Question 1

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Accepted Answer

A) conjectural mistake. 
B) fundamental mishap. 
C) speculative bubble. 
D) temporary inefficiency. 
A) conjectural mistake. 
B) fundamental mishap. 
C) speculative bubble. 
D) temporary inefficiency.

Question 2

Draw graphs showing the following three relationships.1. The relation between utility and wealth for a risk averse consumer.2. The relation between standard deviation and the number of stocks in a portfolio.3. The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.1....

Question 3

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Accepted Answer

A) $25,962 
B) $27,297 
C) $30,188 
D) None of the above are correct to the nearest dollar. 
A) $25,962 
B) $27,297 
C) $30,188 
D) None of the above are correct to the nearest dollar.

Question 4

Figure 14-4. The figure shows a utility function for Dexter.  
-Refer to Figure 14-4. In what way(s) does the graph differ from the usual case?

Accepted Answer

A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B) The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. 
A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B) The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

Question 5

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Accepted Answer

A) $2205 
B) $2200 
C) $1818.18 
D) $1814.06 
A) $2205 
B) $2200 
C) $1818.18 
D) $1814.06

Question 6

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Accepted Answer

A) raise the price of the corporation's stock; if it does not the stock is overvalued. 
B) raise the price of the corporation's stock; if it does not the stock is undervalued. 
C) reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D) reduce the price of the corporation's stock; if it does not the stock is undervalued. 
A) raise the price of the corporation's stock; if it does not the stock is overvalued. 
B) raise the price of the corporation's stock; if it does not the stock is undervalued. 
C) reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D) reduce the price of the corporation's stock; if it does not the stock is undervalued.

Question 7

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope. 
A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope.

Question 8

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Accepted Answer

A) True 
 B)False

Question 9

Three years ago Heidi put $1,200 into an account paying 2 percent interest. How much is the account worth today?

Accepted Answer

A) $1,225.38 
B) $1,248.48 
C) $1,264.72 
D) $1,273.45 
A) $1,225.38 
B) $1,248.48 
C) $1,264.72 
D) $1,273.45

Question 10

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

Accepted Answer

A) $3,180.00 
B) $3,182.70 
C) $3,183.62 
D) None of the above are correct to the nearest cent. 
A) $3,180.00 
B) $3,182.70 
C) $3,183.62 
D) None of the above are correct to the nearest cent.

Question 11

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A) 4 percent 
B) 6 percent 
C) 9 percent 
D) 11 percent 
A) 4 percent 
B) 6 percent 
C) 9 percent 
D) 11 percent

Question 12

Which of the following best illustrates moral hazard?

Accepted Answer

A) After a person obtains life insurance, she takes up skydiving. 
B) A person obtains insurance knowing he is in poor health. 
C) A person holds stock only in very risky corporations. 
D) A person holds stocks from only a few corporations. 
A) After a person obtains life insurance, she takes up skydiving. 
B) A person obtains insurance knowing he is in poor health. 
C) A person holds stock only in very risky corporations. 
D) A person holds stocks from only a few corporations.

Question 13

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A) The first is lowest; the second is highest. 
B) The second is lowest; the third is highest. 
C) The third is lowest; the fourth is highest. 
D) The fourth is lowest; the first is highest. 
A) The first is lowest; the second is highest. 
B) The second is lowest; the third is highest. 
C) The third is lowest; the fourth is highest. 
D) The fourth is lowest; the first is highest.

Question 14

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Accepted Answer

A) $637.50 after 5 years and $822.09 after 10 years. 
B) $637.50 after 5 years and $775.00 after 10 years. 
C) $653.48 after 5 years and $854.07 after 10 years. 
D) $688.36 after 5 years and $915.56 after 10 years. 
A) $637.50 after 5 years and $822.09 after 10 years. 
B) $637.50 after 5 years and $775.00 after 10 years. 
C) $653.48 after 5 years and $854.07 after 10 years. 
D) $688.36 after 5 years and $915.56 after 10 years.

Question 15

Figure 14-2. The figure shows a utility function for Mary Ann.  
-Refer to Figure 14-2. Suppose Mary Ann begins with $1,050 in wealth. Starting from there,

Accepted Answer

A) she would be willing to accept a coin-flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B) the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C) the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D) the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth. 
A) she would be willing to accept a coin-flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B) the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C) the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D) the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Question 16

The present value of a payment to be made in the future falls as

Accepted Answer

A) the interest rate rises and the time until the payment is made increases. 
B) the interest rate rises and the time until the payment is made decreases. 
C) the interest rate falls and the time until the payment is made increases. 
D) the interest rate falls and the time until the payment is made decreases. 
A) the interest rate rises and the time until the payment is made increases. 
B) the interest rate rises and the time until the payment is made decreases. 
C) the interest rate falls and the time until the payment is made increases. 
D) the interest rate falls and the time until the payment is made decreases.

Question 17

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

Accepted Answer

A) $4 
B) $8 
C) $16 
D) $32 
A) $4 
B) $8 
C) $16 
D) $32

Question 18

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Accepted Answer

A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years 
A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years

Question 19

A company that produces computer peripherals is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, 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 20

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Accepted Answer

A) Higher average returns come at the price of higher risk. 
B) People who are risk averse should never hold stock. 
C) Diversification cannot eliminate all of the risk in stock portfolio. 
D) None of her conclusions are incorrect. 
A) Higher average returns come at the price of higher risk. 
B) People who are risk averse should never hold stock. 
C) Diversification cannot eliminate all of the risk in stock portfolio. 
D) None of her conclusions are incorrect.

Exam 14: The Basic Tools of Finance

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Draw graphs showing the following three relationships.1. The relation between utility and wealth for a risk averse consumer.2. The relation between standard deviation and the number of stocks in a portfolio.3. The relation between return and risk.

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. In what way(s) does the graph differ from the usual case?

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Diminishing marginal utility of wealth implies that the utility function is

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Three years ago Heidi put $1,200 into an account paying 2 percent interest. How much is the account worth today?

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Which of the following best illustrates moral hazard?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Figure 14-2. The figure shows a utility function for Mary Ann. -Refer to Figure 14-2. Suppose Mary Ann begins with $1,050 in wealth. Starting from there,

The present value of a payment to be made in the future falls as

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

A company that produces computer peripherals is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, the present value of these future earnings

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

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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