Reference no: EM133021934

Apply Economic Principles to Work in the Financial Services Industry

Multiple Choice

1. In the five sector model, what does it mean if S > I, G > T and M = X?
a. The economy expands
b. The economy contracts
c. The economy is in equilibrium
d. None of these

2. Which of these is not considered a leakage from the five-sector model?
a. Savings
b. Taxes
c. Exports
d. Imports

3. Which of these would not be considered a non-productive transaction?
a. Selling an unwanted present on eBay, it is still brand new and has never been used
b. A parent overseas paying for their childs tuition who is studying in Australia
c. Purchasing stock when a company issues new shares
d. All of these

4. Which of these does the national turnover of goods and services exclude?
a. Government spending
b. Imports
c. Exports
d. None of these

5. If the MPC for a population doubles, then which of these is true?
a. The MPS will halve
b. M will also double
c. The MPS must have been at least 0.5
d. All of these

6. In the aggregate supply curve, what does the Keynesian range represent?
a. Full employment
b. Expansion
c. Recession
d. None of these

7. What is the long-run aggregate supply?
a. A country's potential output
b. How supply will react to a change in price
c. Supply levels when the aggregate demand and aggregate supply curves are in equilibrium
d. None of these

8. A parent has taken time off from work to raise their children, now that all of their children are in school the parent is looking to get back to work. Of which type of unemployment is this an example?
a. Cyclical
b. Frictional
c. Structural
d. Seasonal

9. As unemployment increases, what would be the expected effect on the inflation rate?
a. Increase
b. Decrease
c. No change
d. None of these

10. Which of these is a consequence of high inflation levels?
a. Less disposable income for those with a set income stream
b. Price increases in precious metals higher than the inflation rate
c. Companies focusing on short-term investments
d. All of these

11. What is the purpose for the method used by the RBA to measure inflation over the CPI?
a. It uses a larger range of prices
b. It uses more accurate weights
c. It ignores the largest and smallest price changes
d. All of these

12. Which of these methods of funding a government deficit will increase the money supply?
a. Issuing securities to the RBA
b. Issuing securities to banks
c. Issuing securities to the public
d. None of these

13. You have funds invested with a nominal interest return of 5% with inflation at 3%. What is the real interest rate on this investment?
a. -3%
b. -2%
c. 2%
d. 3%

14. Which type of NBFIs are owned by their members?
a. Retail thrifts
b. Building societies
c. Credit unions
d. All of these

15. Which of these bank assets will have the highest risk weighting?
a. Cash
b. Loan for a mortgage of $100,000 on a property worth $1 million
c. Loan to the local council
d. Loan to state government

16. What was an outcome of deregulation of the financial system for customers?
a. Increased access to bank branches
b. Greater onus to fully understand the risks associated with financial products
c. The need to comply with reserve asset ratios
d. All of these

17. What is meant by a non-recourse home loan?
a. Once the loan is approved, the borrower must take out the loan
b. The loan can not be sold to another financial institution
c. If the borrower is unable to repay the loan, they can give the house keys to the bank and leave with no obligation to repay the loan
d. None of these

18. If $500,000 was invested, which of these would you expect to give the highest return?
a. Purchase of a rental property
b. Purchase of a diversified equity portfolio
c. Purchase of treasury bonds
d. Investment in a high interest bank account

19. What taxes may need to be paid as a result of investment?
a. Capital gains
b. Stamp duty
c. Land tax
d. All of these

20. You purchase shares with a β of 0.75, last year the ASX saw a return of 16% and treasury bonds offer a return of 4%. What is the expected rate of return of the shares?
a. 11%
b. 12%
c. 13%
d. 14%

Short Answer

1. Outline some of the financial products and services which are available since deregulations. Explain how deregulation made these available.

2. Explain how the assets of a bank are used to determine the capital adequacy requirements for that bank.

3. You work for a bank with a CAR of 8% which has the following assets.

Asset	Value
Federal Securities	$50,000,000
Loan to commercial local government entity	$35,000,000
Residential loans (LVR 85, no mortgage insurance)	$75,000,000
Commercial loans	$40,000,000
Total	$200,000,000

What is the value of capital the bank is required to maintain?

4. Outline the legislation and regulatory bodies in place to govern the finance sector in Australia.

5. Explain how the ABS gathers price data and uses it to create the consumer price index.

6. Why must the current and future economic and political climates, both in Australia and overseas, be considered when choosing an investment?

7. Explain how an investor can use the capital structure of a company, including the cost of that capital, to determine the value of assets in that company in making an investment decision.

8. An investor is trying to choose between two companies in which to buy shares. Company A has a share price of $10 per share and last year paid $0.60 per share in dividends while company B has a share price of $15 per share and last year paid $1.20 per share in dividends.

a) Given the information above, which company should the investor choose?

b) The investor has done some further research on the companies and found they both have the following capital structure:

• Number of shares 500,000
• Mortgage $1,500,000 at a cost of 8%
• Debentures $1,200,000 at a cost of 12%
• Loan $750,000 at a cost of 10%
• Expected cash flow $1,600,000 per year for the next 5 years

Given the above information, would you change your answer to part a?

9. Do some research on the ‘Journal of Economic Theory'. Choose an article published in the journal within the last 18 months and give an overview of that article. Make sure to include a link to the article you have chosen.

Attachment:- Assessment.rar