Question 1

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub

Question 2

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

Accepted Answer

A)  $320.69 
B)  $324.00 
C)  $324.73 
D)  $327.81 
A)  $320.69 
B)  $324.00 
C)  $324.73 
D)  $327.81

Question 3

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)  raise the price and raise the present value of the corporation's stock. 
B)  raise the price and lower the present value of the corporation's stock. 
C)  lower the price and raise the present value of the corporation's stock. 
D)  lower the price and lower the present value of the corporation's stock. 
A)  raise the price and raise the present value of the corporation's stock. 
B)  raise the price and lower the present value of the corporation's stock. 
C)  lower the price and raise the present value of the corporation's stock. 
D)  lower the price and lower the present value of the corporation's stock.

Question 4

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 5

Tami knows that people in her family die young, and so she buys life insurance. Preston 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 6

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

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 7

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls. 
A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls.

Question 8

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Accepted Answer

A)  increase the risk of her portfolio. 
B)  decrease some, but not all, of the risk of her portfolio. 
C)  decrease all of the risk of her portfolio. 
D)  leave the risk of her portfolio unchanged from its present level. 
A)  increase the risk of her portfolio. 
B)  decrease some, but not all, of the risk of her portfolio. 
C)  decrease all of the risk of her portfolio. 
D)  leave the risk of her portfolio unchanged from its present level.

Question 9

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 10

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse. 
B)  Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of increasing marginal utility applies to Britney. 
D)  All of the above are correct. 
A)  Britney is risk averse. 
B)  Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of increasing marginal utility applies to Britney. 
D)  All of the above are correct.

Question 11

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 12

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Accepted Answer

A)  8 percent 
B)  9 percent 
C)  10 percent 
D)  None of the above is correct. 
A)  8 percent 
B)  9 percent 
C)  10 percent 
D)  None of the above is correct.

Question 13

The problem of moral hazard arises because

Accepted Answer

A)  life is full of all sorts of risks. 
B)  after people buy insurance, they have less incentive to be careful about their risky behavior. 
C)  a high-risk person is more likely to apply for insurance than is a low-risk person. 
D)  insurance companies go to great effort to avoid paying claims to their policy holders. 
A)  life is full of all sorts of risks. 
B)  after people buy insurance, they have less incentive to be careful about their risky behavior. 
C)  a high-risk person is more likely to apply for insurance than is a low-risk person. 
D)  insurance companies go to great effort to avoid paying claims to their policy holders.

Question 14

Should a person who is risk averse hold a portfolio with no stock and only bonds?
Explain.

Accepted Answer

Not necessarily. Historically bonds have

Question 15

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)  $66,225.25 
B)  $67,556.42 
C)  $68,058.32 
D)  $71,428.57 
A)  $66,225.25 
B)  $67,556.42 
C)  $68,058.32 
D)  $71,428.57

Question 16

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 9% interest rate, the present val

Question 17

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for   .

Accepted Answer

Here is th

Question 18

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 19

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's 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 20

Which of the following is correct?

Accepted Answer

A)  Risk-averse people will not hold stock. 
B)  Diversification cannot reduce firm-specific risk. 
C)  The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. 
D)  Stock prices are determined by fundamental analysis rather than by supply and demand. 
A)  Risk-averse people will not hold stock. 
B)  Diversification cannot reduce firm-specific risk. 
C)  The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. 
D)  Stock prices are determined by fundamental analysis rather than by supply and demand.

Exam 14: The Basic Tools of Finance

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

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?

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

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Economists have developed models of risk aversion using the concept of

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

The problem of moral hazard arises because

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

A bank might make mortgages to people in different regions of the country. By doing so

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

Which of the following is correct?

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 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

Six Debates Over Macroeconomic Policy

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