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The future value of a deposit in a savings account will be smaller


A) the longer a person waits to withdraw the funds.
B) the lower the interest rate is.
C) the larger the initial deposit is.
D) All of the above are correct.

E) A) and D)
F) C) and D)

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In answering which of the following questions would you find it necessary to calculate a present value?


A) Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest?
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
D) You would find it necessary to calculate a present value in order to answer all of these questions.

E) B) and C)
F) None of the above

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At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?


A) 5
B) 7
C) 9
D) 11

E) A) and C)
F) A) and D)

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A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should


A) raise the price of the corporation's stock; if it does not the stock is overvalued.
B) raise the price of the corporation's stock; if it does not the stock is undervalued.
C) reduce the price of the corporation's stock; if it does not the stock is overvalued.
D) reduce the price of the corporation's stock; if it does not the stock is undervalued.

E) A) and B)
F) A) and C)

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Figure 9-4. The figure shows a utility function for Dexter. Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then A) Dexter's subjective measure of his well-being would increase by less than 12 units. B) Dexter's subjective measure of his well-being would increase by more than 12 units. C) Dexter would change from being a risk-averse person into a person who is not risk averse. D) Dexter would forgo the insurance he bought when his wealth was $1,300. -Refer to Figure 9-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then


A) Dexter's subjective measure of his well-being would increase by less than 12 units.
B) Dexter's subjective measure of his well-being would increase by more than 12 units.
C) Dexter would change from being a risk-averse person into a person who is not risk averse.
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

E) A) and B)
F) None of the above

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Which of the following games might a risk-averse person play?


A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1
D) All of the above are correct.

E) A) and B)
F) A) and D)

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An asset market is said to experience a speculative bubble when


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.

E) A) and D)
F) A) and C)

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Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?


A) Option A
B) Option B
C) Option C
D) Option D

E) B) and D)
F) A) and D)

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If a person is risk averse, then as wealth increases, total utility of wealth


A) increases at an increasing rate.
B) increases at a decreasing rate.
C) decreases at an increasing rate.
D) decreases at a decreasing rate.

E) None of the above
F) B) and D)

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Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?


A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

E) A) and B)
F) A) and C)

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Which of the following defines an annuity?


A) For a fee, an insurance company provides you with regular income until you die.
B) A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C) Annuity is another name for stock funds managed by mutual fund managers.
D) Annuity is another name for any diversified portfolio.

E) A) and C)
F) All of the above

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Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?


A) $1,157.90
B) $1,168.65
C) $1,176.00
D) None of the above are correct to the nearest cent.

E) None of the above
F) A) and D)

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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 lowest one at which Harry would be better off paying $11,000 two years from today?


A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

E) B) and D)
F) A) and B)

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Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?


A) 3.5 percent
B) 4.5 percent
C) 5 percent
D) 7 percent

E) B) and C)
F) A) and B)

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Svetlana is risk averse. Which of the following is correct about Svetlana?


A) Her marginal utility of wealth increases as her income increases.
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar.
C) Her utility function is a straight line.
D) None of the above are correct.

E) B) and C)
F) A) and D)

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Figure 9-1. The figure shows a utility function. Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800? A) the distance between the origin and point B B) the distance between the origin and point C C) the distance between point A and point C D) the distance between point B and point C -Refer to Figure 9-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?


A) the distance between the origin and point B
B) the distance between the origin and point C
C) the distance between point A and point C
D) the distance between point B and point C

E) All of the above
F) A) and D)

Correct Answer

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Natasha put $275 in the bank one year ago and forgot about it. Today, the bank sent her a notice indicating that she now has $291.50 in her account. What interest rate did she earn?


A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

E) B) and C)
F) All of the above

Correct Answer

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Figure 9-3. The figure shows a utility function for Rob. Figure 9-3. The figure shows a utility function for Rob. -Refer to Figure 9-3. From the appearance of Rob's utility function, we know that A) the pain that Rob would experience if he lost $200 of his wealth would exceed the pleasure that he would experience if he added $200 to his wealth. B) the pleasure that Rob would experience if he added $200 to his wealth would exceed the pain that he would experience if he lost $200 of his wealth. C) the property of increasing utility does not apply to Rob. D) the property of diminishing marginal utility does not apply to Rob. -Refer to Figure 9-3. From the appearance of Rob's utility function, we know that


A) the pain that Rob would experience if he lost $200 of his wealth would exceed the pleasure that he would experience if he added $200 to his wealth.
B) the pleasure that Rob would experience if he added $200 to his wealth would exceed the pain that he would experience if he lost $200 of his wealth.
C) the property of increasing utility does not apply to Rob.
D) the property of diminishing marginal utility does not apply to Rob.

E) B) and D)
F) B) and C)

Correct Answer

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By diversifying, the risk of holding stock


A) can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
B) can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.
C) can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
D) can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

E) B) and C)
F) A) and D)

Correct Answer

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Ben decided to increase the number of stocks in his portfolio. In doing so, Ben reduced


A) both the firm-specific risk and the market risk of his portfolio.
B) the firm-specific risk, but not the market risk of his portfolio.
C) the market risk, but not the firm-specific risk of his portfolio.
D) neither the market risk nor the firm-specific risk of his portfolio.

E) B) and C)
F) None of the above

Correct Answer

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