Question 1

Comment on the following statement: "Firms will compare the net return on an investment with the opportunity cost of that investment, and they will invest as long as the net return is less than the opportunity cost."

Accepted Answer

The answer of Comment on the following statement: "Firms will...

Question 2

Comment on the following statement: "If the firm owns the funds it uses to purchase investment goods, then the cost of investment is zero."

Accepted Answer

The answer of Comment on the following statement: "If the...

Question 3

The interest rate quoted in financial markets is the nominal interest rate, and the nominal interest rate adjusted for inflation is the real interest rate.

Accepted Answer

A) True 
 B)False

Question 4

Other things being equal, the higher the interest rate, the larger investment spending.

Accepted Answer

A) True 
 B)False

Question 5

Recall Application 3, "Underwater Homes: Bets Gone Wrong" to answer the following questions:
-According to the application, more homes underwater were found in states where:

Accepted Answer

A)  the housing boom was the strongest. 
B)  the average income of the homeowners is the lowest. 
C)  the age of the homeowners is the lowest. 
D)  the unemployment rates were the highest.

Question 6

Recall Application 2, "Options for a Lottery Winner," to answer the following questions:
-According to the application, the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating

Accepted Answer

A)  the present value of the annual payments and comparing it with the lumpsum value. 
B)  the present value of the lumpsum and comparing it with the annual payments. 
C)  the present value of the annual payments and comparing it to zero. 
D)  the present value of the lumpsum and comparing it to zero.

Question 7

If there is inflation, real interest rates will be greater than nominal interest rates.

Accepted Answer

A) True 
 B)False

Question 8

Using the Q- theory of investment, explain how a stock market crash can worsen a recession.

Accepted Answer

The answer of Using the Q- theory of investment, explain...

Question 9

Lacey buys a bond issued by XYZ Corporation. XYZ Corporation uses the funds from the sale of its bonds to build a new factory. Which of the following statements is correct?

Accepted Answer

A)  From what you learned in Chapter 12, Lacey is investing while XYZ Corporation is not. 
B)  From what you learned in Chapter 12, neither Lacey nor XYZ Corporation is investing. 
C)  From what you learned in Chapter 12, both Lacey and XYZ Corporation are investing. 
D)  From what you learned in Chapter 12, XYZ Corporation is investing while Lacey is not.

Question 10

Figure 12.2
-Refer to Figure 12.2 to answer the question. Which of the following components of GDP most closely resembles Series B (countercyclical)?

Accepted Answer

A)  investment 
B)  government purchases 
C)  exports 
D)  net exports

Question 11

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions:
-According to the Application, most of the economy's financial woes can be traced back to a new innovation called:

Accepted Answer

A)  open market operations. 
B)  Fannie Mae. 
C)  Freddie Mac. 
D)  securitization.

Question 12

Bill wants to borrow $100 from John. John wants to make 6% real return on his money, so they both agree on a 6% interest rate paid next year. Neither anticipate the actual - 2% inflation rate next year. In this case:

Accepted Answer

A)  Bill will pay 6% in nominal interest rate. 
B)  Bill will pay 8% in real interest rate. 
C)  John is better off. 
D)  all of the above

Question 13

What is the primary reason why the U.S. government intervenes in financial markets when the economy experiences a financial crisis similar to the one that was experienced in 2008? How do they achieve this objective?

Accepted Answer

The answer of What is the primary reason why the...

Question 14

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions:
-Investment in energy saving technology is more profitable the larger the uncertainty regarding the prices of oil in the future.

Accepted Answer

A) True 
 B)False

Question 15

The formula to calculate the present value of a future payment is:

Accepted Answer

A)  PV = K/(K- t)i. 
B)  PV = K/(1+i)t. 
C)  PV = K/(1+i)k. 
D)  PV = K/(K- i)t.

Question 16

When interest rates are _______, the opportunity cost of holding outside banks is _______.

Accepted Answer

A)  high; cash; high 
B)  high; stocks and bonds; low 
C)  low; stocks and bonds; high 
D)  low; cash; high

Question 17

Recall Application 2, "Options for a Lottery Winner," to answer the following questions:
-According to the application, if the nominal interest rate were 12 percent, a winner of a $20 million lottery with equal payments for 20 years:

Accepted Answer

A)  should definitely $20 million 20 years from now. 
B)  should take the option for 20 equal payments over 20 years. 
C)  should only take half of the winnings today. 
D)  should definitely take $10 million today.

Question 18

Real interest rates _______ and nominal interest rates _______.

Accepted Answer

A)  can be positive or negative; must be positive 
B)  can be positive or negative; can be positive or negative 
C)  must be positive; can be positive or negative 
D)  must be positive; must be positive

Question 19

If the nominal interest rate is 5 percent and the rate of inflation is 1 percent, then the real interest rate is:

Accepted Answer

A)  5 percent. 
B)  6 percent. 
C)  5.5 percent. 
D)  4 percent.

Question 20

If you go to the bank for a loan, and you were quoted an interest rate equal to 7 percent per year, that interest rate is:

Accepted Answer

A)  the net interest rate. 
B)  the nominal interest rate. 
C)  the real interest rate. 
D)  the present discounted interest rate.

Exam 12: Investment and Financial Markets

Comment on the following statement: "Firms will compare the net return on an investment with the opportunity cost of that investment, and they will invest as long as the net return is less than the opportunity cost."

Comment on the following statement: "If the firm owns the funds it uses to purchase investment goods, then the cost of investment is zero."

The interest rate quoted in financial markets is the nominal interest rate, and the nominal interest rate adjusted for inflation is the real interest rate.

Other things being equal, the higher the interest rate, the larger investment spending.

Recall Application 3, "Underwater Homes: Bets Gone Wrong" to answer the following questions: -According to the application, more homes underwater were found in states where:

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating

If there is inflation, real interest rates will be greater than nominal interest rates.

Using the Q- theory of investment, explain how a stock market crash can worsen a recession.

Lacey buys a bond issued by XYZ Corporation. XYZ Corporation uses the funds from the sale of its bonds to build a new factory. Which of the following statements is correct?

Figure 12.2 -Refer to Figure 12.2 to answer the question. Which of the following components of GDP most closely resembles Series B (countercyclical) ?

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the Application, most of the economy's financial woes can be traced back to a new innovation called:

Bill wants to borrow $100 from John. John wants to make 6% real return on his money, so they both agree on a 6% interest rate paid next year. Neither anticipate the actual - 2% inflation rate next year. In this case:

What is the primary reason why the U.S. government intervenes in financial markets when the economy experiences a financial crisis similar to the one that was experienced in 2008? How do they achieve this objective?

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -Investment in energy saving technology is more profitable the larger the uncertainty regarding the prices of oil in the future.

The formula to calculate the present value of a future payment is:

When interest rates are _, the opportunity cost of holding outside banks is _.

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, if the nominal interest rate were 12 percent, a winner of a $20 million lottery with equal payments for 20 years:

Real interest rates _ and nominal interest rates _.

If the nominal interest rate is 5 percent and the rate of inflation is 1 percent, then the real interest rate is:

If you go to the bank for a loan, and you were quoted an interest rate equal to 7 percent per year, that interest rate is: