Question 1

Stock market fluctuations

Accepted Answer

A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct. 
A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct.

Question 2

At an annual interest rate of 10 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)  8 
B)  10 
C)  12 
D)  14 
A)  8 
B)  10 
C)  12 
D)  14

Question 3

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Accepted Answer

A)  has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B)  almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C)  is spending his or her time wisely if the efficient markets hypothesis is correct. 
D)  is interested in the likely ability of a corporation to pay dividends in the future. 
A)  has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B)  almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C)  is spending his or her time wisely if the efficient markets hypothesis is correct. 
D)  is interested in the likely ability of a corporation to pay dividends in the future.

Question 4

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose the vertical distance between the points 0, A) and 0, B) is 5. If her wealth increased from $1,050 to $1,350, then

Accepted Answer

A)  Britney's subjective measure of her well­being would increase by less than 5 units. 
B)  Britney's subjective measure of her well­being would increase by more than 5 units. 
C)  Britney would change from being a risk-averse person into a person who is not risk averse. 
D)  Britney would change from being a person who is not risk averse into a risk-averse person. 
A)  Britney's subjective measure of her well­being would increase by less than 5 units. 
B)  Britney's subjective measure of her well­being would increase by more than 5 units. 
C)  Britney would change from being a risk-averse person into a person who is not risk averse. 
D)  Britney would change from being a person who is not risk averse into a risk-averse person.

Question 5

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Accepted Answer

A)  increasing marginal utility of wealth and is risk averse. 
B)  increasing marginal utility of wealth but is not risk averse. 
C)  decreasing marginal utility of wealth and is risk averse. 
D)  decreasing marginal utility of wealth but is not risk averse. 
A)  increasing marginal utility of wealth and is risk averse. 
B)  increasing marginal utility of wealth but is not risk averse. 
C)  decreasing marginal utility of wealth and is risk averse. 
D)  decreasing marginal utility of wealth but is not risk averse.

Question 6

After the 1982 recession, the U.S. and world economies entered into a long period

Accepted Answer

A)  of high unemployment rates. 
B)  high inflation rates. 
C)  that has become known as the "Great Moderation." 
D)  that has become known as the "Great Recession." 
A)  of high unemployment rates. 
B)  high inflation rates. 
C)  that has become known as the "Great Moderation." 
D)  that has become known as the "Great Recession."

Question 7

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Lisa receives from

Question 8

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

Accepted Answer

A)  an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account 
B)  an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C)  an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus 
A)  an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account 
B)  an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C)  an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus

Question 9

Which of the following statements is correct?

Accepted Answer

A)  A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B)  A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C)  Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D)  Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection. 
A)  A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B)  A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C)  Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D)  Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

Question 10

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Accepted Answer

A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14 
A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14

Question 11

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Accepted Answer

A)  $485.44. 
B)  $496.50. 
C)  $509.28. 
D)  $515.00. 
A)  $485.44. 
B)  $496.50. 
C)  $509.28. 
D)  $515.00.

Question 12

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A)  $2,0001.06) 
B)  $1,000 + $1.06)2 
C)  $1,0001.06)2 
D)  None of the above are correct. 
A)  $2,0001.06) 
B)  $1,000 + $1.06)2 
C)  $1,0001.06)2 
D)  None of the above are correct.

Question 13

David increases the number of companies in which he holds stocks.

Accepted Answer

A)  This reduces risk's standard deviation and firm-specific risk. 
B)  This reduces risk's standard deviation and market risk. 
C)  This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear. 
D)  This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear. 
A)  This reduces risk's standard deviation and firm-specific risk. 
B)  This reduces risk's standard deviation and market risk. 
C)  This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear. 
D)  This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear.

Question 14

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Accepted Answer

A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent 
A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent

Question 15

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Accepted Answer

A)  4 
B)  5 
C)  6 
D)  7 
A)  4 
B)  5 
C)  6 
D)  7

Question 16

Economists have developed models of risk aversion using the concept of

Accepted Answer

A)  utility and the associated assumption of diminishing marginal utility. 
B)  utility and the associated assumption of increasing marginal utility. 
C)  income and the associated assumption of diminishing marginal wealth. 
D)  income and the associated assumption of increasing marginal wealth. 
A)  utility and the associated assumption of diminishing marginal utility. 
B)  utility and the associated assumption of increasing marginal utility. 
C)  income and the associated assumption of diminishing marginal wealth. 
D)  income and the associated assumption of increasing marginal wealth.

Question 17

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A)  $725.62. It would be higher if the interest rate were higher. 
B)  $727.28. It would be higher if the interest rate were higher. 
C)  $725.62. It would be lower if the interest rate were higher. 
D)  $727.28. It would be lower if the interest rate were higher. 
A)  $725.62. It would be higher if the interest rate were higher. 
B)  $727.28. It would be higher if the interest rate were higher. 
C)  $725.62. It would be lower if the interest rate were higher. 
D)  $727.28. It would be lower if the interest rate were higher.

Question 18

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)  adherence to the old adage, "Don't put all your eggs in one basket." 
B)  insurance. 
C)  the risk-return trade-off. 
D)  All of the above are correct. 
A)  adherence to the old adage, "Don't put all your eggs in one basket." 
B)  insurance. 
C)  the risk-return trade-off. 
D)  All of the above are correct.

Question 19

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces

Question 20

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)  You receive the payment 3 years from now and the interest rate is 8 percent. 
B)  You receive the payment 3 years from now and the interest rate is 6 percent. 
C)  You receive the payment 2 years from now and the interest rate is 8 percent. 
D)  You receive the payment 2 years from now and the interest rate is 6 percent. 
A)  You receive the payment 3 years from now and the interest rate is 8 percent. 
B)  You receive the payment 3 years from now and the interest rate is 6 percent. 
C)  You receive the payment 2 years from now and the interest rate is 8 percent. 
D)  You receive the payment 2 years from now and the interest rate is 6 percent.

Exam 19: The Basic Tools of Finance

Stock market fluctuations

At an annual interest rate of 10 percent, about how many years will it take $100 to triple in value?

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose the vertical distance between the points 0, A) and 0, B) is 5. If her wealth increased from $1,050 to $1,350, then

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

After the 1982 recession, the U.S. and world economies entered into a long period

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

Which of the following statements is correct?

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

David increases the number of companies in which he holds stocks.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Economists have developed models of risk aversion using the concept of

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Risk aversion helps to explain various things we observe in the economy, including

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

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