PFM 2-1

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26. Which of the following is/are among the elements of fiscal policy?

Government actions to raise or lower taxes
Government actions to raise or lower the size of the money supply
Government actions to raise or lower the amount it spends

1 only

2 and 3 only

1 and 3 only

1, 2 and 3

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27. Which TWO of the following statements are correct?

Securitisation is the conversion of illiquid assets into marketable securities

The reverse yield gap refers to equity yields being higher than debt yields

Demand-pull inflation will occur when there are increases in production costs independent to the state of demand

Disintermediation arises where borrowers deal directly with lending individuals

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28. A government has adopted a contractionary fiscal policy. How would this typically affect businesses?

Higher interest rates and higher inflation

Lower taxes and higher government subsidies

Lower inflation and lower interest rates

Higher taxes and lower government subsidies

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29. A government follows an expansionary monetary policy. How would this typically affect businesses?

A contraction in demand from customers, higher interest rates and less available credit

Lower taxes, higher demand from customers but less government subsidies/available contracts

Higher demand from customers, lower interest rates on loans and increased availability of credit

Lower interest rates, lower exchange rates and higher tax rate

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30. As the economy booms and approaches the limits of productivity at a point in time, are the following statements a true or false description of the impact of this?

A. Increased inflation (higher sales prices and higher costs), difficulty in finding suitable candidates to fill roles and higher interest rates.

True

False

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B. High export demand, increasing growth rates, high inflation and high interest rates.

True

False

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C. Reducing inflation, falling demand, reducing investment, increasing unemployment.

True

False

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D. Higher government spending, lower tax rates, high inflation and low unemployment.

True

False

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31. The principal objectives of macroeconomic policy include which of the following?

Full employment of resources
Price stability
Economic growth
Balancing the government budget

1, 2 and 3 only

1 and 2 only

2 and 3 only

1, 2, 3 and 4

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32. Governments have a number of economic targets as part of their fiscal policy. Which of the following government actions relate predominantly to fiscal policy?

Decreasing interest rates in order to stimulate consumer spending
Reducing taxation while maintaining public spending
Using official foreign currency reserves to buy the domestic currency
Borrowing money from the capital markets and spending it on public works

1 only

1 and 3

2 and 4

2, 3 and 4

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33. Which of the following organisations is most likely to benefit from a period of high price inflation?

An organisation which has a large number of long-term payables

An exporter of goods to a country with relatively low inflation

A supplier of goods in a market where consumers are highly price sensitive and substitute imported goods are available

A large retailer with a high level of inventory on display and low rate of inventory turnover

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34. Indicate which of the following statements correctly describe the functions that financial intermediaries fulfil for customers and borrowers.

A. Maturity transformation

True

False

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B. Fund aggregation

True

False

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C. Dividend creation

True

False

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D. Pooling of losses

True

False

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35. Which THREE of the following are key roles played by money markets?

Providing short-term liquidity to companies, banks and the public sector

Dealing in long-term funds and transactions

Providing short term trade finance

Allowing companies to issue shares to raise money

Allowing an organisation to manage its exposure to foreign currency risk and interest rate risk

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36. Which THREE of the following are common roles of the treasury function within a firm?

Short-term management of resources

Long-term maximisation of market share

Risk management

Management of accounts receivable

Management of financial reporting

Long-term maximisation of shareholder wealth

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37. Which of the following is a difference between primary and secondary capital markets?

Both primary and secondary capital markets relate to where securities are traded after their initial offering

Both primary and secondary capital markets relate to the sale of new securities

Primary capital markets relate to the sale of new securities, while secondary capital markets are where securities trade after their initial offering

Primary markets are where stocks trade and secondary markets are where loan notes trade

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38. What role would the money market have in a letter of credit arrangement?

Initial arrangement of the letter of credit

Discounting the banker’s acceptance

Acceptance of the letter of credit

Issuing of a banker’s acceptance

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39 .KM plc, a company listed in the UK and Australia, decides to issue unsecured US dollar bonds in Australia. Which of the following is the correct definition for these bonds?

Junk bonds

Commercial paper

Eurobonds

Intercontinental bills

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40. Rank the following from highest risk to lowest risk from the investor’s perspective.

Preference share
Treasury bill
Corporate bond
Ordinary share

1, 4, 3, 2

4, 1, 3, 2

1, 4, 2, 3

4, 2, 1, 3

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41. Are the following statements true or false?

A. Financial markets can be classified into exchange and over-the-counter markets

True

False

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B. Capital market securities are assets for the seller but liabilities for the buyer

True

False

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C. A secondary market is where securities are bought and sold by investors

True

False

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42. Which of the following statements relating to money markets is/are true?

Lending is for periods greater than one year.
Lending is securitised.
Borrowers are mainly small companies.

1 and 2

2 only

2 and 3

1 and 3

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43. There are two main types of financial market: capital and money markets, and within each of these are primary and secondary markets.

Which TWO of the following statements are true?

Primary markets deal in new issues of loanable funds

Primary markets allow the realisation of investments before their maturity date by selling them to other investors

Money markets provide long-term debt finance and investment

Capital markets consist of stock-markets for shares and loan bond markets

27 / 35

44. If the US dollar weakens against the pound sterling, will UK exporters and importers suffer or benefit?

A. UK exporters to US

Benefit

Suffer

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B. UK importers from US

Benefit

Suffer

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45. If a government has a macroeconomic policy objective of expanding the overall level of economic activity, which TWO of the following measures would be consistent with such an objective?

Increasing public expenditure

Increasing interest rates

Increasing the exchange rate

Decreasing taxation

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46. Which of the following statements is correct?

Direct taxes are levied on one set of individuals or organisations but may be partly or wholly passed on to others and are largely related to consumption not income

Indirect taxes are levied directly on income receivers whether they are individuals or organisations

A balanced budget occurs when total expenditure is matched by total taxation

A deficit budget occurs when total expenditure is less than total taxation income

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47. Which of the following is least likely to be a reason for seeking a stock market listing?

Enhancement of the company’s image

Transfer of capital to other users

Access to a wider pool of finance

Improving existing owners’ control over the business

32 / 35

48. Indicate, by clicking in the relevant boxes, whether the following statements are true or false.

A. A prospective merger would need to result in a company having a market share greater than 80% before it can be described as a monopoly

True

False

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B. A government may intervene to weaken its country’s exchange rate in order to eliminate a balance of payments deficit

True

False

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C. A relatively high rate of domestic inflation will lead to a strengthening currency

True

False

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D. Government fiscal policy involves the management of interest rates

True

False

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