Question 1

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A) $747.66 
B) $756.00 
C) $856.00 
D) None of the above are correct to the nearest cent. 
A) $747.66 
B) $756.00 
C) $856.00 
D) None of the above are correct to the nearest cent.

Question 2

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A) $371.75 
B) $386.25 
C) $393.33 
D) None of the above are correct to the nearest cent. 
A) $371.75 
B) $386.25 
C) $393.33 
D) None of the above are correct to the nearest cent.

Question 3

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A) doing research such as thoroughly reading and analyzing companies' annual reports 
B) choosing mutual funds that are managed by individuals with good reputations 
C) viewing individual stock prices as unpredictable 
D) relying upon the advice of Wall Street analysts 
A) doing research such as thoroughly reading and analyzing companies' annual reports 
B) choosing mutual funds that are managed by individuals with good reputations 
C) viewing individual stock prices as unpredictable 
D) relying upon the advice of Wall Street analysts

Question 4

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct. 
A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct.

Question 5

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A) right, so the price rises. 
B) right, so the price falls. 
C) left, so the price rises. 
D) left, so the price falls. 
A) right, so the price rises. 
B) right, so the price falls. 
C) left, so the price rises. 
D) left, so the price falls.

Question 6

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A) $285.83 
B) $236.98 
C) $202.04 
D) $145.65 
A) $285.83 
B) $236.98 
C) $202.04 
D) $145.65

Question 7

Janelle offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Accepted Answer

A) 8 percent. 
B) 9 percent. 
C) 10 percent. 
D) All of the above are correct. 
A) 8 percent. 
B) 9 percent. 
C) 10 percent. 
D) All of the above are correct.

Question 8

Risk

Accepted Answer

A) can be reduced by placing a large number of small bets rather than a small number of large bets. 
B) can be reduced by increasing the number of stocks in a portfolio. 
C) Both A and B are correct. 
D) Neither A nor B are correct. 
A) can be reduced by placing a large number of small bets rather than a small number of large bets. 
B) can be reduced by increasing the number of stocks in a portfolio. 
C) Both A and B are correct. 
D) Neither A nor B are correct.

Question 9

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A) impossible. Many studies find that beating the market is, at best, extremely difficult. 
B) impossible. Many studies find that beating the market is relatively easy. 
C) relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D) relatively easy. Many studies find that beating the market is relatively easy. 
A) impossible. Many studies find that beating the market is, at best, extremely difficult. 
B) impossible. Many studies find that beating the market is relatively easy. 
C) relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D) relatively easy. Many studies find that beating the market is relatively easy.

Question 10

A risk-averse person has

Accepted Answer

A) utility and marginal utility curves that slope upward. 
B) utility and marginal utility curves that slope downward. 
C) a utility curve that slopes down and a marginal utility curve that slopes upward. 
D) a utility curve that slopes upward and a marginal utility curve that slopes downward. 
A) utility and marginal utility curves that slope upward. 
B) utility and marginal utility curves that slope downward. 
C) a utility curve that slopes down and a marginal utility curve that slopes upward. 
D) a utility curve that slopes upward and a marginal utility curve that slopes downward.

Question 11

Economists disagree as to whether

Accepted Answer

A) the stock price of a company should reflect the company's expected profitability. 
B) the basic tools of finance reflect valid ideas. 
C) stock prices reflect rational estimates of a company's true worth. 
D) there is any relationship between stock market fluctuations and fluctuations in the economy more broadly. 
A) the stock price of a company should reflect the company's expected profitability. 
B) the basic tools of finance reflect valid ideas. 
C) stock prices reflect rational estimates of a company's true worth. 
D) there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.

Question 12

A company that produces golf clubs is considering buying some new equipment that it expects will increase future profits. If the interest rate falls the present value of these future earnings

Accepted Answer

A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment. 
A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment.

Question 13

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

Accepted Answer

A) lower than about 8 percent. 
B) higher than about 8 percent. 
C) lower than about 10 percent. 
D) higher than about 10 percent. 
A) lower than about 8 percent. 
B) higher than about 8 percent. 
C) lower than about 10 percent. 
D) higher than about 10 percent.

Question 14

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,310.16. What number of dollars, X, did you deposit?

Accepted Answer

A) $3,680.00 
B) $3,712.77 
C) $3,750.00 
D) $3,772.57 
A) $3,680.00 
B) $3,712.77 
C) $3,750.00 
D) $3,772.57

Question 15

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the highest present value today?

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 16

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 17

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 18

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Accepted Answer

A) This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B) This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C) This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D) This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio. 
A) This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B) This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C) This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D) This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

Question 19

Figure 14-4. The figure shows a utility function for Dexter.  
-Refer to Figure 14-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300. 
A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Question 20

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

Accepted Answer

A) $2,000/1.06 
B) $1000/(1.06)2 
C) $1000/(1 + 0.062) 
D) None of the above are correct. 
A) $2,000/1.06 
B) $1000/(1.06)2 
C) $1000/(1 + 0.062) 
D) None of the above are correct.

Exam 14: The Basic Tools of Finance

What is the future value of $800 one year from today if the interest rate is 7 percent?

What is the future value of $375 at an interest rate of 3 percent one year from today?

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Which of the following is correct concerning a risk-averse person?

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Janelle offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Risk

The efficient markets hypothesis says that beating the market consistently is

A risk-averse person has

Economists disagree as to whether

A company that produces golf clubs is considering buying some new equipment that it expects will increase future profits. If the interest rate falls the present value of these future earnings

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,310.16. What number of dollars, X, did you deposit?

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the highest present value today?

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

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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