Question 1

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

Accepted Answer

A)  undervalued,and evidence later showed that this was clearly correct. 
B)  undervalued,but whether it was remains debatable. 
C)  overvalued,and evidence later showed that this was clearly correct. 
D)  overvalued,but whether it was remains debatable. 
A)  undervalued,and evidence later showed that this was clearly correct. 
B)  undervalued,but whether it was remains debatable. 
C)  overvalued,and evidence later showed that this was clearly correct. 
D)  overvalued,but whether it was remains debatable.

Question 2

Which of the following best illustrates diversification?

Accepted Answer

A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock,corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business,a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past. 
A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock,corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business,a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past.

Question 3

Annie knows that people in her family die young,and so she buys life insurance.Harry knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)  These are both examples of adverse selection. 
B)  These are both examples of moral hazard. 
C)  The first example illustrates adverse selection,and the second illustrates moral hazard. 
D)  The first example illustrates moral hazard,and the second illustrates adverse selection. 
A)  These are both examples of adverse selection. 
B)  These are both examples of moral hazard. 
C)  The first example illustrates adverse selection,and the second illustrates moral hazard. 
D)  The first example illustrates moral hazard,and the second illustrates adverse selection.

Question 4

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 5

You put $275 in the bank one year ago and forgot about it.The bank sends you a notice that you now have $291.50 in your account.What interest rate did you earn?

Accepted Answer

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

Question 6

Which of the following is the largest?

Accepted Answer

A)  the future value of $250 with 3% interest for 2 years 
B)  the future value of $250 at 2% interest for 3 years 
C)  the present value of $250 to be paid in two years when the interest rate is 3% 
D)  the present value of $250 to be paid in three years when the interest rate is 2% 
A)  the future value of $250 with 3% interest for 2 years 
B)  the future value of $250 at 2% interest for 3 years 
C)  the present value of $250 to be paid in two years when the interest rate is 3% 
D)  the present value of $250 to be paid in three years when the interest rate is 2%

Question 7

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Accepted Answer

A)  $500/(1.04)2 
B)  $500 - 500(1.04)2 
C)  $500 - $500/(.04)2 
D)  None of the above is correct. 
A)  $500/(1.04)2 
B)  $500 - 500(1.04)2 
C)  $500 - $500/(.04)2 
D)  None of the above is correct.

Question 8

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

Accepted Answer

A)  the efficient markets hypothesis is not a correct hypothesis. 
B)  the stock market is informationally efficient. 
C)  the stock market is informationally inefficient. 
D)  there is no reason to establish a diversified portfolio of stocks. 
A)  the efficient markets hypothesis is not a correct hypothesis. 
B)  the stock market is informationally efficient. 
C)  the stock market is informationally inefficient. 
D)  there is no reason to establish a diversified portfolio of stocks.

Question 9

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 10

Albert Einstein once referred to compounding as

Accepted Answer

A)  "an obsession among economists that defies explanation." 
B)  "the greatest mathematical discovery of all time." 
C)  his own discovery. 
D)  John Maynard Keynes's greatest contribution. 
A)  "an obsession among economists that defies explanation." 
B)  "the greatest mathematical discovery of all time." 
C)  his own discovery. 
D)  John Maynard Keynes's greatest contribution.

Question 11

Sometimes On Time (SOT)Airlines is considering buying a new jet.SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate. 
A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate.

Question 12

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 13

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

Question 14

Sage decides to cash in all his savings to open a recording studio.He has three accounts to cash in.The first earned 9 percent for two years.The second earned 6 percent for three years.And the last earned 3 percent for six years.Supposing he started with $5,000 in each account,from which account will he get the most cash?

Accepted Answer

A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same. 
A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same.

Question 15

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Accepted Answer

A)  8 percent,$15,000 
B)  7 percent,$16,000 
C)  6 percent,$17,000 
D)  All of the above are correct. 
A)  8 percent,$15,000 
B)  7 percent,$16,000 
C)  6 percent,$17,000 
D)  All of the above are correct.

Question 16

Which of the following actions best illustrates moral hazard?

Accepted Answer

A)  A person adds risky stock to his portfolio. 
B)  A person who has narrowly avoided many accidents applies for automobile insurance. 
C)  A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D)  A person purchases homeowners insurance and then checks his smoke detector batteries less frequently. 
A)  A person adds risky stock to his portfolio. 
B)  A person who has narrowly avoided many accidents applies for automobile insurance. 
C)  A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D)  A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question 17

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  7 
A)  3 
B)  4 
C)  5 
D)  7

Question 18

If a person is risk averse,then she has

Accepted Answer

A)  diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
A)  diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.

Question 19

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 20

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

Accepted Answer

A)  no less than 9.48 percent. 
B)  no greater than 9.48 percent. 
C)  no less than 10.83 percent. 
D)  no greater than 10.83 percent. 
A)  no less than 9.48 percent. 
B)  no greater than 9.48 percent. 
C)  no less than 10.83 percent. 
D)  no greater than 10.83 percent.

Exam 27: The Basic Tools of Finance

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

Which of the following best illustrates diversification?

Annie knows that people in her family die young,and so she buys life insurance.Harry knows he is a reckless driver and so he applies for automobile insurance.

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

You put $275 in the bank one year ago and forgot about it.The bank sends you a notice that you now have $291.50 in your account.What interest rate did you earn?

Which of the following is the largest?

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Albert Einstein once referred to compounding as

Sometimes On Time (SOT)Airlines is considering buying a new jet.SOT would be more likely to buy a new jet if there were either

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?

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 have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Which of the following actions best illustrates moral hazard?

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

If a person is risk averse,then she has

The market for insurance is an example of diversification.

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

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

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

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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