Question 1

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?

Accepted Answer

A) about 6.3 years 
B) about 7 years 
C) about 7.7 years 
D) about 10 years 
A) about 6.3 years 
B) about 7 years 
C) about 7.7 years 
D) about 10 years

Question 2

Which of the following defines an annuity?

Accepted Answer

A) For a fee, an insurance company provides you with regular income until you die. 
B) An extra fee charged to persons in dangerous occupations by life insurance companies. 
C) It's another name for stock funds managed by mutual fund managers. 
D) It's another name for any diversified portfolio. 
A) For a fee, an insurance company provides you with regular income until you die. 
B) An extra fee charged to persons in dangerous occupations by life insurance companies. 
C) It's another name for stock funds managed by mutual fund managers. 
D) It's another name for any diversified portfolio.

Question 3

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that its not a good idea to build the factory.If interest rates fall after the meeting

Accepted Answer

A) the present value of the factory rises.It's more likely the company will build the factory. 
B) the present value of the factory rises.It's less likely the company will build the factory. 
C) the present value of the factory falls.It's more likely the company will build the factory. 
D) the present value of the factory falls.It's less likely the company will build the factory. 
A) the present value of the factory rises.It's more likely the company will build the factory. 
B) the present value of the factory rises.It's less likely the company will build the factory. 
C) the present value of the factory falls.It's more likely the company will build the factory. 
D) the present value of the factory falls.It's less likely the company will build the factory.

Question 4

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Accepted Answer

A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years 
A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years

Question 5

Anna deposited $10,000 into an account three years ago.The first year she earned 12 percent interest,the second year she earned 8 percent interest,and the third year she earned 4 percent interest.How much money does she have in her account today?

Accepted Answer

A) $12,579.84 
B) $12,596.80 
C) $12,597.12 
D) None of the above are correct to the nearest penny. 
A) $12,579.84 
B) $12,596.80 
C) $12,597.12 
D) None of the above are correct to the nearest penny.

Question 6

Other things the same,an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A) rise, and investment spending rise. 
B) rise, and investment spending fall. 
C) fall, and investment spending rise. 
D) fall, and investment spending fall. 
A) rise, and investment spending rise. 
B) rise, and investment spending fall. 
C) fall, and investment spending rise. 
D) fall, and investment spending fall.

Question 7

Heart's Restaurants is considering building a restaurant in a new location.The owners and their accountants decide that this is not the profitable thing to do.However,soon after both the interest rate and the cost of building the restaurant change.In which case do these changes both make it more likely that they will now build the restaurant?

Accepted Answer

A) both interest rates and the cost of building the restaurant rise. 
B) both interest rates and the cost of building the restaurant fall. 
C) interest rates rise and the cost of building the restaurant falls. 
D) interest rates fall and the cost of building the restaurant rises. 
A) both interest rates and the cost of building the restaurant rise. 
B) both interest rates and the cost of building the restaurant fall. 
C) interest rates rise and the cost of building the restaurant falls. 
D) interest rates fall and the cost of building the restaurant rises.

Question 8

In the late 1990s,Fed Chairperson Alan Greenspan believed that the market was

Accepted Answer

A) overvalued, but stock prices continued to rise through mid 2002. 
B) overvalued, and stock prices fell by mid 2002. 
C) undervalued, but stock prices continued to fall into mid 2002. 
D) undervalued, but stock prices continued to rise even into mid 2002. 
A) overvalued, but stock prices continued to rise through mid 2002. 
B) overvalued, and stock prices fell by mid 2002. 
C) undervalued, but stock prices continued to fall into mid 2002. 
D) undervalued, but stock prices continued to rise even into mid 2002.

Question 9

A risk averse person might accept a bet with a 50% chance of losing $100 today if they had a 50% chance of winning

Accepted Answer

A) of winning $120 in two years and the interest rate was 11%. 
B) of winning $114 in two years and the interest rate was 7%. 
C) of winning $110 and two years and the interest rate was 3%. 
D) A risk averse person would not accept any of the above bets. 
A) of winning $120 in two years and the interest rate was 11%. 
B) of winning $114 in two years and the interest rate was 7%. 
C) of winning $110 and two years and the interest rate was 3%. 
D) A risk averse person would not accept any of the above bets.

Question 10

Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally

Accepted Answer

A) and the example with Edward illustrate adverse selection. 
B) and the example with Sally illustrate moral hazard. 
C) best illustrates adverse selection, the example with Edward best illustrates moral hazard. 
D) best illustrates moral hazard, the example with Edward best illustrates adverse selection. 
A) and the example with Edward illustrate adverse selection. 
B) and the example with Sally illustrate moral hazard. 
C) best illustrates adverse selection, the example with Edward best illustrates moral hazard. 
D) best illustrates moral hazard, the example with Edward best illustrates adverse selection.

Question 11

You've been promised a payment of $400 in the future.In which case is the present value of this payment highest?

Accepted Answer

A) you wait 4 years and the interest rate is 4% 
B) you wait 4 years and the interest rate is 5% 
C) you wait 5 years and the interest rate is 4% 
D) you wait 5 years and the interest rate is 5% 
A) you wait 4 years and the interest rate is 4% 
B) you wait 4 years and the interest rate is 5% 
C) you wait 5 years and the interest rate is 4% 
D) you wait 5 years and the interest rate is 5%

Question 12

According to the efficient market hypothesis,which of the following is not correct?

Accepted Answer

A) Stock market prices tend to rise today if they rose yesterday. 
B) As judged by the typical person in the market, all stocks are fairly valued all the time. 
C) At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D) All of the above are incorrect. 
A) Stock market prices tend to rise today if they rose yesterday. 
B) As judged by the typical person in the market, all stocks are fairly valued all the time. 
C) At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D) All of the above are incorrect.

Question 13

Over the past two centuries,the average annual rates of return were about

Accepted Answer

A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct. 
A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct.

Question 14

Fundamental analysis refers to research done to determine which stocks to buy in order to diversify a portfolio.

Accepted Answer

A) True 
 B)False

Question 15

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty.The first one gives her $100,000 one year from today and $100,000 two years from today.The second one gives her $132,000 one year from today and $66,000 two years from today.As her agent,you must compute the present value of each contract.Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Accepted Answer

A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent 
A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent

Question 16

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Accepted Answer

A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 9 percent 
A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 9 percent

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 did, 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 did, you could earn a very high rate of return.This contradicts the efficient market hypothesis.

Question 18

If the efficient market hypothesis is correct,then

Accepted Answer

A) index funds should typically beat managed funds, and usually do. 
B) index fund should typically beat managed funds, but usually do not. 
C) mutual funds should typically beat index funds, and usually do. 
D) mutual funds should typically bet index funds, but usually do not. 
A) index funds should typically beat managed funds, and usually do. 
B) index fund should typically beat managed funds, but usually do not. 
C) mutual funds should typically beat index funds, and usually do. 
D) mutual funds should typically bet index funds, but usually do not.

Question 19

Other things the same,as the number of stocks in a portfolio rises,

Accepted Answer

A) risk increases and so the standard deviation of the return rises. 
B) risk increases and so the standard deviation of the return falls. 
C) risk decreases and so the standard deviation of the return rises. 
D) risk decreases and so the standard deviation of the return falls. 
A) risk increases and so the standard deviation of the return rises. 
B) risk increases and so the standard deviation of the return falls. 
C) risk decreases and so the standard deviation of the return rises. 
D) risk decreases and so the standard deviation of the return falls.

Question 20

If the interest rate is r% then the rule of 70 says that your savings will double about every

Accepted Answer

A) 70/(1-r) years. 
B) 70/(1+r) years. 
C) 70/r years. 
D) 70(1+r)/r years. 
A) 70/(1-r) years. 
B) 70/(1+r) years. 
C) 70/r years. 
D) 70(1+r)/r years.

Exam 27: The Basic Tools of Finance

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?

Which of the following defines an annuity?

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that its not a good idea to build the factory.If interest rates fall after the meeting

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Anna deposited $10,000 into an account three years ago.The first year she earned 12 percent interest,the second year she earned 8 percent interest,and the third year she earned 4 percent interest.How much money does she have in her account today?

Other things the same,an increase in the interest rate makes the quantity of loanable funds supplied

In the late 1990s,Fed Chairperson Alan Greenspan believed that the market was

A risk averse person might accept a bet with a 50% chance of losing $100 today if they had a 50% chance of winning

Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally

You've been promised a payment of $400 in the future.In which case is the present value of this payment highest?

According to the efficient market hypothesis,which of the following is not correct?

Over the past two centuries,the average annual rates of return were about

Fundamental analysis refers to research done to determine which stocks to buy in order to diversify a portfolio.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Which of the following is not correct?

If the efficient market hypothesis is correct,then

Other things the same,as the number of stocks in a portfolio rises,

If the interest rate is r% then the rule of 70 says that your savings will double about every

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: 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

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment

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 Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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