral effect on EPS. As return on assets becomes greater than the interest rate, financial leverage becomes more favorable for Hall.c. 12% x $300,000 = $36,000 break-even level for EBIT.5-12. In Problem 11, compute the stock price for Hall Pharmaceuticals if it sells at 13 times earnings per share and EBIT is $80,000.Solution:Hall Pharmaceuticals (Continued)5-13. Pulp Paper Company and Holt Paper Company are able to generate earnings before interest and taxes of $150,000.The separate capital structures for Pulp and Holt are shown below:Pulp HoltDebt @ 10% .................... $ 800,000 Debt @ 10% .................. $ 400,000Common stock, $5 par .... 700,000 Common stock, $5 par .. 1,100,000Total .............................. $1,500,000 Total ............................ $1,500,000Common shares ............... 140,000 Common shares ............. 220,000a. Compute earnings per share for both firms. Assume a 40 percent tax rate.b. In part a, you should have gotten the same answer for both companies'earnings per share. Assume a P/E ratio of 20 for each company, what wouldits stock price be?c. Now as part of your analysis, assume the P/E ratio would be 15 for theriskier company in terms of heavy debt utilization in the capital structure and26 for the less risky company. What would the stock prices for the two firmsbe under these assumptions? (Note: Although interest rates also would likelybe different based on risk, we hold them constant for ease of analysis).d. Based on the evidence in part c, should management only be concernedabout the impact of financing plans on earnings per share or shouldstockholders' wealth maximization (stock price) be considered as well?Solution:Pulp Paper Company and Holt Paper Companya.b. Stock price = P/E x EPS20 x $.30 = $6.00c. Pulp Holt15 x $.30 = $4.50 26 x $.30 = $7.80d. Clearly, the ultimate objective should be to maximize the stockprice. While management would be indifferent between the two plans based on earnings per share, Holt Paper, with the less risky plan, has a higher stock price.5-14.Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships. Assume the Susaki Company has a sales volume of 100,000 units at a price of $25 per unit; variable costs are $5 per unit and fixed costs are $1,500,000. Interest expense is $250,000. What is the degree of combined leverage for this Japanese firm?Solution:Susaki Company()()()()()()x 8000,250000,000,2$000,750,1$000,000,2$000,000,2$000,750,1$20$ 000,10020$ 000,100000,250$000,500,1$5$25$ 000,1005$25$ 000,100IFC VC P Q VC P Q DCL ==-=-=----=----=5-15. Glynn Enterprises and Monroe, Inc., both produce fluid control products. Their financial information is as follows:Capital StructureGlynn Monroe Debt @ 10% .................................................. $1,500,000 0Common stock, $10 per share ....................... 500,000 $2,000,000$2,000,000 $2,000,000 Common shares ............................................. 50,000 200,000Operating PlanSales (200,000 units at $5 each) .................... $1,000,000 $1,000,000Less: Variable costs..................................... 600,000 200,000($3 per unit) ($1 per unit) Fixed costs ................................................. 0 400,000Earnings before interest and taxes (EBIT) .... $ 400,000 $ 400,000a. If you combine Glynn’s capital structure with Monroe’s operating plan, whatis the degree of combined leverage?b. If you combine Monroe’s capital structure with Glynn’s operating plan, whatis the degree of combined leverage?c. Explain why you got the results you did in part b.d. In part b, if sales double, by what percent will EPS increase?Solution:Glynn Enterprises and Monroe, Inc.()()()()()()x 20.3000,250$000,800$000,550$ 4$000,200$4$000,200000,150$000,400$1$5$ 000,2001$5$ 000,200IFC VC P Q VC P Q DCL a.==-=----=----=()()()()()()x 1000,400$000,400$2$ 000,2002$ 000,200003$5$ 000,2003$5$ 000,200IFC VC P Q VC P Q DCL b.===----=----=c. The combined leverage is fairly high in part a because you arecombining firms that both use operating and financial leverage.However, the leverage factor is only one in part b becauseMonroe has no financial leverage and Glynn has no operatingleverage.d. EPS will increase by 100 percent. However, there is no leverageinvolved. EPS merely grows at the same rate as sales.5-16. DeSoto Tools, Inc., is planning to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14 percentor by selling 10,000 shares of common stock at $30 per share. The currentincome statement before expansion is as follows:DeSoto Tools, Inc.Income Statement199XSales .............................................................. $1,500,000Less: Variable costs..................................... $ 450,000Fixed costs ................................................. 550,000 1,000,000Earnings before interest and taxes................. 500,000Less: Interest expense ................................. 100,000Earnings before taxes .................................... 400,000Less: Taxes @ 34% ..................................... 136,000Earnings after taxes ....................................... $ 264,000Shares ............................................................ 100,000Earnings per share ......................................... $2.64After the expansion, sales are expected to increase by $1,000,000. Variable costswill remain 30 percent of sales, and fixed costs will increase to $800,000. Thetax rate is 34 percent.a. Calculate the degree of operating leverage, the degree of financial leverage,and the degree of combined leverage before expansion. (For the degree ofoperating leverage, use the formula developed in footnote 2; for the degreeof combined leverage, use the formula developed in footnote 3. Theseinstructions apply throughout this problem.)5-16. Continued b. Construct the income statement for the two alternative financing plans.c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion.d. Explain which financing plan you favor and the risks involved with each plan.Solution:DeSoto Tools, Inc.x1.2000,550$000,450$000,500,1$000,450$000,500,1$FCTVC S TVC S DOL a.=---=---=x 25.1000,400$ 000,500$000,100$000,500$000,500$IEBIT EBITDFL ==-=-=x 63.2000,400$ 000,050,1$000,100$000,550$000,450$000,500,1$000,450$000,500,1$IFC TVC S TVCS DCL ==----=----=b. Income Statement After Expansion1New interest expense level if expansion is financed with debt. $100,000 + 14% ($300,000) = $142,000 2Number of common shares outstanding if expansion is financed with equity.100,000 + 10,000 = 110,000c.()x84.1000,950$$1,750,000 000,800$000,750$000,500,2$000,750$000,500,2$y Debt/Equit DOL FCTVC S TVCS DOL ==---=---=()()()x 17.2000,808$000,750,1$000,142$000,800$000,750$000,500,2$000,750$000,500,2$Debt DCL x12.1000,850$000,950$000,100$000,950$000,950$Equity DFL x18.1000,808$000,950$000,142$000,950$000,950$Debt DFL IEBIT EBITDFL ==----===-===-=-=()x 06.2000,850$000,750,1$000,100$000,800$000,750$000,500,2$000,750$000,500,2$Equity DCL ==----=d. The debt financing plan provides a greater earnings per share at the new sales level, but provides more risk because of the increased use of debt. However, the interest coverage ratio in both cases is certainly satisfactory and interest expense is well protected. The crucial point is expectations for future sales. If sales are expected to decline, the debt plan will not provide higher EPS at sales of less than about $2 million so cyclical swings in sales, earnings, andprofit margins need to be considered in choosing the financing plan.5-17.Using Standard & Poor’s data or annual reports, compare the finan cial and operating leverage of Exxon, Eastman Kodak, and Delta Airlines for the most current year. Explain the relationship between operating and financial leverage for each company and the resultant combined leverage. What accounts for the differences in leverage of these companies?Solution:The results for this problem change every year. This is primarily a library assignment to facilitate class discussion.5-18. Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 percent and half with common stockhaving a par value of $8. Ms. Smith, vice-president of finance, wishes toanalyze two refinancing plans, one with more debt (D) and one with moreequity (E). The company earns a return on assets before interest and taxes of10 percent. The tax rate is 45 percent.Under Plan D, a $3 million long-term bond would be sold at an interest rate of12 percent and 375,000 shares of stock would be purchased in the market at $8per share and retired.Under Plan E, 375,000 shares of stock would be sold at $8 per share and the$3,000,000 in proceeds would be used to reduce long-term debt.a. How would each of these plans affect earnings per share? Consider thecurrent plan and the two new plans.b. Which plan would be most favorable if return on assets fell to 5 percent?Increased to 15 percent? Consider the current plan and the two new plans.c. If the market price for common stock rose to $12 before the restructuring,which plan would then be most attractive? Continue to assume that $3million in debt will be used to retire stock in Plan D and $3 million of newequity will be sold to retire debt in Plan E. Also assume for calculations inpart c that return on assets is 10 percent.Solution:Dickinson CompanyIncome Statementsa. Return on assets = 10% EBIT = $1,200,0001$6,000,000 debt @ 10%2$600,000 interest + ($3,000,000 debt @ 12%)3($6,000,000 – $3,000,000 debt retired) x 10%4($6,000,000 common equity)/($8 par value) = 750,000 sharesPlan E and the original plan provide the same earnings per share because the cost of debt at 10 percent is equal to the operating return on assets of 10 percent. With Plan D, the cost of increased debt rises to 12 percent, and the firm incurs negative leverage reducing EPS and also increasing the financial risk to Dickinson.5-18. Continuedb. Return on assets = 5% EBIT = $600,000Return on assets = 15% EBIT = $1,800,000If the return on assets decreases to 5%, Plan E provides the best EPS, and at 15% return, Plan D provides the best EPS. Plan D is still risky, having an interest coverage ratio of less than 2.0.c. Return on Assets = 10% EBIT = $1,200,0001750,000 – ($3,000,000/$12 per share)= 750,000 – 250,000 = 500,000 shares2750,000 + ($3,000,000/$12 per share)= 750,000 + 250,000 = 1,000,000 sharesAs the price of the common stock increases, Plan E becomes more attractive because fewer shares can be retired under Plan D and, by the same logic, fewer shares need to be sold under Plan E.5-19. Johnson Grass and Garden Centers has $20 million in assets, 75 percent financed by debt and 25 percent financed by common stock. The interest rate on the debt is12 percent and the par value of the stock is $10 per share. President Johnson isconsidering two financing plans for an expansion to $30 million in assets.Under Plan A, the debt-to-total assets ratio will be maintained, but new debt willcost 15 percent! New stock will be sold at $10 per share. Under Plan B, only newcommon stock at $10 per share will be issued. The tax rate is 40 percent.a. If EBIT is 12 percent on total assets, compute earnings per share (EPS) beforethe expansion and under the two alternatives.b. What is the degree of financial leverage under each of the three plans?c. If stock could be sold at $20 per share due to increased expectations for thefirm's sales and earnings, what impact would this have on earnings per sharefor the two expansion alternatives? Compute earnings per share for each.d. Explain why corporate financial officers are concerned about their stockvalues!。

Lecture #3 – Practice Questions – International Financial Management 456Chapter 5 – The Market for Foreign Exchange1.Most foreign exchange transactions are forA. intervention by central banks.B. interbank trades between international banks or nonbank dealers.C. retail trade.D. purchase of hard currencies.2.The difference between a broker and a dealer isA. dealers sell drugs; brokers sell houses.B. brokers bring together buyers and sellers, but carry no inventory; dealersstand ready to buy and sell from their inventory.C. brokers transact in stocks and bonds; currency is bought and sold throughdealers.D. none of the above3. Intervention in the foreign exchange market is the process ofA. a central bank requiring the commercial banks of that country to trade at aset price level.B. commercial banks in different countries coordinating efforts in order tostabilize one or more currencies.C. a central bank buying or selling its currency in order to influence itsvalue.D. the government of a country prohibiting transactions in one or morecurrencies.4.The spot marketA. involves the almost-immediate purchase or sale of foreign exchange.B. involves the sale of futures, forwards, and options on foreign exchange.C. takes place only on the floor of a physical exchange.D. all of the above.5.Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective.A. $1.61 = £1.00B. $1.60 = £1.00C. $1.00 = £0.625D. $1.72 = £1.006.Suppose that the current exchange rate is €0.80 = $1.00. The direct quote,from the U.S. perspective isA. €1.00 = $1.25.B. €0.80 = $1.00.C. £1.00 = $1.80.D. None of the above7.Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote,from the U.S. perspective isA. €1.00 = $1.60.B. €0.6250 = $1.00.C. €1.60 = $1.00.D. None of the above8.The Bid priceA. is the price that the dealer has just paid for something, his historicalcost of the most recent trade.B. is the price that a dealer stands ready to pay.C. refers only to auctions like eBay, not over the counter transactions withdealers.D. is the price that a dealer stands ready to sell at.9.Suppose the spot ask exchange rate, S a($|£), is $1.90 = £1.00 and the spot bidexchange rate, S b($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?A. $1,000,000B. $52,910.05C. $100,000D. $52,631.5810.If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, thecorresponding €/$ bid and ask prices areA. €0.6667 and €0.6623.B. $1.51 and $1.50.C. €0.6623 and €0.6667.D. cannot be determined with the information given.11.In the Interbank market, the standard size of a trade among large banks in themajor currencies isA. for the U.S.-dollar equivalent of $10,000,000,000.B. for the U.S.-dollar equivalent of $10,000,000.C. for the U.S.-dollar equivalent of $100,000.D. for the U.S.-dollar equivalent of $1,000.12.The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchangerate is ¥100 = $1.00. What is the euro-yen cross rate?A. ¥125 = €1.00B. ¥1.00 = €125C. ¥1.00 = €0.80D. None of the above13.Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00.Calculate the euro-pound exchange rate.A. €1 = £1.60B. €1 = £0.625C. €2.50 = £1D. €1 = £2.5014.Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00.Calculate the euro-pound exchange rate.A. €1.3333 = £1.00B. £1.3333 = €1.00C. €3.00 = £1D. €1.25 = £1.0015.Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate isquoted as $1.60 = €1.00 and t he dollar-pound exchange rate is quoted at $2.00 = £1.00.A. €1.25/£1.00B. $1.25/£1.00C. £1.25/€1.00D. €0.80/£1.0016.The euro-pound cross exchange rate can be computed as:A. S(€/£) = S($/£) S(€/$)B.C.D. all of the above17.Suppose a bank customer with €1,000,000 wishes to trade out of euro and intoJapanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get?A. ¥192,000,000B. ¥5,208,333C. ¥75,000,000D. ¥5,208.3318.Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and€2.00 = £1.00. Starting with $1,000,000, how can you make money?A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00;trade for $1,062,500 at €1 = $.85.B. Start with dollars, exchange for euros at €1 = $.85; exchange for poundsat €2.00 = £1.00; exchange for dollars at £1 = $1.60.C. Start with euros; exchange for pounds; exchange for dollars; exchange foreuros.D. No arbitrage profit is possible.19.You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euroexchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of £1.00 =€1.50 how much money can an astute trader make?A. No arbitrage is possibleB. $1,160,000C. $500,000D. $250,00020.You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euroexchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 =€1.20 how can you make money?A. No arbitrage is possibleB. Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£C. Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€21.The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, theCanadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15.Determine the triangular arbitrage profit that is possible if you have$1,000,000.A. $44,063 profitB. $46,093 lossC. No profit is possibleD. $46,093 profit22.Market microstructure refers toA. the basic mechanics of how a marketplace operates.B. the basics of how to make small (micro-sized) currency trades.C. how macroeconomic variables such as GDP and inflation are determined.D. none of the above23.The forward priceA. may be higher than the spot price.B. may be the same as the spot price.C. may be less than the spot price.D. all of the above24.For a U.S. trader working in American quotes, if the forward price is higherthan the spot priceA. the currency is trading at a premium in the forward market.B. the currency is trading at a discount in the forward market.C. then you should buy at the spot, hold on to it and sell at the forward—it's a built-in arbitrage.D. all of the above—it really depends if you're talking American or Europeanquotes.25.The forward marketA. involves contracting today for the future purchase of sale of foreignexchange at the spot rate that will prevail at the maturity of the contract.B. involves contracting today for the future purchase of sale of foreignexchange at a price agreed upon today.C. involves contracting today for the right but not obligation to the futurepurchase of sale of foreign exchange at a price agreed upon today.D. none of the above26.If one has agreed to buy foreign exchange forwardA. you have a short position in the forward contract.B. you have a long position in the forward contract.C. until the exchange rate moves, you haven't made money, so you're neithershort nor long.D. you have a long position in the spot market.27.The current spot exchange rate is $1.55/€ and the three-month forward rate is$1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost?A. Lost $100B. Made €100C. Lost $50D. Made $15028.The current spot exchange rate is $1.55/€ and the three-month forward rate is$1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market?A. Take a long position in a forward contract on €1,000,000 at $1.50/€.B. Take a short position in a forward contract on €1,000,000 at $1.50/€.C. Buy euro today at the spot rate, sell them forward.D. Sell euro today at the spot rate, buy them forward.29.The current spot exchange rate is $1.45/€ and the three-month forward rate is$1.55/€. Based upon y our economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?A. Take a short position in a forward. If you're right you will make $15,000.B. Take a long position in a forward contract on euro. If you're right youwill make $5,000.C. Take a short position in a forward contract on euro. If you're right youwill make $5,000.D. Take a long position in a forward contract on euro. If you're right youwill make $15,000.30.Consider a trader who takes a long position in a six-month forward contract onthe euro. The forward rate is $1.75 = €1.00; the contract size is €62,500.At the maturity of the contract the spot exchange rate is $1.65 = €1.00.A. The trader has lost $625.B. The trader has lost $6,250.C. The trader has made $6,250.D. The trader has lost $66,287.8831.The current spot exchange rate is $1.55/€ and the three-month forward rate is$1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you n eed to take to speculate in the forward market? What is the expected dollar profit from speculation?A. Sell €1,000,000 forward for $1.50/€.B. Buy €1,000,000 forward for $1.50/€.C. Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.D. Buy €1,000,000 today at $1.55/€; wait three months, if your forecast iscorrect sell €1,000,000 at $1.62/€.32.When a currency trades at a premium in the forward marketA. the exchange rate is more than one dollar (e.g. €1.00 = $1.28).B. the exchange rate is less than one dollar.C. the forward rate is less than the spot rate.D. the forward rate is more than the spot rate.33.When a currency trades at a discount in the forward marketA. the forward rate is less than the spot rate.B. the forward rate is more than the spot rate.C. the forward exchange rate is less than one dollar (e.g. €1.00 = $0.928).D. the exchange rate is less than it was yesterday.34.The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rateis SF1.30/$. The forward premium (discount) isA. the dollar is trading at an 8% premium to the Swiss franc for delivery in180 days.B. the dollar is trading at a 4% premium to the Swiss franc for delivery in180 days.C. the dollar is trading at an 8% discount to the Swiss franc for delivery in180 days.D. the dollar is trading at a 4% discount to the Swiss franc for delivery in180 days.35.The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rateis 1.45/€. The forward premium (discount) isA. the dollar is trading at an 8% premium to the euro for delivery in 120 days.B. the dollar is trading at a 5% premium to the Swiss franc for delivery in120 days.C. the dollar is trading at a 10% discount to the euro for delivery in 120days.D. the dollar is trading at a 5% discount to the euro for delivery in 120 days.36.. The SF/$ spot exchange rate is SF1.25/$ and the 180 forward premium is 8percent. What is the outright 180 day forward exchange rate?A. SF1.30/$B. SF1.35/$C. SF6.25/$D. None of the above37.Consider the following spot and forward rate quotations for the Swiss franc?Which of the following is true:A. The Swiss franc is definitely going to be worth more dollars in six months.B. The Swiss franc is probably going to be worth less in dollars in six months.C. The Swiss franc is trading at a forward discount.D. The Swiss franc is trading at a forward premium.38.Consider the following spot and forward rate quotations for the Swiss franc?Which of the following is true:A. The Swiss franc is definitely going to be worth more dollars in six months.B. The Swiss franc is probably going to be worth less in dollars in six months.C. The Swiss franc is trading at a forward discount.D. The Swiss franc is trading at a forward premium.39.Swap transactionsA. involve the simultaneous sale (or purchase) of spot foreign exchangeagainst a forward purchase (or sale) of approximately an equal amount of the foreign currency.B. account for about half of Interbank FX trading.C. involve trades of one foreign currency for another without going throughthe U.S. dollar.D. all of the above40.The largest and most active financial market in the world isA. the Fleet Street Exchange in London.B. the NYSE in New York.C. the FX market.D. none of the above.Answer Key:1. B2. B3. C4. A5. B6. A7. B8. B9. D10.C11.B12.A13.The correct answer should be B.14.D15.A16.D17.A18.A19.A20.B21.D22.A23.D24.A25.B26.B27.A28.A29.C30.B31.B32.D33.A34.A35.C36.A37.D38.D39.A40.C. WORD版本。