Question 1

Assuming an interest rate of 5%, what would the present value be of $4 million to be received in 4 years?&#10;A) $2,468,107.42&#10;B) $2,887,753.24&#10;C) $3,290,809.89&#10;D) $3,469,145.89

Accepted Answer

The present value (PV) can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($4 million), r is the annual interest rate (5% or 0.05), and n is the number of years (4). Plugging in these values gives PV = $4,000,000 / (1 + 0.05)^4 = $3,290,809.89.

Question 2

Figure 5-1&#10;  &#10;&#10;-Which of the following best describes the diagram of Figure 5-1?&#10;A) The demand for loanable funds increased. This, in turn, increased the interest rate and the supply of loanable funds.&#10;B) The demand for loanable funds increased. This, in turn, increased the interest rate and the quantity supplied of loanable funds.&#10;C) The supply of loanable fund increased. In turn, interest rates increased.&#10;D) Interest rates increased, causing the demand of loanable funds to increase.

Accepted Answer

An increase in the demand for loanable funds shifts the demand curve to the right, leading to a higher interest rate and an increase in the quantity supplied of loanable funds, without necessarily changing the overall supply curve of loanable funds.

Question 3

Figure 5-1&#10;  &#10;&#10;-Which of the following occurrences could have generated the phenomena diagrammed in Figure 5-1?&#10;A) a decrease in income&#10;B) an increase in income&#10;C) an increase in money supply&#10;D) a decrease in money supply

Accepted Answer

an increase in income&#10;

Question 4

Figure 5-1&#10;  &#10;&#10;-In which phase of the business cycle would the diagrammed phenomena of Figure 5-1 most likely have occurred?&#10;A) recession&#10;B) expansion&#10;C) trough&#10;D) depression

Accepted Answer

The phenomena in Figure 5-1 most likely occurred during the expansion phase, where economic activity is increasing, leading to growth in GDP, employment, and production.

Question 5

Figure 5-2&#10;  &#10;&#10;-Which of the following best describes the diagram of Figure 5-2?&#10;A) The demand for loanable funds decreased. This in turn decreased the interest rate and increased the quantity supplied of loanable funds.&#10;B) The supply of loanable funds increased. This in turn increased the interest rate.&#10;C) The supply of loanable funds increased. In turn, interest rates decreased and the quantity demanded of loanable funds increased.&#10;D) The interest rate fell, causing an increase in the supply of loanable funds.

Accepted Answer

The correct answer is C because when the supply of loanable funds increases, it typically leads to a decrease in interest rates due to the higher availability of funds. This decrease in interest rates makes borrowing more attractive, thereby increasing the quantity demanded of loanable funds.

Question 6

Figure 5-2&#10;  &#10;&#10;-In which phase of the business cycle would the diagrammed phenomena of Figure 5-2 most likely have occurred?&#10;A) recession&#10;B) expansion&#10;C) trough&#10;D) depression

Accepted Answer

During a recession, economic activity slows down, which is when phenomena like decreased spending, increased unemployment, and lower industrial production typically occur, as might be suggested by the context of "Figure 5-2".

Question 7

If a bank will pay 7% interest compounded annually on $2,500 deposited today, the depositor will receive how much at the end of 8 years?&#10;A) $3,900.00&#10;B) $3,950.45&#10;C) $4,267.63&#10;D) $4,295.47

Accepted Answer

The correct answer is D. $4,295.47.The formula for compound interest is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal (initial amount), r is the annual interest rate, n is the number of times per year that the interest is compounded, and t is the number of years.In this case, P = $2,500, r = 7%, n = 1 (compounded annually), and t = 8. Plugging these values into the formula, we get A = 2500(1 + 0.07/1)^(1*8) = $4,295.47.

Deck 2: Interest Rates and Bond Prices