Question 1

An asset market is said to experience a speculative bubble when

Accepted Answer

A)  the price of the asset rises above what appears to be its fundamental value. 
B)  the price of the asset appears to follow a random walk. 
C)  the market cannot establish an equilibrium price for the asset. 
D)  the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms. 
A)  the price of the asset rises above what appears to be its fundamental value. 
B)  the price of the asset appears to follow a random walk. 
C)  the market cannot establish an equilibrium price for the asset. 
D)  the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 2

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Accepted Answer

A)  raise the price of the company's stock. 
B)  not affect the price of the company's stock. 
C)  reduce the price of the company's stock. 
D)  More information is needed to answer the question. 
A)  raise the price of the company's stock. 
B)  not affect the price of the company's stock. 
C)  reduce the price of the company's stock. 
D)  More information is needed to answer the question.

Question 3

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 4

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 5

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)  For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent. 
B)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
C)  For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
D)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent. 
A)  For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent. 
B)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
C)  For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
D)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.

Question 6

The financial system

Accepted Answer

A)  involves bank accounts, mortgages, stock prices, and many other items. 
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future. 
C)  coordinates the economy's saving and investment. 
D)  All of the above are correct. 
A)  involves bank accounts, mortgages, stock prices, and many other items. 
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future. 
C)  coordinates the economy's saving and investment. 
D)  All of the above are correct.

Question 7

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 8

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Accepted Answer

The boss is asking for an estimate of th

Question 9

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)  do not believe that there is positive relationship between risk and return. 
B)  do not believe that stock prices reflect all available information. 
C)  believe in the validity of the efficient markets hypothesis. 
D)  believe that it is a good idea to engage in fundamental analysis. 
A)  do not believe that there is positive relationship between risk and return. 
B)  do not believe that stock prices reflect all available information. 
C)  believe in the validity of the efficient markets hypothesis. 
D)  believe that it is a good idea to engage in fundamental analysis.

Question 10

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Accepted Answer

A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39 
A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39

Question 11

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)  upward-sloping and has decreasing slope. 
B)  upward-sloping and has increasing slope. 
C)  downward-sloping and has decreasing slope. 
D)  downward-sloping and has increasing slope. 
A)  upward-sloping and has decreasing slope. 
B)  upward-sloping and has increasing slope. 
C)  downward-sloping and has decreasing slope. 
D)  downward-sloping and has increasing slope.

Question 12

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  an increase in the interest rate 
D)  All of the above are correct. 
A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  an increase in the interest rate 
D)  All of the above are correct.

Question 13

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct. 
A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct.

Question 14

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

A) True 
 B)False

Question 15

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called a(n)

Accepted Answer

A)  portfolio. 
B)  bond. 
C)  dividend. 
D)  annuity. 
A)  portfolio. 
B)  bond. 
C)  dividend. 
D)  annuity.

Question 16

If Alan is risk-averse, then he will always

Accepted Answer

A)  choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B)  choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C)  choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D)  All of the above are correct. 
A)  choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B)  choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C)  choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D)  All of the above are correct.

Question 17

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Accepted Answer

A)  10 
B)  14 
C)  17 
D)  20 
A)  10 
B)  14 
C)  17 
D)  20

Question 18

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 19

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion. 
A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion.

Question 20

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

Accepted Answer

A)  the demand for bank stocks rise which would raise the prices of bank stocks. 
B)  the demand for bank stocks rise which would reduce the prices of bank stocks. 
C)  the demand for bank stocks fall which would raise the prices of bank stocks. 
D)  the demand for bank stocks fall which would reduce the prices of bank stocks. 
A)  the demand for bank stocks rise which would raise the prices of bank stocks. 
B)  the demand for bank stocks rise which would reduce the prices of bank stocks. 
C)  the demand for bank stocks fall which would raise the prices of bank stocks. 
D)  the demand for bank stocks fall which would reduce the prices of bank stocks.

Exam 27: The Basic Tools of Finance

An asset market is said to experience a speculative bubble when

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

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

The problem of moral hazard arises because

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

The financial system

Diversification can reduce firm-specific risk.

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

If you believe that stock prices follow a random walk, then probably you

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Diminishing marginal utility of wealth implies that the utility function is

Which of the following changes would decrease the present value of a future payment?

Which of the following is correct concerning a risk-averse person?

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called a(n)

If Alan is risk-averse, then he will always

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

The market for insurance is an example of diversification.

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

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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