2. Economics

Question: A bank in Canada is quoting CAD/USD 1.4950 − 1.5005, and USD/EUR 0.9350 − 0.9400. What is bid/ask exchange rate for CAD/EUR?

• A) CAD/EUR 1.3978 − 1.4105
• B) CAD/EUR 0.6254 − 0.6264
• C) CAD/EUR 1.5904 − 1.6048

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Question: Under the Mundell-Fleming model and the portfolio balance approach to exchange rate determination, a country following sustained expansionary fiscal policy would see its currency:

• A) appreciate in the short-run and depreciate in the long-run
• B) appreciate in the short-run and appreciate in the long-run Correct
• C) depreciate in the short-run and depreciate in the long-run

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Question: Today, the spot rate on pounds sterling is $0.6960 and 90-day forward pounds are priced at $0.6925. The forward discount/premium is:

• A) premium of $0.0035 Correct
• B) premium of $0.0005
• C) discount of $0.0035

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Question: Zimbaya is a developed economy with high capital mobility. Deborah Isaccson is evaluating the Zim (Z$), the national currency of Zimbaya. Which of the following is most likely to lead to appreciation of Z$? If Zimbaya starts following:

• A) an expansionary fiscal policy Correct
• B) a loose monetary policy
• C) a restrictive fiscal policy

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Question: Which of the following statements regarding purchasing power parity (PPP) is least accurate?

• A) Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level
• B) Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good
• C) Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods

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Question: Given spot exchange rate of CAD/EUR 1.425-1.435, The spread is closest to:

• A) 10 pips EUR
• B) CAD 0.010
• C) CAD 0.0010 Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market. Nance has the following data available: U.S. Dollar ($) U.K. Pound (£) Euro(€) Expected inflation rate 6.0% 3.0% 7.0% One-year nominal interest rate 10.0% 6.0% 9.0% Market Spot Rates U.S. Dollar ($) U.K. Pound (£) Euro(€) U.S. Dollar ($) $1.0000 $1.6000 $0.8000 U.K. Pound (£) 0.6250 1.0000 2.0000 Euro (€) 1.2500 0.5000 1.0000 Market 1-year Forward Rates U.S. Dollar ($) U.K. Pound (£) Euro(€) U.S. Dollar ($) $1.0000 $1.6400 $0.8082

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Question: The no-arbitrage one-year forward USD/EUR rate is closest to:

• A) USD/EUR 0.7925
• B) USD/EUR 0.8082
• C) USD/EUR 0.8073

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Question: For this question only, assume that the United States has a current account surplus versus the U.K. The amount by which the GBP/$ has to change to restore current account balance is least likely to depend on:

• A) the initial level of current account surplus Correct
• B) the projected current account deficit
• C) the response of import and export demand to changes in export prices

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Question: For an investor pursuing a carry-trade, the funding currency would most likely be the:

• A) Pound Correct
• B) Euro
• C) U.S. Dollar

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Question: Which of the following is least likely to be a warning sign for currency crisis?

• A) Real exchange rate substantially lower than mean reverting level Correct
• B) Nominal credit relative to bank reserves increase
• C) Inflation increases

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Question: If the one-year forward exchange rate is DC/FC 2 and the spot rate is DC/FC 1.9 when the foreign rate of return is 12% and the domestic return is 10%, which of the following statements would be most accurate?

• A) Arbitrage is possible here, investors should borrow domestic, lend foreign Correct
• B) Arbitrage is possible here, investors should borrow foreign, lend domestic
• C) The arbitrage possibilities cannot be determined with the data given

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Question: One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is USD/NZD 0.5500. If uncovered interest rate parity holds, the expected spot rate in one year must be closest to:

• A) USD/NZD 0.54233
• B) USD/NZD 0.55825 Correct
• C) USD/NZD 0.56675

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Question: Tim Kramer is assessing the risks of the carry trade for his firm. He obtains a distribution of expected returns for the carry trade. This distribution is most likely to exhibit:

• A) fat tails and a negative skew Correct
• B) a normal distribution
• C) fat tails and a positive skew

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Question: The return distribution of FX carry trade is characterized by:

• A) negative skewness and negative excess kurtosis Correct
• B) negative skewness and positive excess kurtosis
• C) positive skewness and positive excess kurtosis

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Question: Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is DC/FC 0.400, the forward rate consistent with covered interest rate parity is:

• A) 0.400
• B) 0.318
• C) 0.396

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Question: The following information is gathered for three countries: Country Comment A Current account deficit is very large relative to GDP B Imports highly price-elastic goods C Exports global commodities Which country will most likely see its current account deficit restored to sustainable level more rapidly under the flows mechanism of balance of payments?

• A) B) Country Correct
• B) C) Country
• C) Country C

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Question: Terrance Burnhart, a junior analyst at Wertheim Investments Inc., was discussing the concepts of purchasing power parity (PPP) and uncovered interest rate parity (UIRP) with his colleague, Francis Ferngood. During the conversation Burnhart made the following statements: Statement 1: Absolute PPP is based on a number of unrealistic assumptions that limits its real-world usefulness. These assumptions are: that all goods and services can be transported among countries at no cost; and all countries use the same basket of goods and services to measure their price levels. Statement 2: UIRP rests on the idea of equal real interest rates across international borders. Real interest rate differentials would result in capital flows to the higher real interest rate country, equalizing the rates over time. Another way to say this is that differences in interest rates are equal to differences in expected changes in exchange rates. With respect to these statements:

• A) only statement 1 is correct
• B) both are correct
• C)

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Question: The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is DC/FC 5.00, what spot exchange rate is consistent with covered interest parity?

• A) 4.91
• B) 5.09
• C) 4.83

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Question: The carry trade is most likely to be profitable when:

• A) uncovered interest rate parity holds Correct
• B) the forward rate is biased estimator of future spot rate
• C) the Fisher relation is violated

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Question: Given the following information, what is the forward exchange rate implied by interest rate parity? U.S. interest rate = 9%. North Korea interest rate = 10%. Spot rate = 1.65 KPW/$.

• A) 1.665 KPW/$
• B) 1.635 KPW/$
• C) 0.612 KPW/$

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Question: Under high capital mobility, the Mundell-Fleming model to determine exchange rate focuses on the impact of:

• A) trade balance
• B) interest rates Correct
• C) inflation. Patrick Sheehan is the head of foreign currency desk at GPN Bank NA, a large U.S. Bank holding company. Patrick is concerned about recent spike in volatility of EUR. He obtains current spot and forward quotes from his terminal (given in Exhibit 1). He also collects interest rate information (given in Exhibit 2). Exhibit 1: Current spot and forward exchange rate quotes Currency Paid Spot rates Forward rates 30-day 60-day 90-day USD/EUR 1.3110−14 +3.18/+3.38 +6.73/+7.18 +10.48/+10.78 CHF/USD 0.9273−77 −4.09/−3.79 −8.45/−7.95 −12.80/−12.05 USD/GBP 1.6242−47 −26.10/−24.6 −50.20/−47.20 −72.20/−68.2 Exhibit 2: Selected interest rates Interest Rates USD EUR CHF INR 30 day 0.21% 0.90% 1.12% 6.72% 60 day 0.22% 0.93% 1.15% 6.84% 90 day 0.25% 1.04% 1.25% 6.90% Sheehan reviews bank's current open forward contracts. One of the contracts calls for purchase of EUR 200 million at an all-in rate of USD 1.3912 and matures in 30 days. During the market turmoil of late 2008, GPN had lost a lot of money in FX carry trades. Sheehan realizes that GPN has not established any new FX carry trade positions since then and is anxious to establish new positions. One trade that he finds promising is a carry trade in Indian Rupee (INR). Sheehan notes that while the spot rate is 53.88 INR/USD, Melissa Andrews, GPN's Chief Economist expects the Rupee to trade at 54.12 INR/USD in 90 days

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Question: The current mark-to-market value of the EUR forward contract is closest to:

• A) –USD 15,889,620
• B) USD 15,976,000
• C) –USD 15,973,205

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Question: Regarding the valuation of INR, Andrews would most likely use:

• A) Monetary approach
• B) Portfolio Balance Approach Correct
• C) Mundell-Fleming model

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Question: Based on the Mundell-Fleming model, relative to the USD, the INR would most likely:

• A) depreciate
• B) appreciate
• C)

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Question: Under the portfolio balance approach to exchange rate determination, relative to USD, INR would most likely:

• A) appreciate in the short-term
• B) appreciate in the long-term
• C) depreciate in the long-term

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Question: Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics. Ackerman and Bos have the following information available to them: Spot Rates Bid Price Ask Price EUR/USD EUR1.0000 EUR1.0015 GBP/USD GBP2.0000 GBP2.0100 EUR/GBP EUR0.3985 EUR0.4000 Ackerman and Bos are interested in pursuing profitable arbitrage opportunities for State Bank. What will be the profits from triangular arbitrage, starting with $1,000?

• A) $243.78
• B) $245.65
• C) $248.46

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Question: An investor has entered into a 90-day forward contract to purchase 2 million GBP at an all-in rate of USD 1.4612. In 30 days, the following quotes were available: USD/GBP spot rate 1.4522−24 30-day forward rate 1.4618−21 60-day forward rate 1.4621−25 90-day forward rate 1.4632−36 Interest rate information: Interest rates When contract was initiated Currently (t=30) USD GBP USD GBP 30-day 0.20% 0.32% 0.20% 0.32% 60-day 0.21% 0.32% 0.21% 0.32% 90-day 0.21% 0.33% 0.21% 0.33% The mark-to-market value of the forward contract is closest to:

• A) USD 1999
• B) USD 1800
• C) USD 2599

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Question: Which of the following is least likely a warning sign of an impending currency crisis?

• A) Liberalized capital markets that allow for a free flow of capital
• B) Terms of trade deteriorate
• C) Money supply relative to bank reserves shrinks

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Question: Which of the following statements about foreign currency bid-ask spreads is least accurate? Foreign currency bid-ask spreads:

• A) are influenced by time window in a trading day
• B) increase as the size of the transaction decreases Correct
• C) are a function of transaction volume and volatility

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Question: Given currency quotes in DC/FC, if: 1 + rDC < (1 + rF

• A) flow out of the domestic country Correct
• B) flow into the domestic country
• C) flow in and out of the domestic country

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Question: Which of the following is least likely a warning sign of an impending currency crisis?

• A) Official foreign exchange reserves decline dramatically
• B) Currency value is substantially higher than the mean-reverting level Correct
• C) Floating exchange rates

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Question: Ackerman explains to Bos that a theoretical relationship exists between forward rates and future spot rates, called the forward rate parity. This relation suggests that:

• A) the forward rate is an unbiased predictor of the expected future spot rate, and uncovered interest rate parity would hold
• B) the forward rate is a biased predictor of the expected future spot rate, and uncovered interest rate parity would not hold
• C) the forward rate is an unbiased predictor of the expected future spot rate, and uncovered interest rate parity would not hold

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Question: Professor Imada Suzaken made the following statement to his economics class: "If you can earn 8% on A-rated bonds in the U.S. but only 6% on similar bonds in Canada, Canadian investors may want to buy those bonds in the U.S. for the excess return. However, after collecting the extra dollars, the investors would lose those profits when they converted their gains into their home currency." Suzaken's statement most accurately describes:

• A) covered interest rate parity Correct
• B) uncovered interest-rate parity
• C) purchasing-power parity

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Question: Ashok Jain is assessing the currency value of Lutina. Jain believes that prices are sticky in the short term and, hence, do not immediately reflect changes in monetary policy. If Lutina announces a change to a restrictive monetary policy, Jain would most likely conclude that Lutina's currency would:

• A) excessively depreciate in the long-term
• B) excessively appreciate in the long-term
• C) excessively appreciate in the short-term

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Question: Country P has high capital mobility and has recently switched from balanced fiscal policy to an expansionary fiscal policy. Over time this expansionary is expected to lead to an increase in government debt to GDP ratio. If we simultaneously consider both the Mundell-Fleming and the portfolio balance model, in the long run country P's currency is most likely to:

• A) appreciate
• B) depreciate Correct
• C) remain stable

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Question: As compared to Cragistan's long-term growth rate of labor, West Lundia's higher long-term growth rate of labor is most likely caused by the difference in the two countries':

• A) fertility rates
• B) labor force participation rates Correct
• C)

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Question: Cragistan's potential GDP growth rate exceeds that of Kurtenstein's. Which difference in factors could help justify Cragistan's higher sustainable growth rate?

• A) The savings rate between the two countries Correct
• B) The established financial sector intermediation
• C) The free trade and unrestricted capital flows

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Question: The evidence that supports the club convergence hypothesis includes, Cragistan's and West Lundia's:

• A) savings rates, and population growth rates are stabilizing and becoming similar to Kurtenstein’s rates
• B) institutions are becoming standardized according to regional monetary union guidelines
• C) long-term growth rates are converging toward Kurtenstein’s long-term growth rates

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Question: If in Kurtenstein the growth in earnings relative to GDP is 0.50% and the growth of price-to- earnings is 0.8%, then the long-term aggregate equity growth rate is:

• A) 3.9%
• B) 4.7%
• C) 3.0%

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Question: Which of the following is least likely to affect the rate of appreciation of the aggregate stock market?

• A) Growth rate in potential GDP Correct
• B) Reinvestment of dividends
• C) Growth in Price earnings multiples

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Question: While having lunch with a group of friends, Francine Lenser, CFA, was overheard saying the following: "The recent boom in technological advances should keep the economy growing. Whenever the economy slows, someone will come along with a bold new idea that kick- starts it." Lenser's statement most accurately reflects the:

• A) neoclassical growth theory
• B) endogenous growth theory Correct
• C) exogenous growth theory

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Question: Relative to the growth rate in potential GDP, the rate of appreciation in the aggregate stock market:

• A) can be lower in the short-term but is equal in the long run Correct
• B) is the same in the short and long run
• C) can be higher in the long run but is the same in the short-term

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Question: Jon Barnton is studying the potential rate of economic growth in Barini, a large developed economy in Western Europe. He makes the following statement: 'Barini has seen a slowdown in GDP growth over the past decade, the likely causes being a slowdown in population growth, the wealth effect and increasing immigration.' Which of the factors stated by Barnton is least likely to explain the slowdown?

• A) Wealth effect
• B) Population growth Correct
• C) Immigration

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Question: Which of the following situations is least likely to constrain growth in an economy?

• A) Strong domestic currency appreciation due to demand for domestically owned natural resources
• B) A lack of access to natural resources Correct
• C) Limited ownership of natural resources

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Question: The endogenous growth theory contends that economic growth is a function of which of the following two economic variables?

• A) Real interest rates and technological change Correct
• B) The subsistence real wage and real interest rates
• C) The creation of knowledge capital and real interest rates

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Question: Which of the following concepts is uniquely associated with the classical theory of economic growth?

• A) Subsistence real wage Correct
• B) Real GDP growth
• C) Target rate of return

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Question: Which country is most likely to rely on improving technology rather than capital deepening for increase in potential GDP growth?

• A) Surico Correct
• B) Wisterbon
• C) Pratia

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Question: Which economist is mostly applying neoclassical theory when stating her concerns?

• A) Economist #3 Correct
• B) Economist #2
• C) Economist #1

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Question: The three countries' willingness to provide financial incentives for innovation is because:

• A) consideration of private benefits alone would lead to suboptimal investment in R&
• B) Increase in innovation would lead to convergence of standard of living
• C) increase in innovation is the only way to grow under the endogenous growth theory

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Question: For Surico, the education investment that may increase the growth rate of potential GDP is the one that would increase:

• A) application of technology to increase TFP and productivity of labor
• B) non-ICT capital to increase capital deepening Correct
• C) research and development to increase TFP

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Question: Hannah Burton is a fixed income analyst and has questioned her supervisor as to why she needs to spend so much time forecasting potential GDP and its growth rate. Her supervisor replies: "Positive growth in potential GDP leads to an expectation of rising income, leading in turn to higher current savings. Positive growth in potential GDP therefore implies higher real asset returns and higher real interest rates. Hannah's supervisor is least accurate regarding:

• A) higher real asset returns Correct
• B) higher real interest rates
• C) higher current savings

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Question: Which of the following concepts is uniquely associated with the endogenous growth theory of economic growth?

• A) No diminishing returns to knowledge capital Correct
• B) Real gross domestic product (GDP) growth based on investment in new capital and technological change
• C) Increased spending on health care and population growth

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Question: Which of the following statements regarding the long-run rate of stock market appreciation and the sustainable growth rate of the economy is most likely correct?

• A) Long-term growth in the aggregate stock market valuation is most closely correlated to long term growth in GDP
• B) Long-term growth in the aggregate stock market valuation is most closely correlated to long term growth in P/E ratios
• C) Long-term growth in the aggregate stock market valuation is most closely correlated to long term growth in earnings relative to GDP

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Question: Which of the following concepts is uniquely associated with the neoclassical theory of economic growth?

• A) In steady state GDP growth rate is equal to growth rate in total factor productivity divided by labor's share of total factor cost
• B) diminishing marginal product of capital Correct
• C) In steady state, the rental price of capital is equal to additional output resulting from use of an additional unit of capital

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Question: Which of the following factors is most likely to contribute to a failure of the conditional convergence hypothesis?

• A) Political stability
• B) Regulatory policies that encourage investment
• C) Low rates of savings

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Question: An increase in growth rate of potential GDP in developed countries is most likely to be driven by:

• A) technological progress
• B) both capital deepening and technological progress Correct
• C) capital deepening

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Question: Countries can increase labor productivity by:

• A) improvement in technology
• B) increase in labor force participation rate Correct
• C) increase in average hours worked

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Question: Hemali is an emerging market economy where labor's share of GDP is 60%. The long-term trend of labor growth is 2%. Capital investment has been growing at 1.5% and is expected to continue at that rate in the future. Hemali has increased the budgetary allocation for primary and secondary education. Accordingly, economists estimate that labor productivity will increase by 2% per year. The potential GDP growth rate for Hemali is closest to:

• A) 5.50%
• B) 4%
• C) 3.80%

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Question: Ruritania and Utopia are two emerging market economies for which Jon Gordon, CFA, calculated a potential GDP growth rate of 4.3% (for both). In calculating the identical growth rates, Gordon used the Cobb-Douglas production function and the following data: Labor Growth Rate Capital Growth Rate Growth in TFP* Ruritania 2.2% 3.1% 1.8% Utopia 1.7% 3.1% 1.8% *Total Factor Productivity Which of the following statements is most accurate regarding Gordon's assumptions in calculating growth rates?

• A) Gordon has assumed that the elasticity of output with respect to labor is lower in Utopia than Ruritania
• B) Gordon has assumed that the elasticity of output with respect to capital is higher in Ruritania than Utopia
• C) Gordon has assumed that the elasticity of output with respect to TFP is higher in Utopia than Ruritania

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Question: A country with relatively poor endowment of natural resources is most likely to:

• A) enjoy the technological progress of a country with a vigorous manufacturing sector
• B) suffer from ‘Dutch disease’ Correct
• C) devote a disproportionate amount of its economic energy to pursuing the limited natural resources that the country has

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Question: Bob Forster makes the following statements regarding economic growth theories and trade barriers Statement 1 Removing trade barriers and allowing the free flow of capital often leads to countries specializing in industries where they have comparative advantage Statement 2 Developing economies that have not reached the point of significant diminishing returns to capital can attract investment, leading to development of their economy and an eventual slowing of growth Which of Forster's comments are most likely correct?

• A) Statement 1 only
• B) Both statements are correct Correct
• C) Statement 2 only

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Question: Which of the following would least likely occur due to an increase in growth rate of potential GDP?

• A) Monetary policy would be expansionary Correct
• B) Fiscal policy would be expansionary
• C)

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Question: Tamay Farthani, CFA, is studying the economic growth rate in several developing and developed countries. She believes there is strong evidence that well developed financial markets enhance growth prospects by channeling investment to projects with the highest risk-adjusted returns and by encouraging the use of leverage. Farthani is correct regarding developed financial markets impact on growth regarding:

• A) both channeling investment to projects with the highest risk-adjusted returns and the use of leverage
• B) only channeling investment to projects with the highest risk-adjusted returns Correct
• C) only the use of leverage

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Question: Government incentives that encourage private investment in technology and knowledge are most strongly supported by the:

• A) endogenous growth model Correct
• B) neoclassical growth model
• C) classical growth model

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Question: After a recent financial crisis, Ruritania and all of its neighbors except one voted to enact stringent regulations prohibiting 100% mortgage loans. (A 100% mortgage is one where the borrower receives a loan amount equal to the total value of the property.) The Ruritanian government is now concerned that firms may leave Ruritania and base themselves in a country without the stringent regulation. This situation is best described as an example of:

• A) regulatory arbitrage Correct
• B) regulatory capture
• C) regulatory burden

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Question: The requirement for firms to carry out an annual independent audit is best described as a regulation implemented to address:

• A) externalities Correct
• B) sub-optimal allocation of resources
• C) information asymmetry

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Question: "Net regulatory burden" is best defined as:

• A) direct costs of implementation, less private benefits resulting from implementation, plus the indirect cost of changes in economic behavior resulting from implementation
• B) direct costs of implementation, plus the indirect cost of changes in economic behavior resulting from implementation
• C) direct costs of implementation, less private benefits resulting from implementation

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Question: Which of the following regulatory interventions is theoretically least effective?

• A) Imposing a punitive tax on the consumption of junk food to cut its consumption
• B) Subsidizing the cost of environmentally friendly projects for small firms
• C) Requiring a company to pay a fine if annual financial statements are not filed in a timely fashion

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Question: Which of the following statements regarding self-regulating bodies is least accurate?

• A) FINRA in the U.S. is an example of a self-regulating organization in the financial markets
• B) Self-regulating bodies are recognized by the government Correct
• C) Self-regulatory bodies are private organizations that both represent and regulate their members

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Question: A review of an existing regulation with a sunset clause has revealed that the net regulatory burden is less than the initial estimates. A possible reason for this is that:

• A) private benefits were underestimated
• B) regulatory burden was underestimated Correct
• C) indirect costs were underestimated

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Question: Which of the following organizations is most likely to face conflict of interest issues?

• A) The Derivative Trading Commission
• B) The Public Audit Commission
• C) The Market and Trading Commission

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Question: The disclosure rules being implemented in Proposal 18d.5 most likely suggest that:

• A) regulations have historically focused on institutional investors Correct
• B) regulations have historically focused on retail investors
• C) regulations have historically taken a buyer beware approach for retail investors

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Question: Which of the following statements is most likely correct regarding the approach a government typically takes to competition?

• A) Antitrust laws typically aim to restrict competition from overseas and promote competition domestically
• B) Antitrust laws typically aim to promote competition from overseas and restrict it domestically
• C) Antitrust laws typically aim to restrict competition from overseas and domestically

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Question: Regulations are least likely needed under which of the following situations:

• A) A small town is experiencing large inflow of out-of- town visitors constraining street parking
• B) A small privately-held developing ‘Apps’ seeks equity investors to finance development of additional software
• C)

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Question: Which of the following statements is most accurate regarding the regulation of security markets?

• A) Regulations requiring the insurance of retail deposits at large banks may increase risk-taking incentives for the bank
• B) Most securities markets require investors to transact through intermediaries to reduce potential agency problems
• C) Historically, regulations have focused on large investment schemes such as private equity funds, rather than on retail investors

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Question: Which of the following is least likely to be a purpose of regulating commerce:

• A) Protect domestic industries from unfair foreign competition Correct
• B) Restrict unfair competition
• C) Preserve integrity of stock exchanges

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Question: Self regulating bodies that are recognized by the government and are given regulatory powers:

• A) are less effective in carrying out regulatory objectives than are governmental agencies
• B) are common in civil law countries Correct
• C) may be susceptible to political pressures from members

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Question: What type of regulation is the Financial Intermediaries Standards Act of 2001 (FISA)?

• A) A statute Correct
• B) An administrative regulation
• C) A judicial law

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Question: The differences in the consumption of tobacco is most likely a result of:

• A) using pricing mechanisms
• B) regulatory capture theory Correct
• C) regulatory arbitrage

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Question: Which industry could possibly benefit from Calisto's regulatory changes?

• A) Accountancy
• B) Oil
• C) Tobacco

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Question: Maldovia is a rapidly growing emerging market economy. To boost the level of capital per worker, the government allows for higher-than-previously allowed levels of depreciation expense for tax purposes on new equipment lowering the effective cost for the business. This is an example of:

• A) a provision of public good/financing private project regulatory tool
• B) a price mechanism regulatory tool Correct
• C)

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Question: Gordon Futona is evaluating the regulatory burden faced by a company he follows as an equity analyst. Futona makes the following two statements: Statement 1 Prudential supervision is a regulatory tool governments may use to limit potential financial contagion. Statement 2 Antitrust regulation may prevent two companies from merging, but has no power over the pricing policies of firms. Which of Futona's statement(s) are correct?

• A) Statement 2 only Correct
• B) Both statements are correct
• C) Statement 1 only

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Question: Regarding the impact on industry of regulation, regulation is least likely to:

• A) reduce inefficiencies in the industry
• B) benefit the industry being regulated Correct
• C) increase the size of an industry

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Question: To combat childhood obesity, the city of San Francisco, CA banned fast food restaurants to bundle free toys with kids menu choices deemed unhealthy. The restaurants simply allowed customers an option to purchase toys at an insignificant cost in lieu of including it free. This is an example of:

• A) Regulatory failure
• B) Regulatory capture Correct
• C) Regulatory arbitrage

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