Question 1

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 2

For a risk averse person,

Accepted Answer

A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases. 
A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases.

Question 3

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Accepted Answer

A)  $12,000 
B)  $14,000 
C)  $15,500 
D)  $20,000 
A)  $12,000 
B)  $14,000 
C)  $15,500 
D)  $20,000

Question 4

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

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

Question 5

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Accepted Answer

A)  You receive the payment 2 years from now and the interest rate is 6 percent. 
B)  You receive the payment 2 years from now and the interest rate is 4 percent. 
C)  You receive the payment 3 years from now and the interest rate is 6 percent. 
D)  You receive the payment 3 years from now and the interest rate is 4 percent. 
A)  You receive the payment 2 years from now and the interest rate is 6 percent. 
B)  You receive the payment 2 years from now and the interest rate is 4 percent. 
C)  You receive the payment 3 years from now and the interest rate is 6 percent. 
D)  You receive the payment 3 years from now and the interest rate is 4 percent.

Question 6

According to the efficient market hypothesis, which of the following statements is not correct?

Accepted Answer

A)  Stock market prices tend to rise today if they rose yesterday. 
B)  As judged by the typical person in the market, all stocks are fairly valued all the time. 
C)  At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D)  All of the above statements are incorrect. 
A)  Stock market prices tend to rise today if they rose yesterday. 
B)  As judged by the typical person in the market, all stocks are fairly valued all the time. 
C)  At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D)  All of the above statements are incorrect.

Question 7

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Accepted Answer

A)  $3,680.00 
B)  $3,712.77 
C)  $3,750.00 
D)  $3,772.57 
A)  $3,680.00 
B)  $3,712.77 
C)  $3,750.00 
D)  $3,772.57

Question 8

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 9

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. What is measured along the vertical axis?

Accepted Answer

A)  risk aversion 
B)  marginal utility 
C)  utility 
D)  the number of units of a good that can be purchased 
A)  risk aversion 
B)  marginal utility 
C)  utility 
D)  the number of units of a good that can be purchased

Question 10

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 11

Diversification of a portfolio

Accepted Answer

A)  can eliminate market risk, but it cannot eliminate firm-specific risk. 
B)  can eliminate firm-specific risk, but it cannot eliminate market risk. 
C)  increases the portfolio's standard deviation. 
D)  is not necessary for a person who is risk averse. 
A)  can eliminate market risk, but it cannot eliminate firm-specific risk. 
B)  can eliminate firm-specific risk, but it cannot eliminate market risk. 
C)  increases the portfolio's standard deviation. 
D)  is not necessary for a person who is risk averse.

Question 12

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

A) True 
 B)False

Question 13

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Accepted Answer

A)  $210 
B)  $300 
C)  $800 
D)  $1,010 
A)  $210 
B)  $300 
C)  $800 
D)  $1,010

Question 14

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Accepted Answer

A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years 
A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years

Question 15

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A)  about 6.3 years 
B)  about 7 years 
C)  about 7.7 years 
D)  about 10 years 
A)  about 6.3 years 
B)  about 7 years 
C)  about 7.7 years 
D)  about 10 years

Question 16

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Accepted Answer

A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63 
A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63

Question 17

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.

Question 18

Which of the following is not correct?

Accepted Answer

A)  There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B)  The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C)  Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D)  If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis. 
A)  There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B)  The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C)  Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D)  If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.

Question 19

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent. 
A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent.

Question 20

Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent. 
A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent.

Exam 27: The Basic Tools of Finance

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?

For a risk averse person,

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

According to the efficient market hypothesis, which of the following statements is not correct?

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

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

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. What is measured along the vertical axis?

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Diversification of a portfolio

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Which of the following is correct?

Which of the following is not correct?

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

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

Six Debates Over Macroeconomic Policy

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