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Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
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1. Lekeisha's income exceeds her expenditures. Lekeisha is a
a. saver who demands money from the financial system.
b. saver who supplies money to the financial system.
c. borrower who demands money from the financial system.
d. borrower who demands money from the financial system.
2. Which of the following is not correct?
a. When a country saves more, it has more capital.
b. A supplier of loanable funds borrows money.
c. The interest rate adjusts to balance the quantity supplied of and the quantity demanded of
loanable funds.
d. If Mary buys equipment for her factory, Mary is engaging in capital investment.
3. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a
a. bond.
b. stock.
c. mutual fund.
d. All of the above are correct.
4. Megasoft wants to finance the purchase of new equipment for developing security software called Doors, but
they have limited internal funds. Megasoft will likely
a. demand loanable funds by buying bonds.
b. demand loanable funds by selling bonds.
c. supply loanable funds by buying bonds.
d. supply loanable funds by selling bonds.
5. Which of the following is correct?
a. Some bonds have terms as short as a few months.
b. Because they are so risky, junk bonds pay a low rate of interest.
c. Corporations buy bonds to raise funds.
d. All of the above are correct.
6. A bond that never matures is known as a
a. perpetuity.
b. an intermediary bond.
c. an indexed bond.
d. a junk bond.
7. Compared to long-term bonds, other things the same, short-term bonds generally have
a. more risk and so pay higher interest.
b. less risk and so pay lower interest.
c. less risk and so pay higher interest.
d. about the same risk and so pay about the same interest.
8. You are thinking of buying a bond from Knight Corporation. You know that this bond is long term and you
know that Knight’s business ventures are risky and uncertain. You then consider another bond with a shorter
term to maturity issued by a company with good prospects and an established reputation. Which of the
following is correct?
a. The longer term would tend to make the interest rate on the bond issued by Knight higher,
while the higher risk would tend to make the interest rate lower.
b. The longer term would tend to make the interest rate on the bond issued by Knight lower,
____
9.
____ 10.
____ 11.
____ 12.
____ 13.
____ 14.
____ 15.
while the higher risk would tend to make the interest rate higher.
c. Both the longer term and the higher risk would tend to make the interest rate lower on the
bond issued by Knight.
d. Both the longer term and the higher risk would tend to make the interest rate higher on the
bond issued by Knight.
Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which
of the following is most likely?
a. The 6 percent bond is less risky than the 3 percent bond.
b. The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond.
c. The 6 percent bond has a longer term than the 3 percent bond.
d. The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government
bond.
Suppose that the government finds a major defect in one of a company's products and demands that it take it
off the market. We would expect that the
a. supply of existing shares of the stock and the price will both rise.
b. supply of existing shares of the stock and the price will both fall.
c. demand for existing shares of the stock and the price will both rise.
d. demand for existing shares of the stock and the price will both fall.
World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We
would expect that this would
a. raise the demand for existing shares of the stock, causing the price to rise.
b. decrease the demand for existing shares of the stock, causing the price to fall.
c. raise the supply of the existing shares of stock, causing the price to rise.
d. raise the supply of the existing shares of stock, causing the price to fall.
Profits paid out to stockholders are
a. retained earnings.
b. dividends.
c. the denominator in the price-earnings ratio.
d. All of the above are correct.
ACME Pumps had a price to earnings ratio of 15, paid a dividend of $1, and retained earnings of $2 a share.
What was the price of a share of its stock?
a. $15
b. $30
c. $45
d. None of the above is correct.
Thomas Publishing has a share price of $30, retained earnings of $1 per share, and a dividend yield of 5%.
What is its PE ratio?
a. 30
b. 20
c. 15
d. 12
A corporation's earnings are
a. the amount of revenue it receives for the sale of its products minus its costs of production
as measured by its accountants minus the dividends paid out.
b. the amount of revenue it receives for the sale of its products minus its direct and indirect
costs of production as measured by its economists minus the dividends paid out.
c. the amount of revenue it receives for the sale of its products minus its costs of production
as measured by its accountants.
d. the amount of revenue it receives for the sale of its products minus its direct and indirect
costs of production as measured by its economists.
____ 16. Thomas Publishing has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1
million dollars, and a dividend yield of 2 percent. It has a price to earnings ratio of
a. 50, which is high by historical standards.
b. 50, which is low by historical standards.
c. 25, which is high by historical standards.
d. 25, which is low by historical standards.
Use the following table to answer the following questions.
Table 26-2
Stock
Sym
Yld %
PE
Vol 100s
Hi
Lo
Close
Net
Chg
Boeing Co.
Eli Lily and Co.
H. J. Heniz and Co.
Kellog Co.
BA
LLY
HNZ
K
1.55
30.48
4,531,600
64.78
63.70
64.62
+.93
2.60
29.71
3,765,700
58.98
58.21
58.52
+.16
3.30
15.33
1,350,200
36.55
36.26
36.33
+.21
2.22
20.50
1,990,600
45.72
45.20
45.50
+.24
____ 17. Refer to Table 26-2. Which company had the lowest dollar dividend?
a. Boeing Co.
b. Eli Lilly and Co.
c. H. J. Heinz and Co.
d. Kellog Co.
____ 18. A checking deposit functions as
a. a medium of exchange and a store of value.
b. a medium of exchange, but not a store of value.
c. a store of value, but not a medium of exchange.
d. neither a medium of exchange nor a store of value.
____ 19. A mutual fund
a. is a financial market where small firms mutually agree to sell stocks and bonds to raise
funds.
b. is funds set aside by local governments to lend to small firms who want to invest in
projects that are mutually beneficial to the firm and community.
c. sells stocks and bonds on behalf of small and less known firms who would otherwise have
to pay high interest to obtain credit.
d. is an institution that sells shares to the public and uses the proceeds to buy a selection of
various types of stocks, bonds, or both stocks and bonds.
____ 20. As a money management fee, mutual funds usually charge their customers
a. between 0.5 and 2.0 percent of assets each year.
b. between 1.5 and 3.0 percent of assets each year.
c. nothing, because they receive commissions from the firms whose stock they buy.
d. a flat fee of about $50.
____ 21. Index funds
a. buy all the stocks in a given stock index.
b. promise to beat the market by a certain percentage known as an index.
c. provide a return that is adjusted for changes in the consumer price index.
d. buy industries within a particular category of the North American Industry Classification
System.
____ 22. Y = C + I + G + NX is an identity because
____ 23.
____ 24.
____ 25.
____ 26.
____ 27.
____ 28.
____ 29.
____ 30.
a. each symbol identifies a variable.
b. the right-hand and left-hand sides are equal.
c. the equality holds due to the way the variables are defined.
d. None of the above is correct.
Consider T-G and Y-T-C.
a. Each one of these is equal to national saving.
b. Each one of these is equal to public saving.
c. The first of these is private saving, the second one is public saving.
d. The first of these is public saving, the second one is private saving.
According to the definitions of national saving and public saving, if Y, C, and G remained the same, an
increase in taxes would
a. raise national saving and public saving.
b. raise national saving and raise public saving.
c. leave national saving and public saving unchanged.
d. leave national saving unchanged and raise public saving.
In the small closed economy of San Lucretia, the currency is the denar. Statistics for last year show that
private saving was 60 billion denars, taxes were 70 billion denars, government purchases of goods and
services were 80 billion denars, there were no transfer payments by the government, and GDP was 400 billion
denars. What were consumption and investment in San Lucretia?
a. 270 billion denars, 50 billion denars
b. 260 billion denars, 60 billion denars
c. 250 billion denars, 70 billion denars
d. None of the above is correct.
The country of Meditor uses the merit as its currency. Recent national income statistics showed that it had
GDP of $700 million merits, no government transfer payments, taxes of $210 million merits, a budget surplus
of $60 billion merits, and investment of $100 billion merits. What were its consumption and government
expenditures on goods and services?
a. 450 million merits and $150 million merits
b. 410 million merits and $150 million merits
c. 330 million merits and $270 million merits
d. 290 million merits and $270 million merits
Which of the following is not always correct in a closed economy?
a. National saving equals private saving plus public saving.
b. Net exports equal zero.
c. Real GDP measures both income and expenditures.
d. Private saving equals investment.
Larry buys stock in A to Z Express Company. Curly Corporation builds a new factory. Whose transaction
would be investment in the language of macroeconomics?
a. only Larry’s
b. only Curly Corporation’s
c. Larry’s and Curly Corporation’s
d. Neither Larry’s nor Curly Corporation’s
Which of the following would be included as investment in the GDP accounts?
a. the government buys goods from another country
b. someone buys stock in an American company
c. a firm increases its capital stock
d. All of the above are correct.
If the demand for loanable funds shifts left, the equilibrium interest rate
a. and quantity of loanable funds rise.
____ 31.
____ 32.
____ 33.
____ 34.
____ 35.
____ 36.
____ 37.
____ 38.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.
If the supply for loanable funds shifts left, the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.
Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable
funds?
a. The demand for loanable funds shifted right.
b. The demand for loanable funds shifted left.
c. The supply of loanable funds shifted right.
d. The supply of loanable funds shifted left.
In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of
these changes?
a. The demand for loanable funds shifted right.
b. The demand for loanable funds shifted left.
c. The supply of loanable funds shifted right.
d. The supply of loanable funds shifted left.
If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the real interest rate is
a. 7 percent.
b. 3 percent.
c. 2.5 percent.
d. .4 percent.
What would happen in the market for loanable funds if the government were to decrease the tax rate on
interest income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed.
c. There would be no change in the amount of loanable funds borrowed.
d. The change in loanable funds is uncertain.
Which of the following would not be a result of replacing the income tax with a consumption tax so that
interest income was not taxed?
a. The interest rate would decrease.
b. Investment would decrease.
c. The standard of living would eventually rise.
d. The supply of loanable funds would shift right.
Suppose that a government that taxed all interest income changed its tax law so that the first $5,000 of a
taxpayer’s interest income was tax free. This would shift the
a. supply for loanable funds right making interest rates fall.
b. supply of loanable funds left making interest rates rise.
c. demand for loanable funds right making the interest rate rise.
d. demand for loanable funds left making the interest rate fall.
Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable
funds?
a. The demand and supply of loanable funds would shift right.
b. The demand and supply of loanable funds would shift left.
c. The supply of loanable funds would shift right.
d. The demand for loanable funds would shift left.
____ 39. Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the
a. demand for and the supply of loanable funds to the right.
b. demand for and the supply of loanable funds to the left.
c. supply of loanable funds to the right and the demand for loanable funds to the left.
d. None of the above is correct.
____ 40. An increase in an investment tax credit would create a
a. shortage at the former equilibrium interest rate. This shortage would lead to a rise in the
interest rate.
b. shortage at the former equilibrium interest rate. This shortage would lead to a fall in the
interest rate.
c. surplus at the former equilibrium interest rate. This surplus would lead to a rise in the
interest rate.
d. surplus at the former equilibrium interest rate. This surplus would lead to a fall in the
interest rate.
____ 41. In the first part of this decade the U.S. government went from a surplus to a deficit. Other things the same,
this means the
a. supply of loanable funds shifted right.
b. supply of loanable funds shifted left.
c. demand for loanable funds shifted right.
d. demand for loanable funds shifted left.
____ 42. Other things the same, if the government increases transfer payments to households, then the effect of this on
the government’s budget
a. will make investment rise.
b. will make the rate of interest rise.
c. will make public saving rise.
d. All of the above are correct.
____ 43. Crowding out occurs when investment declines because
a. a budget deficit makes interest rates rise.
b. a budget deficit makes interest rates fall.
c. a budget surplus makes interest rates rise.
d. a budget surplus makes interest rates fall.
____ 44. Suppose that the Congress and President increase the maximum annual contributions limits to retirement
accounts and at the same time reduce the budget deficit. What happens to the interest rate?
a. It decreases.
b. It increases.
c. It stays the same.
d. It might do any of the above.
____ 45. Interest rates fall and investment falls. Which of the following could explain these changes?
a. the government goes from a surplus to a deficit
b. the government repeals an investment tax credit
c. the government replaces a consumption tax with an income tax
d. None of the above is correct.
____ 46. The future value of a deposit in a savings account will be larger
a. the longer a person waits to withdraw the funds.
b. the higher the interest rate is.
c. the larger the initial deposit is.
d. All of the above are correct.
____ 47. What is the future value of $800 one year from today if the interest rate is 7 percent?
a. $747.66
____ 48.
____ 49.
____ 50.
____ 51.
____ 52.
____ 53.
____ 54.
b. $756.00
c. $856.00
d. None of the above are correct to the nearest penny.
What is the future value of $333 at an interest rate of 3 percent one year from today?
a. $337.39
b. $342.99
c. $343.09
d. None of the above are correct to the nearest penny.
Darby puts $75 in an account and one year later has $100; what was the interest rate on the account?
a. 20 percent
b. 25 percent
c. 30 percent
d. None of the above is correct.
Alex says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two
years at 2 percent interest. Brian says that the present value of $400 one year from today if the interest rate is
4 percent is more than the present value of $400 two years from today if the interest rate is 2 percent.
a. Alex and Brian are both correct.
b. Alex and Brian are both incorrect.
c. Only Alex is correct.
d. Only Brian is correct.
John says that the future value of $250 saved for one year at 6 percent is less than the future value of $250
saved for two years at 3 percent. George says that the present value of a $250 payment in one year when the
interest rate is 6 percent is less than the value of a $250 payment in two years when the interest rate is 3
percent.
a. John and George are both correct.
b. John and George are both incorrect.
c. Only John is correct.
d. Only George is correct.
Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the
second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money
does she have in her account today?
a. $12,579.84
b. $12,596.80
c. $12,597.12
d. None of the above are correct to the nearest penny.
Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for
the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current
interest rate?
a. 9 percent
b. 10 percent
c. 11 percent
d. 12 percent
George has almost $300 in his account. Some years ago he put $213.20 into his account that promised to pay
5 percent interest. How many years ago did he open his account?
a. 4 years
b. 5 years
c. 6 years
d. 7 years
____ 55. Two years ago Brian put some money into an account. He earned 6 percent interest on this account and now
has about $1,000. About how much did he deposit into his account two years ago?
a. about $860
b. about $870
c. about $880
d. about $890
____ 56. On May 25, 1975 three pals graduated from high school, pooled together $1000 and put the money into an
account promising to pay 8% for the next 30 years. On May 25, 2005 they withdrew the money? To the
nearest dollar, how much did they withdraw?
a. $2,400
b. $10,063
c. $32,400
d. None of the above are correct to the nearest dollar.
____ 57. Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first
earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for
six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?
a. the two-year account at 9 percent
b. the three-year account at 6 percent
c. the six-year account at 3 percent
d. The accounts are all worth the same.
____ 58. A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the
present value of these payments?
a. $2,000/(1 + r)2.
b. $1,000 + $1,000/(1 + r)
c. $1,000/(1 + r) + $1,000/(1 + r)2
d. $1,000(1 + r) + $1,000(1 + r)2
____ 59. At which interest rate is the present value of $95.40 one year from today equal to $90 today?
a. 4 percent
b. 5 percent
c. 6 percent
d. 7 percent
____ 60. What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?
a. $141.11
b. $141.36
c. $141.75
d. None of the above are correct to the nearest penny.
____ 61. What is the present value of a payment of $200 to be made one year from today if the interest rate is 10
percent?
a. $180
b. $181.82
c. $220
d. $222.22
____ 62. Natasha promises to pay Jennifer $1,000 in two years. If the interest rate is 6 percent, how many dollars today
is this future payment worth?
a. $883.60
b. $887.97
c. $893.67
d. None of the above are correct to the nearest penny.
____ 63. Your rich uncle Earl tells you that he will give you $500 in two years. You could borrow the present value of
this $500 and when your uncle sends you the gift have just enough to pay off the loan. About how much can
you borrow if the interest rate is 11 percent?
a. $396.05
b. $402.13
c. $405.81
d. $409.84
____ 64. At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?
a. 2 percent
b. 3 percent
c. 4 percent
d. 5 percent
____ 65. Suppose that the interest rate is 8 percent. Consider three payment options:
1. $200 today.
2. $220 one year from today.
3. $240 two years from today.
Which of the following is correct?
a. 1 has the highest present value and 2 has the lowest.
b. 2 has the highest present value and 3 has the lowest.
c. 3 has the highest present value and 1 has the lowest.
d. None of the above is correct.
____ 66. A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000
today or $11,000 two years from today. Of the following interest rates, which is the highest one at which
Harry would be better off paying the money today?
a. 3%
b. 4%
c. 5%
d. 6%
____ 67. Which of the following is correct if the interest rate is 6 percent?
a. $215 a year from today has a present value of over $200, $420 a year from now has a
present value over $400
b. $215 a year from today has a present value of over $200, $420 a year from now has a
present value under $400
c. $215 a year from today has a present value of under $200, $420 a year from now has a
present value over $400
d. $215 a year from today has a present value of under $200, $420 a year from now has a
present value under $400
____ 68. Consider the present value in each of the following cases.
1. the current value of an account that paid 5% interest on $700 for the past three years
2. $800 today
3. a payment of $1,000 in three years when the interest rate is 5%
Which is correct?
a. 1 has the highest present value, 3 has the lowest
b. 2 has the highest present value, 1 has the lowest
c. 3 has the highest present value, 2 has the lowest
d. None of the above is correct.
____ 69. Other things the same, as the interest rate rises, the present value of future revenues from investment projects
a. rise, so investment spending rises.
____ 70.
____ 71.
____ 72.
____ 73.
____ 74.
____ 75.
b. fall, so investment spending rises.
c. rise, so investment spending falls.
d. fall, so investment spending falls.
Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants
decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks
change. In which case do these changes both make them less likely to buy the truck?
a. both interest rates and price of trucks rise
b. both interest rates and the price of trucks fall
c. the interest rate rises and the price of trucks fall
d. the interest rate falls and the price of trucks rises
Heart’s Restaurants is considering building a restaurant in a new location. The owners and their accountants
decide that this is not the profitable thing to do. However, soon after both the interest rate and the cost of
building the restaurant change. In which case do these changes both make it more likely that they will now
build the restaurant?
a. both interest rates and the cost of building the restaurant rise.
b. both interest rates and the cost of building the restaurant fall.
c. interest rates rise and the cost of building the restaurant falls.
d. interest rates fall and the cost of building the restaurant rises.
Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle
would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle.
At the end of the second year the increase to their revenues would be $115 per bicycle and they can sell each
used bike for another $25. At which of the following interest rates is the sum of the present value of the
revenues from buying a bicycle closest to the price of a bicycle?
a. 5 percent
b. 6 percent
c. 7 percent
d. 8 percent
A firm has three different investment options, each costing $10 million. Option A will generate $12 million in
revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option
C will generate $18 million in revenue at the end of three years. Which option should the firm choose?
a. Option A
b. Option B
c. Option C
d. The answer depends on the rate of interest.
A firm has three 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 $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 C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options
has the highest present value?
a. Option A
b. Option B
c. Option C
d. The answer depends on the rate of interest.
Kramer's Frozen Sandwiches is thinking of building a new warehouse. They believe that this will given them
$50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and
$70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, they would be willing
to pay
a. $140,000, but not $150,000.
b. $150,000, but not $160,000.
c. $160,000, but not $170,000.
____ 76.
____ 77.
____ 78.
____ 79.
____ 80.
____ 81.
____ 82.
d. $170,000, but not $180,000.
Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded
a. rise, and investment spending rise.
b. rise, and investment spending fall.
c. fall, and investment spending rise.
d. fall, and investment spending fall.
Which of the following is the largest?
a. the future value of $250 with 3% interest for 2 years
b. the future value of $250 at 2% interest for 3 years
c. the present value of $250 to be paid in two years when the interest rate is 3%
d. the present value of $250 to be paid in three years when the interest rate is 2%
Rita puts $10,000 into to two different assets. The first pays 10% and the second pays 5%. According to the
rule of 70, what is the approximate difference in the value of the two assets after 14 years?
a. $12,000
b. $14,000
c. $17,000
d. $20,000
What is the future value in two years of $100 saved today and the present value of a promise of $100 to be
paid two years from today if the interest rate is 10%?
a. $121.00, about $82.65
b. $121.00, $80.00
c. $120.00, about $82.65
d. $120,00, $80.00
According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings
account to double?
a. about 3.5 years
b. about 6.3 years
c. about 12 years
d. about 14 years
Which of the following games might a risk-averse person be willing to play?
a. A game where she has a 60 percent chance of winning $1 and a 40 percent chance of
losing $1.
b. A game where she has a 70 percent chance of winning $1 and a 30 percent chance of
losing $1.
c. Both A and B.
d. Neither A nor B.
Which of the following is correct concerning a risk-averse person?
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.
Figure 27-1
____ 83. Refer to Figure 27-1. Which of the graphs above is consistent with positive but diminishing marginal utility?
a. Diagram A
b. Diagram B
c. Diagram C
d. Diagram D
____ 84. Which of the following defines an annuity?
a. For a fee, an insurance company provides you with regular income until you die.
b. An extra fee charged to persons in dangerous occupations by life insurance companies.
c. It's another name for stock funds managed by mutual fund managers.
d. It's another name for any diversified portfolio.
____ 85. Annie knows that people in her family die young, and so she buys life insurance. Harry knows he is a reckless
driver and so he applies for automobile insurance.
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.
____ 86. Which of the following best illustrates moral hazard?
a. After a person obtains life insurance, she takes up skydiving.
b. A person obtains insurance knowing he is in poor health.
c. A person holds stock only in very risky corporations.
d. A person holds stocks from only a few corporations.
____ 87. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers
A, B, and C. Which broker, if any, gave her incorrect advice?
a. There are risks in holding stocks, even in a highly diversified portfolio.
b. Portfolios with smaller standard deviations have lower risk.
c. Stocks with greater risks offer lower average returns.
d. They all gave her correct advice.
____ 88. Which of the following is not correct?
a. A risk averse person might be willing to hold stocks.
b. Other things the same, a portfolio with the stocks of a large number of companies has less
risk.
____ 89.
____ 90.
____ 91.
____ 92.
____ 93.
____ 94.
____ 95.
____ 96.
c. Other things the same, the larger a portion of savings a person invests in stocks, the greater
their expected return.
d. Diversification can eliminate market risk but not firm-specific risk.
To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. pay higher returns when interest rates rise and lower returns when interest rates fall.
b. pay lower returns when interest rates rise and higher returns when interest rates fall.
c. provide a higher return than the market average.
d. provide a lower return than the market average.
Marcus puts a greater proportion of his portfolio into government bonds. This
a. increases both risk and the average rate of return
b. decreases both risk and the average rate of return
c. increases risk, but decreases the average rate of return
d. decreases risk, but increases the average rate of return
Which of the flowing is correct?
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 supply and demand.
Fundamental analysis is
a. the study of the relation between risk and return of stock portfolios.
b. the determination of the allocation of savings between stocks and bonds based on a
person’s degree of risk aversion.
c. the study of a company’s accounting statements and future prospects to determine its
value.
d. a method used to determine how adding stocks to a portfolio will change the risk of the
portfolio.
Some people claim that stocks follow a random walk. What does this mean?
a. The price of stock one day is about what it was on the previous day.
b. Changes in stock prices cannot be predicted from available information.
c. Stock prices are not determined by market fundamentals such as supply and demand.
d. Prices of stocks of different firms in the same industry show no or little tendency to move
together.
If stock prices follow a random walk, then stock investors can make large profits by
a. buying stocks whose prices have been falling for several days.
b. buying stocks whose prices have been rising for several days.
c. performing fundamental analysis of stocks using data contained in annual reports.
d. using inside information.
According to the efficient markets hypothesis, worse than expected news about a corporation will
a. have no effect on it's stock price.
b. raise the price of the stock.
c. lower the price of the stock.
d. change the price of the stock in a random direction.
Research studies have shown that
a. the correlation between how well a stock does one year and how well it does the next is
significantly greater than zero.
b. managed mutual funds generally outperform indexed mutual funds.
c. people tend to be overconfident when making investment decisions.
d. All of the above are correct.
____ 97. Which of the following is not consistent with the efficient market hypothesis?
a. Stock prices should follow a random walk.
b. Index funds should typically outperform highly managed funds.
c. News has no effect on stock prices..
d. There is little point in spending many hours studying the business pages looking for
undervalued stocks.
____ 98. According to the efficient markets hypothesis, which of the following would increase the price of stock in the
McCloud Corporation?
a. McCloud announces, just as everyone had expected, that it has hired a new highly
respected CEO.
b. McCloud announces that its profits were low, but not as low as the market had expected.
c. Analysis by a column in a business weekly indicates that McCloud is overvalued.
d. All of the above would increase the price.
____ 99. Which of the following is correct concerning stock market irrationality?
a. Bubbles could arise, in part, because the price that people pay for stock depends on what
they think someone else will pay for it in the future.
b. Economists almost all agree that the evidence for stock market irrationality is convincing
and the departures from rational pricing are important.
c. Some evidence for the existence of market irrationality is that informed and presumably
rational managers of mutual funds generally beat the market.
d. All of the above are correct.
____ 100. Prospect theory says that
a. people should follow their gut feelings and purchase stocks they think have good
prospects.
b. people will tend to sell off winning investments too quickly and hold onto losing ones too
long.
c. people tend to be overly pessimistic about developments in the stock market.
d. during a speculative bubble most people are thinking that they won’t be able to get out of
the market before the bubble bursts.
102finalmc
Answer Section
MULTIPLE CHOICE
1. ANS:
MSC:
2. ANS:
TOP:
3. ANS:
MSC:
4. ANS:
TOP:
5. ANS:
MSC:
6. ANS:
MSC:
7. ANS:
MSC:
8. ANS:
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9. ANS:
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10. ANS:
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11. ANS:
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12. ANS:
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13. ANS:
MSC:
14. ANS:
MSC:
15. ANS:
MSC:
16. ANS:
MSC:
17. ANS:
MSC:
18. ANS:
TOP:
19. ANS:
MSC:
20. ANS:
MSC:
21. ANS:
MSC:
22. ANS:
B
DIF: 2
REF: 26-1
Definitional
B
DIF: 1
REF: 26-1
Investment, Capital, Market for loanable funds
A
DIF: 1
REF: 26-1
Definitional
B
DIF: 2
REF: 26-1
Investment, Market for loanable funds
A
DIF: 1
REF: 26-1
Interpretive
A
DIF: 1
REF: 26-1
Definitional
B
DIF: 1
REF: 26-1
Definitional
D
DIF: 2
REF: 26-1
Applicative
C
DIF: 2
REF: 26-1
Applicative
D
DIF: 2
REF: 26-1
Analytical
A
DIF: 2
REF: 26-1
Analytical
B
DIF: 1
REF: 26-1
Definitional
C
DIF: 1
REF: 26-1
Applicative
D
DIF: 2
REF: 26-1
Analytical
C
DIF: 2
REF: 26-1
Definitional
C
DIF: 3
REF: 26-1
Analytical
A
DIF: 2
REF: 26-1
Analytical
A
DIF: 1
REF: 26-1
Store of value, Medium of exchange
D
DIF: 1
REF: 26-1
Definitional
A
DIF: 1
REF: 26-1
Definitional
A
DIF: 1
REF: 26-1
Definitional
C
DIF: 1
REF: 26-2
TOP: Supply of loanable funds
MSC: Definitional
TOP: Bonds
MSC: Interpretive
TOP: Bonds
TOP: Perpetuity
TOP: Bonds and risk
TOP: Interest on bonds
TOP: Interest on bonds
TOP: Stock prices
TOP: Stock prices
TOP: Dividends
TOP: PE ratio
TOP: Dividend yield, PE ratio
TOP: Earnings
TOP: PE ratio, Dividend yield
TOP: Stock tables, Dividend yield
MSC: Interpretive
TOP: Mutual funds
TOP: Mutual fund fees
TOP: Mutual funds, Index funds
TOP: Identities, GDP
MSC:
23. ANS:
MSC:
24. ANS:
MSC:
25. ANS:
TOP:
26. ANS:
TOP:
27. ANS:
MSC:
28. ANS:
MSC:
29. ANS:
MSC:
30. ANS:
TOP:
31. ANS:
TOP:
32. ANS:
TOP:
33. ANS:
TOP:
34. ANS:
MSC:
35. ANS:
MSC:
36. ANS:
MSC:
37. ANS:
MSC:
38. ANS:
MSC:
39. ANS:
MSC:
40. ANS:
MSC:
41. ANS:
MSC:
42. ANS:
MSC:
43. ANS:
MSC:
44. ANS:
TOP:
45. ANS:
TOP:
46. ANS:
Definitional
D
DIF: 1
REF: 26-2
Definitional
D
DIF: 2
REF: 26-2
Interpretive
A
DIF: 2
REF: 26-2
Private saving, Public saving, National saving
A
DIF: 3
REF: 26-2
Private saving, Public saving, National saving
D
DIF: 1
REF: 26-2
Definitional
B
DIF: 1
REF: 26-2
Interpretive
C
DIF: 2
REF: 26-2
Definitional
B
DIF: 1
REF: 26-3
Market for loanable funds equilibrium
C
DIF: 1
REF: 26-3
Market for loanable funds equilibrium
A
DIF: 2
REF: 26-3
Market for loanable funds equilibrium
C
DIF: 2
REF: 26-3
Market for loanable funds equilibrium
B
DIF: 1
REF: 26-3
Definitional
A
DIF: 1
REF: 26-3
Analytical
B
DIF: 2
REF: 26-3
Analytical
A
DIF: 2
REF: 26-3
Applicative
D
DIF: 1
REF: 26-3
Applicative
D
DIF: 2
REF: 26-3
Applicative
A
DIF: 3
REF: 26-3
Analytical
B
DIF: 2
REF: 26-3
Interpretive
B
DIF: 3
REF: 26-3
Analytical
A
DIF: 1
REF: 26-3
Definitional
A
DIF: 3
REF: 26-3
Government policy and the market for loanable funds
B
DIF: 2
REF: 26-3
Government policy and the market for loanable funds
D
DIF: 2
REF: 27-1
TOP: Public saving, Private saving
TOP: National saving, Public saving
MSC: Analytical
MSC: Analytical
TOP: Closed economy
TOP: Investment
TOP: Investment
MSC: Applicative
MSC: Applicative
MSC: Analytical
MSC: Applicative
TOP: Nominal and real interest rates
TOP: Saving incentives
TOP: Saving incentives
TOP: Saving incentives
TOP: Investment incentives
TOP: Investment incentives
TOP: Investment incentives
TOP: Budget deficit
TOP: Budget deficit
TOP: Crowding out
MSC: Analytical
MSC: Analytical
TOP: Future value
MSC:
47. ANS:
MSC:
48. ANS:
MSC:
49. ANS:
MSC:
50. ANS:
MSC:
51. ANS:
MSC:
52. ANS:
MSC:
53. ANS:
MSC:
54. ANS:
MSC:
55. ANS:
MSC:
56. ANS:
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57. ANS:
MSC:
58. ANS:
MSC:
59. ANS:
MSC:
60. ANS:
MSC:
61. ANS:
MSC:
62. ANS:
MSC:
63. ANS:
MSC:
64. ANS:
MSC:
65. ANS:
MSC:
66. ANS:
MSC:
67. ANS:
MSC:
68. ANS:
MSC:
69. ANS:
MSC:
70. ANS:
Analytical
C
Applicative
B
Applicative
D
Applicative
A
Applicative
C
Applicative
A
Applicative
B
Applicative
D
Applicative
D
Applicative
B
Applicative
C
Applicative
B
Applicative
C
Applicative
D
Applicative
B
Applicative
D
Applicative
C
Analytical
B
Applicative
C
Applicative
B
Applicative
B
Applicative
C
Applicative
D
Analytical
A
DIF: 1
REF: 27-1
TOP: Future value
DIF: 1
REF: 27-1
TOP: Future value
DIF: 1
REF: 27-1
TOP: Future value
DIF: 3
REF: 27-1
TOP: Future value, Present value
DIF: 3
REF: 27-1
TOP: Future value, Present value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 2
REF: 27-1
TOP: Future value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 2
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 2
REF: 27-1
TOP: Present value
DIF: 2
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value
DIF: 3
REF: 27-1
TOP: Present value, Investment
DIF: 3
REF: 27-1
TOP: Present value, Investment
MSC:
71. ANS:
MSC:
72. ANS:
MSC:
73. ANS:
MSC:
74. ANS:
MSC:
75. ANS:
MSC:
76. ANS:
MSC:
77. ANS:
MSC:
78. ANS:
MSC:
79. ANS:
MSC:
80. ANS:
MSC:
81. ANS:
MSC:
82. ANS:
MSC:
83. ANS:
MSC:
84. ANS:
MSC:
85. ANS:
MSC:
86. ANS:
MSC:
87. ANS:
MSC:
88. ANS:
MSC:
89. ANS:
MSC:
90. ANS:
MSC:
91. ANS:
MSC:
92. ANS:
MSC:
93. ANS:
MSC:
94. ANS:
Applicative
B
Applicative
D
Analytical
D
Interpretive
C
Applicative
C
Analytical
D
Applicative
B
Analytical
D
Analytical
A
Definitional
D
Applicative
C
Interpretive
D
Interpretive
C
Interpretive
A
Definitional
A
Interpretive
A
Interpretive
C
Definitional
D
Definitional
A
Analytical
B
Interpretive
C
Definitional
C
Definitional
B
Definitional
D
DIF: 3
REF: 27-1
TOP: Present value, Investment
DIF: 3
REF: 27-1
TOP: Present value, Investment
DIF: 1
REF: 27-1
TOP: Investment
DIF: 3
REF: 27-1
TOP: Present value
DIF: 1
REF: 27-1
TOP: Present value, Investment
DIF: 1
REF: 27-1
TOP: Investment, Loanable funds
DIF: 1
REF: 27-1
TOP: Present value, Future value
DIF: 2
REF: 27-1
TOP: Rule of 70
DIF: 1
REF: 27-1
TOP: Future value, Present value
DIF: 1
REF: 27-1
TOP: Rule of 70
DIF: 2
REF: 27-2
TOP: Risk aversion
DIF: 2
REF: 27-2
TOP: Risk aversion
DIF: 2
REF: 27-2
TOP: Risk aversion, Utility function
DIF: 1
REF: 27-2
TOP: Annuity
DIF: 1
REF: 27-2
TOP: Adverse selection, Moral hazard
DIF: 1
REF: 27-2
TOP: Moral hazard
DIF: 1
REF: 27-2
TOP: Risk
DIF: 1
REF: 27-2
TOP: Diversification
DIF: 1
REF: 27-2
TOP: Diversification
DIF: 2
REF: 27-2
TOP: Risk
DIF: 1
REF: 27-3
TOP: Risk
DIF: 1
REF: 27-3
TOP: Fundamental analysis
DIF: 2
REF: 27-3
TOP: Random walk
DIF: 2
REF: 27-3
TOP: Random walk
MSC:
95. ANS:
MSC:
96. ANS:
MSC:
97. ANS:
MSC:
98. ANS:
MSC:
99. ANS:
MSC:
100. ANS:
MSC:
Interpretive
C
Interpretive
C
Definitional
C
Interpretive
B
Applicative
A
Interpretive
B
Definitional
DIF: 2
REF: 27-3
TOP: Efficient markets hypothesis
DIF: 2
REF: 27-3
TOP: Efficient markets hypothesis
DIF: 1
REF: 27-3
TOP: Efficient markets hypothesis
DIF: 2
REF: 27-3
TOP: Efficient markets hypothesis
DIF: 2
REF: 27-3
TOP: Stock market irrationality
DIF: 2
REF: 27-3
TOP: Prospect theory