Deck 14: Financial Crises, Stabilization, and Deficits

Question 1

One would expect the price of a share of stock to fall if

A) the interest rate rises.
B) expected dividends paid on the stock rise.
C) the risk of the business falls.
D) the economy expands.

Answer 1

A

Question 2

A bond is

A) a share of ownership in a company.
B) a document that formally promises to repay a loan.
C) a promise to pay a dividend.
D) a non-contingent payment.

Answer 2

B

Question 3

To finance a capital expenditure a firm can,

A) buy bonds.
B) engage in monetary policy.
C) sell stock in the company.
D) all of the above

Answer 3

C

Question 4

The owners of a company are its

A) bond holders.
B) employees.
C) stockholders.
D) A and C

Question 5

A firm issues bonds to

A) borrow money.
B) earn a return.
C) lend money.
D) influence monetary policy.

Question 6

You would expect the price of a share of stock to rise if

A) the expected dividend of the stock rose.
B) the economy went into recession.
C) the price level was declining.
D) interest rates rise.

Question 7

A firm might issue stock to

A) finance a capital project.
B) decrease the number of owners.
C) to increase its debt.
D) employ more people.

Question 8

A share of stock

A) is a fractional ownership of the firm.
B) gives the owner with other owners the right to pick the management of the company.
C) does not promise a fixed annual payment.
D) all of the above

Question 9

If the risk associated with a company goes up, you would expect the price of its stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 10

If the expected future earnings of a company goes up, you would expect the price of its stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 11

The Dow-Jones Industrial Average index is all of the following except

A) an index based on 30 actively traded large companies on the New York Stock Exchange.
B) the most widely followed U.S. stock index.
C) the oldest U.S. stock index.
D) representative of the U.S. economy.

Question 12

The Standard and Poor's 500 index is

A) an index of a basket of consumer good purchased by the typical consumer.
B) an index based on the stock prices of 30 actively traded large companies.
C) an index based on the 500 largest firms traded in the three biggest stock markets.
D) an index of 5,000 companies traded on the national association of securities dealers automatic quotation system.

Question 13

A capital gain is

A) when you can sell an asset for more than you paid for it.
B) when you increase the plant and equipment you own.
C) when your dividends rise.
D) when your coupon payment rises.

Question 14

The general trend in the S&P 500 stock index since 1948 has been

A) flat.
B) increasing.
C) decreasing
D) there has been no trend but it has been very volatile.

Question 15

If you think the price of a share of stock reflects its true value, but you buy it anyway because you expect to be able to sell it later at a higher price, then you are participating in

A) a stock market price bubble.
B) insider trading.
C) hedging.
D) fraud.

Question 16

Dividends

A) must be paid annually.
B) are a return on the money risked on a share of stock.
C) are set by the Securities and Exchange commission.
D) are guaranteed.

Question 17

Firms can finance capital spending by doing all of the following except

A) selling stock in the company.
B) issuing bonds.
C) borrowing from a bank.
D) paying dividends.

Question 18

If the interest rate falls, you would expect the price of any stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 19

Among the factors that determine the price of a share of stock in a firm is

A) expected dividends.
B) the number of workers the firm has.
C) the number of years the firm has existed.
D) the time to maturity of a bond.

Question 20

If a share of stock is correctly valued today, a bubble in the stock market is when you purchase a stock because

A) you expect future dividends to rise.
B) you expect interest rates to fall.
C) you expect other people will be willing to pay more for the stock in the future.
D) you expect interest rates to rise.

Question 21

Between the first quarter of 2000 and the first quarter of 2006, the value of housing wealth

A) increased by about $500 billion.
B) increased by about $13 trillion.
C) decreased by about $600 billion.
D) decreased by about $7 trillion.

Question 22

When there is a run up in stock prices

A) saving increases.
B) investment increases.
C) inflation increases.
D) interest rates decrease.

Question 23

When there is a stock market crash

A) wealth and consumption rise.
B) wealth rises and consumption falls.
C) wealth falls and consumption rises.
D) wealth and consumption fall.

Question 24

A person who strongly wishes to avoid risk would pick which of the following choices?

A) a 50% chance of winning $750 or a 50% chance of winning $0
B) a 100% of getting $375
C) a 50% chance of getting $750, 25% chance of getting &1,500 and a 25% chance of losing $1,500
D) All of the above are equal to a person who wishes to avoid risk.

Question 25

From 1995 to 2000 the stock market as measured by the S&P 500 index

A) bust a bubble.
B) had a record boom.
C) declined in real terms.
D) was flat.

Question 26

When there is a stock market crash

A) consumption and investment rise.
B) consumption rises and investment falls.
C) consumption falls and investment rises.
D) consumption and investment fall.

Question 27

A boom in the stock market affects the economy because

A) firms invest more as demand grows.
B) consumers consume less with their money tied up in assets.
C) the stock market causes the money supply to rise.
D) interest rates fall.

Question 28

A boom in the stock market affects the economy because

A) wealth of households grow as the stock market booms.
B) brokers make a lot of money.
C) the Fed feels it can increase the money supply without worry.
D) the stock market boom takes pressure off social security.

Question 29

Which of the following financial institutions was not bailed out by the federal government during the financial crisis of 2008-2009?

A) J.P. Morgan Chase
B) A.I.G.
C) Lehman Brothers
D) Goldman Sachs

Question 30

Which of the following chances has the biggest expected return?

A) a 60% chance of winning $2,400 and a 40% chance of winning $0
B) a 100% chance of getting $1,200
C) a 50% chance of winning $1,200, 20% chance of winning $2,400 and a 30% chance of losing $2,400
D) All of the above have the same expected return.

Question 31

Which of the following chances has the biggest expected return?

A) a 40% chance of winning $200 and a 60% chance of winning $0
B) a 100% chance of getting $100
C) a 50% chance of winning $200, 30% chance of winning $400 and a 20% chance of losing $400
D) All of the above have the same expected return.

Question 32

Between the second quarter of 2006 and the first quarter of 2009, the value of housing wealth

A) increased by about $500 billion.
B) increased by about $13 trillion.
C) decreased by about $600 billion.
D) decreased by about $7 trillion.

Question 33

A $1.00 change in the value of stocks changes consumption and investment by about

A) $1.10.
B) $1.00.
C) $.10.
D) $.04.

Question 34

If interest rates are positive, one dollar today is worth

A) more than a dollar a year from now.
B) less than a dollar a year from now.
C) the same as a dollar a year from now.
D) nothing.

Question 35

When there is a stock market boom

A) wealth and investment rise.
B) wealth rises and investment falls.
C) wealth falls and investment rises.
D) wealth and investment fall.

Question 36

A boom in the stock market affects the economy because

A) firms invest more as demand grows.
B) consumers consume more as stock prices increase.
C) wealth of consumers grows as stock prices increase.
D) all of the above

Question 37

Which of the following chances has the biggest expected return?

A) a 50% chance of winning $1,600 and a 50% chance of winning $0
B) a 100% chance of getting $800
C) a 50% chance of winning $1,600, 25% chance of winning $3,200 and a 25% chance of losing $3,200
D) All of the above have the same expected return.

Question 38

If interest rates are positive, which of the following has the highest current value

A) $350 a year from now.
B) $350 now.
C) $350 two years from now.
D) All of the above have the same current value.

Question 39

If you own a share of stock in a company and the risk associated with its business rises you would expect

A) a capital gain.
B) a capital loss.
C) a higher dividend.
D) a bubble.

Question 40

Rising stock prices increase investment because

A) the rising prices increase firm profits and make investment out of retained earnings easier.
B) firms can raise more money per share of stock sold.
C) rising stock prices guarantee an increased level of retained earnings.
D) interest rates are lower.

Question 41

When you can sell an asset for more than you paid for it, you have earned a

A) capital gain.
B) dividend.
C) retained earning.
D) perpetuity asset.

Question 42

If the risk associated with a company goes down, you would expect the price of its stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 43

When a firm sells stock in the company, it

A) is increasing its debt load.
B) is divesting itself of net worth.
C) can finance a capital expenditure.
D) all of the above

Question 44

An index based on the 500 largest firms traded in the three biggest stock markets is the

A) NASDAQ.
B) Dow Jones Industrial Average.
C) Standard and Poor's 500 index.
D) Blue Chip index.

Question 45

Fractional ownership of a firm is represented by

A) capital gains.
B) retained earnings.
C) a corporate bond.
D) a share of stock.

Question 46

All of the following are determining factors in the price of a share of stock except

A) expected dividends.
B) the interest rate.
C) the number of years the firm has existed.
D) risk associated with the company.

Question 47

If the expected future earnings of a company goes down, you would expect the price of its stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 48

The return on the money risked on a share of stock is called

A) interest.
B) dividends.
C) retained earnings.
D) capital gains.

Question 49

When the owner of an asset sells it for more than she paid for it, she has a(n)

A) unnatural profit.
B) tax-free profit.
C) asset accumulation.
D) realized capital gain.

Question 50

If a share of stock is correctly valued today, a ________ in the stock market is when you purchase a stock because you expect other people will be willing to pay more for the stock in the future.

A) balloon
B) hiccup
C) bubble
D) floatation

Question 51

If the interest rate rises, you would expect the price of any stock to

A) rise.
B) fall.
C) be unaffected.
D) fall to zero.

Question 52

If the federal government ________ during the financial crisis of 2008-2009, the negative wealth effect would likely have been larger.

A) had bailed out the large financial institutions
B) had not allowed the large financial institutions to declare bankruptcy
C) had not bailed out the large financial institutions
D) had allowed the sale of the large financial institutions to foreign investors

Question 53

If you think the price of a share of stock ________, but you buy it anyway because you expect to be able to sell it later at a higher price, then you are participating in a stock market price bubble.

A) reflects its true value
B) reflects the interest rate
C) is currently undervalued
D) misrepresents the current value of the company

Question 54

Stock holders are classified as the ________ of a company.

A) liabilities
B) employees
C) owners
D) debt holders

Question 55

When a firm issues new shares of stock

A) it increases its debt load.
B) it does not add to its debt.
C) it must buy back existing shares of stock in return.
D) it lessens the relative value of its net worth.

Question 56

A stock is

A) a certificate that certifies ownership of a certain portion of a company.
B) document verifying a loan to a company.
C) a promise of capital gains to its owner.
D) a retained earning of a corporation.

Question 57

You would expect the price of a share of stock to fall if

A) the expected dividend of the stock rose.
B) the economy went into recession.
C) the price level were rising.
D) all of the above

Question 58

An index based on 30 actively traded large companies on the New York Stock Exchange is the

A) Dow Jones Industrial Average.
B) NASDAQ.
C) Standard and Poor's 500 index.
D) Blue Chip index.

Question 59

If the federal government had not bailed out the large financial institutions during the financial crisis of 2008-2009,

A) the rise in overall stock prices would likely have been smaller.
B) the rise in overall stock prices would likely have been larger.
C) the fall in overall stock prices would likely have been smaller.
D) the fall in overall stock prices would likely have been larger.

Question 60

The gain that occurs when the owner of an asset actually sells it for more than she paid for it is called a(n)

A) dividend.
B) realized capital gain.
C) coupon payment.
D) economic profit.

Question 61

If the federal government had not bailed out the large financial institutions during the financial crisis of 2008-2009,

A) the negative wealth effect would likely have been smaller.
B) the positive wealth effect would likely have been smaller.
C) the negative wealth effect would likely have been larger.
D) the positive wealth effect would likely have been larger.

Question 62

From ________ the stock market as measured by the S&P 500 index had a record boom.

A) 1986-1988
B) 1995-2000
C) 2000-2002
D) 1973-1976

Question 63

A person who wishes to avoid risk would pick which of the following choices?

A) a 100% of getting $4,000
B) a 50% chance of winning $8,000 or a 50% chance of winning $0
C) a 50% chance of getting $8,000, 25% chance of getting $16,000 and a 25% chance of losing $16,000
D) All of the above are equal to a person who wishes to avoid risk.

Question 64

Between the second quarter of 2006 and the first quarter of 2009, the value of housing wealth

A) increased by about $500 billion per quarter.
B) increased by about $13 trillion per quarter.
C) decreased by about $600 billion per quarter.
D) decreased by about $7 trillion per quarter.

Question 65

If interest rates are ________, one dollar today is worth more than one dollar one year from now.

A) positive
B) negative
C) zero
D) all of the above are correct

Question 66

Investment increases when there ________ stock prices.

A) are deflated
B) is a run up in
C) are overvalued
D) a consolidation of

Question 67

Which of the following chances has the biggest expected return?

A) a 100% chance of getting $5,000
B) a 40% chance of winning $10,000 and a 60% chance of winning $0
C) a 50% chance of winning $10,000, 30% chance of winning $20,000 and a 20% chance of losing $20,000
D) All of the above have the same expected return.

Question 68

Which of the following chances has the biggest expected return?

A) a 100% chance of getting $1,000
B) a 50% chance of winning $2,000 and a 50% chance of winning $0
C) a 50% chance of winning $2,000, 25% chance of winning $4,000 and a 25% chance of losing $4,000
D) All of the above have the same expected return.

Question 69

Falling stock prices decrease investment because

A) the falling prices decrease firm profits and makes investment out of retained earnings harder.
B) firms can raise less money per share of stock sold.
C) falling stock prices guarantee a decreased level of retained earnings.
D) interest rates are lower.

Question 70

A $10.00 change in the value of stocks changes consumption and investment by about

A) $11.00.
B) $10.00.
C) $1.00.
D) $0.40.

Question 71

Wealth and consumption rise when there is a stock market

A) boom.
B) crash.
C) split.
D) merger.

Question 72

If interest rates are positive, which of the following has the lowest current value?

A) $350 now
B) $350 a year from now
C) $350 two years from now
D) All of the above have the same current value.

Question 73

Consumption and investment fall when there is a stock market

A) merger.
B) split.
C) boom.
D) crash.

Question 74

If the federal government ________ during the financial crisis of 2008-2009, the fall in overall stock prices would likely have been larger.

A) had bailed out the large financial institutions
B) had not allowed the large financial institutions to declare bankruptcy
C) had not bailed out the large financial institutions
D) had allowed the sale of the large financial institutions to foreign investors

Question 75

In response to the financial crisis of 2008, the federal government passed a ________ bailout bill.

A) $450 million
B) $36 billion
C) $700 billion
D) $3 trillion

Question 76

Between the first quarter of 2000 and the first quarter of 2006, the value of housing wealth

A) increased by about $500 billion per quarter.
B) increased by about $13 trillion per quarter.
C) decreased by about $600 billion per quarter.
D) decreased by about $7 trillion per quarter.

Question 77

Which of the following chances has the biggest expected return?

A) a 100% chance of getting $1,500
B) a 60% chance of winning $3,000 and a 40% chance of winning $0
C) a 50% chance of winning $3,000, 20% chance of winning $6,000 and a 30% chance of losing $6,000
D) All of the above have the same expected return.

Question 78

Wealth and investment fall when there is a stock market

A) crash.
B) boom.
C) merger.
D) split.

Question 79

All of the following are stock price indices except

A) the Dow Jones Industrial Average.
B) the Fortune 500.
C) the NASDAQ composite.
D) the S&P 500.

Question 80

If you own a share of stock in a company and the risk associated with its business falls, you would expect

A) a capital gain.
B) a capital loss.
C) a higher dividend.
D) a bubble.