Question 1

Which of the following is an example of an investment, as described in Chapter 12 of your textbook?

Accepted Answer

A)  A firm builds a new plant. 
B)  A student attends college. 
C)  The government builds a dam to have a source of hydroelectric power. 
D)  all of the above 
A)  A firm builds a new plant. 
B)  A student attends college. 
C)  The government builds a dam to have a source of hydroelectric power. 
D)  all of the above

Question 2

If a project costs $3,500 today and pays a return of $4,200 next year, what is the highest interest rate at which the project should be undertaken?

Accepted Answer

A)  7 percent 
B)  14 percent 
C)  20 percent 
D)  70 percent 
A)  7 percent 
B)  14 percent 
C)  20 percent 
D)  70 percent

Question 3

Insurance companies can reduce risk by accepting premiums from

Accepted Answer

A)  many people to insure against independent events. 
B)  few people to insure against independent events. 
C)  many people to insure against dependent events. 
D)  few people to insure against dependent events. 
A)  many people to insure against independent events. 
B)  few people to insure against independent events. 
C)  many people to insure against dependent events. 
D)  few people to insure against dependent events.

Question 4

Recall the Application about the number of homeowners in the year 2012 who owed more on their homes than their homes were worth to answer the following question(s). To assist homeowners who are behind on their payments and may eventually lose their homes to foreclosure, many in Congress have advocated for reduction on the amount of money they actually owe-or principal reduction. The hope is that with a reduction in the amount they owed they would start making timely payments on their mortgages and avoid a messy default.
-Recall the Application. Assume that immediately before the housing bubble burst, you purchased a $250,000 home and took out a $225,000 mortgage to make the purchase. When the bubble burst, the value of your home fell by 20 percent. The value of the home is now ________ and you owe the mortgage company ________.

Accepted Answer

A)  $200,000; $225,000 
B)  $180,000; $225,000 
C)  $200,000; $180,000 
D)  $180,000; $200,000 
A)  $200,000; $225,000 
B)  $180,000; $225,000 
C)  $200,000; $180,000 
D)  $180,000; $200,000

Question 5

Financial intermediaries reduce the costs of negotiation by

Accepted Answer

A)  pooling funds. 
B)  gaining expertise in evaluating and monitoring investments. 
C)  investing in a large number of projects with independent returns. 
D)  investing in a small number of projects with independent returns. 
A)  pooling funds. 
B)  gaining expertise in evaluating and monitoring investments. 
C)  investing in a large number of projects with independent returns. 
D)  investing in a small number of projects with independent returns.

Question 6

Recall the Application about the number of homeowners in the year 2012 who owed more on their homes than their homes were worth to answer the following question(s). To assist homeowners who are behind on their payments and may eventually lose their homes to foreclosure, many in Congress have advocated for reduction on the amount of money they actually owe-or principal reduction. The hope is that with a reduction in the amount they owed they would start making timely payments on their mortgages and avoid a messy default.
-This Application addresses the concept of

Accepted Answer

A)  the down-side of leverage. 
B)  increases in consumer wealth. 
C)  inflation and the housing boom. 
D)  the dangers of high interest rates. 
A)  the down-side of leverage. 
B)  increases in consumer wealth. 
C)  inflation and the housing boom. 
D)  the dangers of high interest rates.

Question 7

From the beginning of the 1990s to the year 2000, investment spending as a share of U.S. GDP has tended to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  fluctuate wildly. 
A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  fluctuate wildly.

Question 8

Nominal interest rates are the

Accepted Answer

A)  interest rates quoted in the market minus the inflation rate. 
B)  interest rates quoted in the market plus the expected inflation rate. 
C)  interest rates quoted in the market. 
D)  real interest rates less the inflation rate. 
A)  interest rates quoted in the market minus the inflation rate. 
B)  interest rates quoted in the market plus the expected inflation rate. 
C)  interest rates quoted in the market. 
D)  real interest rates less the inflation rate.

Question 9

At an interest rate of 4 percent, what would be the present value of receiving $4,000 four years from now?

Accepted Answer

A)  $3,420 
B)  $3,637 
C)  $3,704 
D)  $3,847 
A)  $3,420 
B)  $3,637 
C)  $3,704 
D)  $3,847

Question 10

The neoclassical theory of investment

Accepted Answer

A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends positively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes as determinants of investment. 
A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends positively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes as determinants of investment.

Question 11

Table 12.1
Expected Real Rates of Interest for Five Countries
   
Source: Trading Economics, September, 2010
-Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation would pay the highest nominal rate of return?

Accepted Answer

A)  South Africa 
B)  Australia 
C)  Brazil 
D)  the United States 
A)  South Africa 
B)  Australia 
C)  Brazil 
D)  the United States

Question 12

If a firm wants to finance a new project, it can obtain financing by

Accepted Answer

A)  issuing and selling new shares of stock. 
B)  selling corporate bonds to the public. 
C)  using its retained earnings. 
D)  all of the above 
A)  issuing and selling new shares of stock. 
B)  selling corporate bonds to the public. 
C)  using its retained earnings. 
D)  all of the above

Question 13

The present value of a given payment in the future ________ when the interest rates fall.

Accepted Answer

A)  increases 
B)  decreases 
C)  remains the same 
D)  reverts to the original value 
A)  increases 
B)  decreases 
C)  remains the same 
D)  reverts to the original value

Question 14

The multiplier-accelerator model

Accepted Answer

A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends negatively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes. 
A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends negatively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes.

Question 15

Suppose that the following table represents all of the possible investments in the economy. If the nominal interest rate is six percent, what is the total amount of investment in the economy? (Note: The Returns are for one period later.)

Accepted Answer

At an interest rate of six per

Question 16

If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent.

Accepted Answer

A) True 
 B)False

Question 17

Deposit insurance indirectly helped to create the savings and loan crisis in the United States because

Accepted Answer

A)  the government, without warning, eliminated deposit insurance for savings and loans, thereby causing a run on these institutions. 
B)  depositors were not concerned with the types of investments made because they were insured, while at the same time savings and loans were aggressively investing in risky projects. 
C)  depositors were not concerned with the types of investment made because savings and loans were making very conservative investments. 
D)  depositors, believing that the government would not secure their deposits, were very concerned with the types of investments made at savings and loans. 
A)  the government, without warning, eliminated deposit insurance for savings and loans, thereby causing a run on these institutions. 
B)  depositors were not concerned with the types of investments made because they were insured, while at the same time savings and loans were aggressively investing in risky projects. 
C)  depositors were not concerned with the types of investment made because savings and loans were making very conservative investments. 
D)  depositors, believing that the government would not secure their deposits, were very concerned with the types of investments made at savings and loans.

Question 18

What is most affected by the expected rate or pace of economic growth?

Accepted Answer

A)  unemployment 
B)  investment spending 
C)  government purchases 
D)  exports 
A)  unemployment 
B)  investment spending 
C)  government purchases 
D)  exports

Question 19

Which of the following activities does NOT diversify risk?

Accepted Answer

A)  writing earthquake insurance policies for the entire Western United States 
B)  writing hurricane insurance policies only in Florida 
C)  investing in real estate in various states across the United States. 
D)  purchasing the stock of a variety of different companies 
A)  writing earthquake insurance policies for the entire Western United States 
B)  writing hurricane insurance policies only in Florida 
C)  investing in real estate in various states across the United States. 
D)  purchasing the stock of a variety of different companies

Question 20

Table 12.2
Returns on Investment
  
-Referring to Table 12.2, if the nominal interest rate is 9.5 percent and there is no inflation, which investments will be undertaken?

Accepted Answer

A)  E 
B)  E and D 
C)  C, D, E 
D)  none of the above 
A)  E 
B)  E and D 
C)  C, D, E 
D)  none of the above

Which of the following is an example of an investment, as described in Chapter 12 of your textbook?

If a project costs $3,500 today and pays a return of $4,200 next year, what is the highest interest rate at which the project should be undertaken?

Insurance companies can reduce risk by accepting premiums from

Financial intermediaries reduce the costs of negotiation by

From the beginning of the 1990s to the year 2000, investment spending as a share of U.S. GDP has tended to

Nominal interest rates are the

At an interest rate of 4 percent, what would be the present value of receiving $4,000 four years from now?

The neoclassical theory of investment

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation would pay the highest nominal rate of return?

If a firm wants to finance a new project, it can obtain financing by

The present value of a given payment in the future ________ when the interest rates fall.

The multiplier-accelerator model

Suppose that the following table represents all of the possible investments in the economy. If the nominal interest rate is six percent, what is the total amount of investment in the economy? (Note: The Returns are for one period later.)

If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent.

Deposit insurance indirectly helped to create the savings and loan crisis in the United States because

What is most affected by the expected rate or pace of economic growth?

Which of the following activities does NOT diversify risk?

Table 12.2 Returns on Investment -Referring to Table 12.2, if the nominal interest rate is 9.5 percent and there is no inflation, which investments will be undertaken?

Introduction: What Is Economics?

The Key Principles of Economics

Exchange and Markets

Demand, Supply, and Market Equilibrium

Measuring a Nation's Production and Income

Unemployment and Inflation

The Economy at Full Employment

Why Do Economies Grow?

Aggregate Demand and Aggregate Supply

Fiscal Policy

The Income-Expenditure Model

Money and the Banking System

The Federal Reserve and Monetary Policy

Modern Macroeconomics: From the Short Run to the Long Run

The Dynamics of Inflation and Unemployment

Macroeconomic Policy Debates

International Trade and Public Policy

The World of International Finance

Filters

Exam 12: Investment and Financial Markets

Which of the following is an example of an investment, as described in Chapter 12 of your textbook?

If a project costs $3,500 today and pays a return of $4,200 next year, what is the highest interest rate at which the project should be undertaken?

Insurance companies can reduce risk by accepting premiums from

Financial intermediaries reduce the costs of negotiation by

From the beginning of the 1990s to the year 2000, investment spending as a share of U.S. GDP has tended to

Nominal interest rates are the

At an interest rate of 4 percent, what would be the present value of receiving $4,000 four years from now?

The neoclassical theory of investment

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation would pay the highest nominal rate of return?

If a firm wants to finance a new project, it can obtain financing by

The present value of a given payment in the future ________ when the interest rates fall.

The multiplier-accelerator model

Suppose that the following table represents all of the possible investments in the economy. If the nominal interest rate is six percent, what is the total amount of investment in the economy? (Note: The Returns are for one period later.)

If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent.

Deposit insurance indirectly helped to create the savings and loan crisis in the United States because

What is most affected by the expected rate or pace of economic growth?

Which of the following activities does NOT diversify risk?

Table 12.2 Returns on Investment -Referring to Table 12.2, if the nominal interest rate is 9.5 percent and there is no inflation, which investments will be undertaken?

Introduction: What Is Economics?

The Key Principles of Economics

Exchange and Markets

Demand, Supply, and Market Equilibrium

Measuring a Nation's Production and Income

Unemployment and Inflation

The Economy at Full Employment

Why Do Economies Grow?

Aggregate Demand and Aggregate Supply

Fiscal Policy

The Income-Expenditure Model

Money and the Banking System

The Federal Reserve and Monetary Policy

Modern Macroeconomics: From the Short Run to the Long Run

The Dynamics of Inflation and Unemployment

Macroeconomic Policy Debates

International Trade and Public Policy

The World of International Finance

Filters