Question 1

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. For the person to whom this utility function applies,

Accepted Answer

A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. 
A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Question 2

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.

Accepted Answer

A)  Both Vince and Terri are correct. 
B)  Only Vince is correct. 
C)  Only Terri is correct. 
D)  Neither Vince nor Terri is correct. 
A)  Both Vince and Terri are correct. 
B)  Only Vince is correct. 
C)  Only Terri is correct. 
D)  Neither Vince nor Terri is correct.

Question 3

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Accepted Answer

The present value of the futur

Question 4

A risk-averse person has

Accepted Answer

A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth. 
A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

Question 5

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 6

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Accepted Answer

A)  about $860 
B)  about $870 
C)  about $880 
D)  about $890 
A)  about $860 
B)  about $870 
C)  about $880 
D)  about $890

Question 7

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65 
A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65

Question 8

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 9

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 10

The efficient markets hypothesis says that

Accepted Answer

A)  only individual investors can make money in the stock market. 
B)  it should be easy to find stocks whose price differs from their fundamental value. 
C)  stock prices follow a random walk. 
D)  All of the above are correct. 
A)  only individual investors can make money in the stock market. 
B)  it should be easy to find stocks whose price differs from their fundamental value. 
C)  stock prices follow a random walk. 
D)  All of the above are correct.

Question 11

If the efficient market hypothesis is correct, then

Accepted Answer

A)  index funds should typically beat managed funds, and usually do. 
B)  index fund should typically beat managed funds, but usually do not. 
C)  mutual funds should typically beat index funds, and usually do. 
D)  mutual funds should typically beat index funds, but usually do not. 
A)  index funds should typically beat managed funds, and usually do. 
B)  index fund should typically beat managed funds, but usually do not. 
C)  mutual funds should typically beat index funds, and usually do. 
D)  mutual funds should typically beat index funds, but usually do not.

Question 12

Jarrod says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. Simon says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A)  Jarrod and Simon are both correct. 
B)  Jarrod and Simon are both incorrect. 
C)  Only Jarrod is correct. 
D)  Only Simon is correct. 
A)  Jarrod and Simon are both correct. 
B)  Jarrod and Simon are both incorrect. 
C)  Only Jarrod is correct. 
D)  Only Simon is correct.

Question 13

In general, as a person includes fewer stocks and more bonds in his portfolio,

Accepted Answer

A)  both risk and expected return rise. 
B)  risk rises but expected return falls. 
C)  risk falls, but expected return rises. 
D)  both risk and expected return fall. 
A)  both risk and expected return rise. 
B)  risk rises but expected return falls. 
C)  risk falls, but expected return rises. 
D)  both risk and expected return fall.

Question 14

La Rossa Pasta Company is considering expanding its factory. In which case would both the change in the cost and the change in the interest rate each make it less likely that La Rossa's would expand?

Accepted Answer

A)  a decrease in the cost of expanding and a decrease in the interest rate. 
B)  a decrease in the cost of expanding and an increase in the interest rate. 
C)  an increase in the cost of expanding and a decrease in the interest rate. 
D)  an increase in the cost of expanding and an increase in the interest rate. 
A)  a decrease in the cost of expanding and a decrease in the interest rate. 
B)  a decrease in the cost of expanding and an increase in the interest rate. 
C)  an increase in the cost of expanding and a decrease in the interest rate. 
D)  an increase in the cost of expanding and an increase in the interest rate.

Question 15

Economists disagree as to whether

Accepted Answer

A)  the stock price of a company should reflect the company's expected profitability. 
B)  the basic tools of finance reflect valid ideas. 
C)  stock prices reflect rational estimates of a company's true worth. 
D)  there is any relationship between stock market fluctuations and fluctuations in the economy more broadly. 
A)  the stock price of a company should reflect the company's expected profitability. 
B)  the basic tools of finance reflect valid ideas. 
C)  stock prices reflect rational estimates of a company's true worth. 
D)  there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.

Question 16

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A)  compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B)  discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C)  the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D)  the process of compounding produces a present value, whereas the process of discounting produces a future value. 
A)  compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B)  discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C)  the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D)  the process of compounding produces a present value, whereas the process of discounting produces a future value.

Question 17

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A)  doubles every 70/X years. 
B)  doubles every 70(1 - 1/X) years. 
C)  doubles every 70/X2 years. 
D)  doubles every 70/(1 - X) years. 
A)  doubles every 70/X years. 
B)  doubles every 70(1 - 1/X) years. 
C)  doubles every 70/X2 years. 
D)  doubles every 70/(1 - X) years.

Question 18

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

Accepted Answer

A)  wealth. 
B)  utility. 
C)  marginal wealth. 
D)  marginal utility. 
A)  wealth. 
B)  utility. 
C)  marginal wealth. 
D)  marginal utility.

Question 19

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A)  right, so the price rises. 
B)  right, so the price falls. 
C)  left, so the price rises. 
D)  left, so the price falls. 
A)  right, so the price rises. 
B)  right, so the price falls. 
C)  left, so the price rises. 
D)  left, so the price falls.

Question 20

Which of the following is correct?

Accepted Answer

A)  Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market hypothesis. 
B)  Managed funds typically have a higher return than indexed funds. This tends to support the efficient market hypothesis. 
C)  Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market hypothesis. 
D)  Index funds typically have a higher rate of return than managed funds. This tends to support the efficient market hypothesis. 
A)  Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market hypothesis. 
B)  Managed funds typically have a higher return than indexed funds. This tends to support the efficient market hypothesis. 
C)  Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market hypothesis. 
D)  Index funds typically have a higher rate of return than managed funds. This tends to support the efficient market hypothesis.

Exam 27: The Basic Tools of Finance

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

A risk-averse person has

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

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

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

The efficient markets hypothesis says that

If the efficient market hypothesis is correct, then

In general, as a person includes fewer stocks and more bonds in his portfolio,

La Rossa Pasta Company is considering expanding its factory. In which case would both the change in the cost and the change in the interest rate each make it less likely that La Rossa's would expand?

Economists disagree as to whether

One way to characterize the difference between compounding and discounting is to say that

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

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

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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