Question 1

Stock market fluctuations

Accepted Answer

A) often go hand in hand with fluctuations in the economy more broadly. 
B) rarely have anything to do with fluctuations in the economy more broadly. 
C) have few, if any, macroeconomic implications. 
D) are attributable to the widespread belief that the efficient markets hypothesis is correct. 
A) often go hand in hand with fluctuations in the economy more broadly. 
B) rarely have anything to do with fluctuations in the economy more broadly. 
C) have few, if any, macroeconomic implications. 
D) are attributable to the widespread belief that the efficient markets hypothesis is correct.

Question 2

John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) risk-return tradeoff. 
D) diversification. 
A) moral hazard. 
B) adverse selection. 
C) risk-return tradeoff. 
D) diversification.

Question 3

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

Accepted Answer

A) $141.11 
B) $141.36 
C) $141.75 
D) None of the above are correct to the nearest cent. 
A) $141.11 
B) $141.36 
C) $141.75 
D) None of the above are correct to the nearest cent.

Question 4

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A) the first one 
B) the second one 
C) the third one 
D) They all have the same balance. 
A) the first one 
B) the second one 
C) the third one 
D) They all have the same balance.

Question 5

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A) These are both examples of adverse selection. 
B) These are both examples of moral hazard. 
C) The first example illustrates adverse selection, and the second illustrates moral hazard. 
D) The first example illustrates moral hazard, and the second illustrates adverse selection. 
A) These are both examples of adverse selection. 
B) These are both examples of moral hazard. 
C) The first example illustrates adverse selection, and the second illustrates moral hazard. 
D) The first example illustrates moral hazard, and the second illustrates adverse selection.

Question 6

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A) Dexter is risk averse. 
B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of decreasing marginal utility applies to Dexter. 
D) All of the above are correct. 
A) Dexter is risk averse. 
B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of decreasing marginal utility applies to Dexter. 
D) All of the above are correct.

Question 7

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Accepted Answer

A) You receive $90.91 two years from today. 
B) You receive $82.64 one year from today. 
C) You receive $75.13 today. 
D) All of these payments have the same present value to the nearest cent. 
A) You receive $90.91 two years from today. 
B) You receive $82.64 one year from today. 
C) You receive $75.13 today. 
D) All of these payments have the same present value to the nearest cent.

Question 8

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of

Question 9

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent 
A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent

Question 10

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Accepted Answer

A) 5 percent 
B) 7 percent 
C) 8 percent 
D) 10 percent 
A) 5 percent 
B) 7 percent 
C) 8 percent 
D) 10 percent

Question 11

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.

Accepted Answer

A) Both Vince and Terri are correct. 
B) Only Vince is correct. 
C) Only Terri is correct. 
D) Neither Vince nor Terri is correct. 
A) Both Vince and Terri are correct. 
B) Only Vince is correct. 
C) Only Terri is correct. 
D) Neither Vince nor Terri is correct.

Question 12

Suppose your grandfather put $10,000 in the bank in 1965 at an annual interest rate of 7%. Using the Rule of 70, approximately how large should the bank balance be in 2015?

Accepted Answer

A) $50,000 
B) $60,000 
C) $80,000 
D) $320,000 
A) $50,000 
B) $60,000 
C) $80,000 
D) $320,000

Question 13

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Accepted Answer

The future

Question 14

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A) 4 percent. 
B) 6 percent. 
C) 8 percent. 
D) All of the above are correct. 
A) 4 percent. 
B) 6 percent. 
C) 8 percent. 
D) All of the above are correct.

Question 15

Jarrod says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. Simon says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A) Jarrod and Simon are both correct. 
B) Jarrod and Simon are both incorrect. 
C) Only Jarrod is correct. 
D) Only Simon is correct. 
A) Jarrod and Simon are both correct. 
B) Jarrod and Simon are both incorrect. 
C) Only Jarrod is correct. 
D) Only Simon is correct.

Question 16

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Accepted Answer

A) the two-year account at 9 percent 
B) the three-year account at 6 percent 
C) the six-year account at 3 percent 
D) The accounts are all worth the same. 
A) the two-year account at 9 percent 
B) the three-year account at 6 percent 
C) the six-year account at 3 percent 
D) The accounts are all worth the same.

Question 17

Which of the following is not correct?

Accepted Answer

A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis. 
A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.

Question 18

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Accepted Answer

A) $95.50 
B) $95.24 
C) $95.00 
D) None of the above are correct to the nearest cent. 
A) $95.50 
B) $95.24 
C) $95.00 
D) None of the above are correct to the nearest cent.

Question 19

Cash payments that companies make to shareholders are called

Accepted Answer

A) annuities. 
B) dividends. 
C) premiums. 
D) favorables. 
A) annuities. 
B) dividends. 
C) premiums. 
D) favorables.

Question 20

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Accepted Answer

A) True 
 B)False

Exam 27: Tools of Finance

Stock market fluctuations

John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Suppose your grandfather put $10,000 in the bank in 1965 at an annual interest rate of 7%. Using the Rule of 70, approximately how large should the bank balance be in 2015?

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Which of the following is not correct?

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Cash payments that companies make to shareholders are called

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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