Question 1

What is the present value of a payment of $100 to be made one year from today?

Accepted Answer

A) $100*(1 + r) 
B) $100/(1 + r) 
C) $100 - $100r 
D) $100 - (1 + r)/$100 
A) $100*(1 + r) 
B) $100/(1 + r) 
C) $100 - $100r 
D) $100 - (1 + r)/$100

Question 2

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Accepted Answer

A) True 
 B)False

Question 3

The future value of a deposit in a savings account will be smaller

Accepted Answer

A) the longer a person waits to withdraw the funds. 
B) the lower the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct. 
A) the longer a person waits to withdraw the funds. 
B) the lower the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct.

Question 4

Figure 14-4. The figure shows a utility function for Dexter.  
-Refer to Figure 14-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph. 
A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph.

Question 5

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

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 6

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A) firm-specific risk, which will likely raise shareholders' demand for higher return. 
B) firm-specific risk, which will likely not likely raise shareholders' demand for higher return. 
C) market risk, which will likely raise shareholders' demand for higher return. 
D) market risk, which will likely not raise shareholders' demand for higher return. 
A) firm-specific risk, which will likely raise shareholders' demand for higher return. 
B) firm-specific risk, which will likely not likely raise shareholders' demand for higher return. 
C) market risk, which will likely raise shareholders' demand for higher return. 
D) market risk, which will likely not raise shareholders' demand for higher return.

Question 7

The value of a stock is based on the

Accepted Answer

A) present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
A) present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

Question 8

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A) rises, so investment spending rises. 
B) falls, so investment spending rises. 
C) rises, so investment spending falls. 
D) falls, so investment spending falls. 
A) rises, so investment spending rises. 
B) falls, so investment spending rises. 
C) rises, so investment spending falls. 
D) falls, so investment spending falls.

Question 9

Risk-averse individuals like good things more than they dislike comparable bad things.

Accepted Answer

A) True 
 B)False

Question 10

Mary talked to several stockbrokers and made the following conclusions. Which, if any, of her conclusions are correct?

Accepted Answer

A) It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B) Stock prices, even if not exactly a random walk, are very close to it. 
C) Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D) All of Mary's conclusions are correct. 
A) It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B) Stock prices, even if not exactly a random walk, are very close to it. 
C) Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D) All of Mary's conclusions are correct.

Question 11

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Accepted Answer

A) was responsible for the financial crisis of 2008-2009. 
B) was responsible for the Great Depression of the 1930s. 
C) claims that prices observed in financial markets are always "right." 
D) claims that prices observed in financial markets are mostly "wrong." 
A) was responsible for the financial crisis of 2008-2009. 
B) was responsible for the Great Depression of the 1930s. 
C) claims that prices observed in financial markets are always "right." 
D) claims that prices observed in financial markets are mostly "wrong."

Question 12

Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is

Accepted Answer

A) 3% but not if it is 4%. 
B) 4% but not if it is 5%. 
C) 5% but not if it is 6%. 
D) 6% but not if it is 7%. 
A) 3% but not if it is 4%. 
B) 4% but not if it is 5%. 
C) 5% but not if it is 6%. 
D) 6% but not if it is 7%.

Question 13

Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?

Accepted Answer

A) 7.1 percent 
B) 5.9 percent 
C) 6.8 percent 
D) None of the above is correct. 
A) 7.1 percent 
B) 5.9 percent 
C) 6.8 percent 
D) None of the above is correct.

Question 14

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho

Question 15

The idea of insurance

Accepted Answer

A) would not appeal to a risk-averse person. 
B) is, other things the same, to reduce the probability of a fire, accident, or death. 
C) is to share risk. 
D) is to provide a sure thing, not a gamble. 
A) would not appeal to a risk-averse person. 
B) is, other things the same, to reduce the probability of a fire, accident, or death. 
C) is to share risk. 
D) is to provide a sure thing, not a gamble.

Question 16

According to the efficient market hypothesis, which of the following statements 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 statements 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 statements are incorrect.

Question 17

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Accepted Answer

A) True 
 B)False

Question 18

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Accepted Answer

A) benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B) benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C) eliminate market risk. 
D) reduce the standard deviation of his or her portfolio to zero. 
A) benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B) benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C) eliminate market risk. 
D) reduce the standard deviation of his or her portfolio to zero.

Question 19

Figure 14-4. The figure shows a utility function for Dexter.  
-Refer to Figure 14-4. 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 20

Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A) 3.5 percent 
B) 4.5 percent 
C) 5 percent 
D) 7 percent 
A) 3.5 percent 
B) 4.5 percent 
C) 5 percent 
D) 7 percent

Exam 14: The Basic Tools of Finance

What is the present value of a payment of $100 to be made one year from today?

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

The future value of a deposit in a savings account will be smaller

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,

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

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

The value of a stock is based on the

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Risk-averse individuals like good things more than they dislike comparable bad things.

Mary talked to several stockbrokers and made the following conclusions. Which, if any, of her conclusions are correct?

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

The idea of insurance

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

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. From the appearance of the utility function, we know that

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

Application: The Costs of Taxation

Application: International Trade

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 Macroeconomic Models

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

Six Debates Over Macroeconomic Policy

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