Question 1

The sum of the terms of the infinite geometric series 1, 0.86, 0.862, 0.863, ..., is closest to which of the following numbers?

Accepted Answer

A) B0 
B) 1.86 
C) 7.14 
D) 0.54 
E) 116.28 
A) B0 
B) 1.86 
C) 7.14 
D) 0.54 
E) 116.28 C

Question 2

Suppose that a dispute in the Persian Gulf halts the sale of oil from the Persian Gulf for one year.At the same time an important new oil field is found in a place where nobody expected there to be oil.What does economic theory predict will be the effect on the future price of oil to be delivered two years from now?

Accepted Answer

A) It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise. 
B) It will fall. 
C) It will rise unless the new pool can be brought into production before the Persian Gulf supply is resumed. 
D) It will rise. 
E) It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf and fall otherwise. 
A) It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise. 
B) It will fall. 
C) It will rise unless the new pool can be brought into production before the Persian Gulf supply is resumed. 
D) It will rise. 
E) It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf and fall otherwise. B

Question 3

A bond has a face value of 7,000 dollars.It will pay 700 dollars in interest at the end of every year for the next 50 years.At the time of the last interest payment, 50 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

Accepted Answer

A) 7,000 dollars 
B) 42,000 dollars 
C) 35,000 dollars 
D) More than any of the above amounts 
E) Less than any of the above amounts 
A) 7,000 dollars 
B) 42,000 dollars 
C) 35,000 dollars 
D) More than any of the above amounts 
E) Less than any of the above amounts A

Question 4

If everybody has the same information, then a well-functioning market for assets would, in equilibrium, leave no opportunities for arbitrage.

Accepted Answer

A) True 
 B)False

Question 5

If the interest rate is 10%, then an asset that returns $1 a year forever is worth $1/1.1.

Accepted Answer

A) True 
 B)False

Question 6

In a perfect asset market, it is known with certainty that an asset will sell for $24 in one year.If the annual interest rate is 10%, then the asset will sell for $26.40 right now.

Accepted Answer

A) True 
 B)False

Question 7

A large (subterranean)pool of oil lies in a remote region of Ohio.Oil companies have explored this region and know how much oil there is.They have purchased the rights to drill and extract oil when they wish to do so.Because of the extremely forbidding geography and the savagery of the natives, the companies have decided to postpone extraction until the price of oil is higher.The theory of intertemporal arbitrage predicts that

Accepted Answer

A) the companies are behaving irrationally. 
B) the price of rights to this oil must rise at the interest rate. 
C) the oil companies will not drill unless production costs fall. 
D) the price of rights to this oil will stay constant until it pays to extract. 
E) None of the above. 
A) the companies are behaving irrationally. 
B) the price of rights to this oil must rise at the interest rate. 
C) the oil companies will not drill unless production costs fall. 
D) the price of rights to this oil will stay constant until it pays to extract. 
E) None of the above.

Question 8

A certain wine costs $3 a bottle to produce.It improves in taste if stored properly for a period of time.When it is newly bottled, people are willing to pay only $2 a bottle to drink it.But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years.Storage costs, not including interest, are $.50 per year.If the interest rate is 5% and the wine is kept by rational investors, how old will it be when it is drunk and what will be its price at that time?

Accepted Answer

A) 50 years old and $152 
B) 16 years old and $50 
C) 50 years old and $153 
D) 20 years old and $63 
E) 4 years old and $14 
A) 50 years old and $152 
B) 16 years old and $50 
C) 50 years old and $153 
D) 20 years old and $63 
E) 4 years old and $14

Question 9

The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?

Accepted Answer

A) $4,000 
B) $8,800 
C) $4,400 
D) $8,000 
E) $9,000 
A) $4,000 
B) $8,800 
C) $4,400 
D) $8,000 
E) $9,000

Question 10

If the nominal interest rate is 80% and the rate of inflation is 50%, then the exact real rate of interest is

Accepted Answer

A) 10%. 
B) 20%. 
C) 30%. 
D) 40%. 
E) None of the above. 
A) 10%. 
B) 20%. 
C) 30%. 
D) 40%. 
E) None of the above.

Question 11

If the interest rate is 17%, and will remain 17% forever, how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now, 1,368 dollars 2 years from now, and nothing at any other time?

Accepted Answer

A) 7,000 dollars 
B) 6,000 dollars 
C) 41,176.47 dollars 
D) 126,000 dollars 
E) 8,000 dollars 
A) 7,000 dollars 
B) 6,000 dollars 
C) 41,176.47 dollars 
D) 126,000 dollars 
E) 8,000 dollars

Question 12

The price of an antique is expected to rise by 4% during the next year.The interest rate is 6%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 400 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique?

Accepted Answer

A) 6,666.67 dollars 
B) 8,400 dollars 
C) 400 dollars 
D) 20,000 dollars 
E) 4,000 dollars 
A) 6,666.67 dollars 
B) 8,400 dollars 
C) 400 dollars 
D) 20,000 dollars 
E) 4,000 dollars

Question 13

The sum of the terms of the infinite geometric series 1, 0.85, 0.852, 0.853, ..., is closest to which of the following numbers?

Accepted Answer

A) 0.54 
B) 1.85 
C) B0 
D) 6.67 
E) 117.65 
A) 0.54 
B) 1.85 
C) B0 
D) 6.67 
E) 117.65

Question 14

If the rate of inflation is greater than the interest rate,

Accepted Answer

A) you should consume all of your wealth in the first period. 
B) you are better off keeping your money in a mattress at home (assuming no risk of it being stolen)than at a bank. 
C) you will necessarily consume less this period than you would if the rate of inflation were less than the interest rate. 
D) you will necessarily consume more this period than you would if the rate of inflation were less than the interest rate. 
E) None of the above. 
A) you should consume all of your wealth in the first period. 
B) you are better off keeping your money in a mattress at home (assuming no risk of it being stolen)than at a bank. 
C) you will necessarily consume less this period than you would if the rate of inflation were less than the interest rate. 
D) you will necessarily consume more this period than you would if the rate of inflation were less than the interest rate. 
E) None of the above.

Question 15

If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?

Accepted Answer

A) 9,000 dollars 
B) 171,000 dollars 
C) 8,000 dollars 
D) 50,000 dollars 
E) 10,000 dollars 
A) 9,000 dollars 
B) 171,000 dollars 
C) 8,000 dollars 
D) 50,000 dollars 
E) 10,000 dollars

Question 16

If the interest rate is r and will remain r forever, then a bond that will pay 75 dollars a year forever, starting one year from now, is worth how much today?

Accepted Answer

A) 75/(1 + r)dollars. 
B) 75(1 + r)dollars. 
C) 75/(1 + r + r2 +.......+ r n +.......)dollars. 
D) 75/r dollars. 
E) None of the above. 
A) 75/(1 + r)dollars. 
B) 75(1 + r)dollars. 
C) 75/(1 + r + r2 +.......+ r n +.......)dollars. 
D) 75/r dollars. 
E) None of the above.

Question 17

Bank 1 offers a deal on deposits of $1,000 or more.You must leave your money in the bank for three years, but bank 1 will pay you 8% interest for the first year, 8% interest for the second year, and 7% interest for the third year.In response, bank 2 offers a deal that it claims is even better.It also requires you to deposit at least $1,000 and to leave it in the bank for three years, but it will pay 12% interest in the first year and then 8% in the second and third year.After three years, you can take your money out of either bank and do what you want with it.Both banks compound interest annually.

Accepted Answer

A) The offer of bank 2 becomes relatively more attractive as the size of your initial deposit is larger. 
B) Bank 2 offers a better deal than bank 1. 
C) Bank 1 offers a better deal than bank 2. 
D) The two offers are equally valuable. 
E) None of the above. 
A) The offer of bank 2 becomes relatively more attractive as the size of your initial deposit is larger. 
B) Bank 2 offers a better deal than bank 1. 
C) Bank 1 offers a better deal than bank 2. 
D) The two offers are equally valuable. 
E) None of the above.

Question 18

Suppose that the cost of cutting down a tree is zero and the tree grows on land that is useless for anything else, that the interest rate is constant, and that the price of lumber does not change.The optimal time to cut the tree is when the difference between its growth rate and the interest rate is maximized.

Accepted Answer

A) True 
 B)False

Question 19

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $44 one year from now, $51 two years from now, and $55 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer.)

Accepted Answer

A) $40 
B) $42.15 
C) $47.15 
D) $41.32 
E) $49.30 
A) $40 
B) $42.15 
C) $47.15 
D) $41.32 
E) $49.30

Question 20

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $55 one year from now, $58 two years from now, and $64 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer.)

Accepted Answer

A) $47.93 
B) $53.12 
C) $48.08 
D) $50 
E) $57.08 
A) $47.93 
B) $53.12 
C) $48.08 
D) $50 
E) $57.08

Exam 10: Asset Markets-Part A

The sum of the terms of the infinite geometric series 1, 0.86, 0.862, 0.863, ..., is closest to which of the following numbers?

If everybody has the same information, then a well-functioning market for assets would, in equilibrium, leave no opportunities for arbitrage.

If the interest rate is 10%, then an asset that returns $1 a year forever is worth $1/1.1.

In a perfect asset market, it is known with certainty that an asset will sell for $24 in one year.If the annual interest rate is 10%, then the asset will sell for $26.40 right now.

The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?

If the nominal interest rate is 80% and the rate of inflation is 50%, then the exact real rate of interest is

If the interest rate is 17%, and will remain 17% forever, how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now, 1,368 dollars 2 years from now, and nothing at any other time?

The sum of the terms of the infinite geometric series 1, 0.85, 0.852, 0.853, ..., is closest to which of the following numbers?

If the rate of inflation is greater than the interest rate,

If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?

If the interest rate is r and will remain r forever, then a bond that will pay 75 dollars a year forever, starting one year from now, is worth how much today?

Budget Constraint-Part A

Budget Constraint-Part B

Preferences-Part A

Preferences-Part B

Utility-Part A

Utility-Part B

Choice-Part A

Choice-Part B

Demand-Part A

Demand-Part B

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part A

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part A

Intertemporal Choice-Part B

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Behavioral Economics

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A

Information Technology-Part B

Public Goods-Part A

Public Goods-Part B

The sum of the terms of the infinite geometric series 1, 0.86, 0.86², 0.86³, ..., is closest to which of the following numbers?

The sum of the terms of the infinite geometric series 1, 0.85, 0.85², 0.85³, ..., is closest to which of the following numbers?