Question 1

The real interest rate is:

Accepted Answer

The real interest rate is the nominal interest rate adjusted for the effects of inflation. Therefore, option A is incorrect as it refers to the nominal interest rate quoted in financial markets, and option C is incorrect as it includes option A, which is incorrect. Option D is also incorrect as the real interest rate is a valid term in finance.

Question 2

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions:
-The application cited the decrease in oil prices from per barrel in 2008 to a year later as an example of the uncertainty in energy prices that energy producers face.

Accepted Answer

The answer of Recall Application 1, "Energy Price Uncertainty Reduces...

Question 3

A "bank run" occurs when panicky depositors simultaneously:

Accepted Answer

A bank run occurs when depositors lose confidence in a bank's ability to return their deposits and start withdrawing their funds hastily, causing panic among other depositors who also begin to withdraw their money. This cycle continues until the bank runs out of cash and is forced to close its doors. This type of scenario is usually seen as a precursor to a broader financial crisis.

Question 4

Which of the following is generally procyclical?

Accepted Answer

All of the above options are generally procyclical, meaning they tend to move in the same direction as the overall business cycle. During periods of economic expansion, investment, consumption expenditures, and interest rates typically increase. Conversely, during recessions, these variables tend to decrease.

Question 5

If the price of a stock equals the present value of expected future dividend payments, then the price of the firm's stock would be expected to decrease when:

Accepted Answer

All of the above factors can lead to a decrease in the expected future dividends, thus reducing the present value and price of the stock. Increased competition can reduce profits, higher taxes can reduce net income, and lower predicted profits directly reduce expected dividends.

Question 6

When using the formula PV = K/(1+i)^tto calculate the present value of a future payment, t represents:

Accepted Answer

In the formula PV = K/(1+i)^t, t represents the number of periods in the future that the future payment is received. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect as they do not represent t in the formula.

Question 7

Which of the following is an investment (broadly defined)?

Accepted Answer

All of the options given (purchase of ownership of a company, purchase of capital equipment, and education) are investments as they involve allocating resources with the expectation of generating returns or benefits in the future.

Question 8

Which of the following assets is the least liquid?

Accepted Answer

Real estate is the least liquid asset as it can take a significant amount of time to sell a property and convert it into cash compared to checking accounts, stocks, and currency.

Question 9

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

Bill will pay 6% in nominal interest rate, but due to inflation, the real interest rate will be 8%. John is better off because he is receiving a higher real return on his money than he anticipated.

Question 10

With a higher interest rate, the opportunity cost of keeping your money as cash is:

Accepted Answer

When interest rates are higher, the opportunity cost of keeping your money as cash is higher because you will forgo a greater amount of potential interest earnings. This means that it is more costly to hold onto cash when interest rates are higher and it would be more advantageous to invest the money in an account or instrument that earns interest.

Question 11

Because investment is generally procyclical, it usually _______ when the economy _______.

Accepted Answer

Investment is procyclical, which means it tends to move in the same direction as the economy. During a recession, businesses may be hesitant to invest due to uncertainty and decreased demand, leading to a decrease in investment. Therefore, the best choice is B, which states that investment decreases when the economy is in a recession.

Question 12

Which of the following increases the real interest rate?

Accepted Answer

Real interest rate is calculated as nominal interest rate minus inflation rate. Therefore, a decrease in inflation rate while holding the nominal interest rate constant will increase the real interest rate. Option A would not change the real interest rate as the increase in nominal rate is offset by the increase in inflation rate. Option C would decrease the nominal interest rate but the impact on the real interest rate would depend on the inflation rate. Option D would decrease the real interest rate as both nominal interest rate and inflation rate decrease by the same amount.

Question 13

The investment rule states that you should invest in a project as long as:

Accepted Answer

The investment rule is based on the principle of time value of money. In other words, the economic cost we incur today should be less than or equal to the present value of the future payments for the project. This means that the returns we receive from the project in the future should be higher than the cost incurred today, in present value terms. Options A and D are incorrect because they don't consider the present value of future payments. Option B is irrelevant to the investment rule.

Question 14

A rise in the interest rate:

Accepted Answer

When the interest rate increases, the opportunity cost of investing also increases because the return on investment needs to exceed the higher interest rate in order to be profitable. This can make firms less eager to invest.

Question 15

Figure 12.1
-Refer to Figure 12.1. Which of the following causes a movement from Point A to Point B?

Accepted Answer

The answer of  Figure 12.1
-Refer to Figure 12.1. Which...

Question 16

The existence of deposit insurance indirectly led to the U.S. savings and loan crisis in the 1980s because it:

Accepted Answer

The answer of The existence of deposit insurance indirectly led...

Question 17

If Andrew is paid an interest rate of 10% on his savings account, but the inflation rate is 20%, the real (effective) value of his savings account is

Accepted Answer

Andrew's savings account is earning an interest rate of 10%, but the inflation rate is 20%. This means that the purchasing power of his savings is decreasing by 10% (20% - 10%) each year. Therefore, the real (effective) value of his savings account is dropping.

Question 18

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

Accepted Answer

Real interest rate = nominal interest rate - inflation rate 
Real interest rate = 5% - 1% = 4%

Question 19

The accelerator theory describes the impact of:

Accepted Answer

The accelerator theory describes the impact of a change in future GDP on investment.

Question 20

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions:
-According to the application, high energy prices may encourage investment spending in:

Accepted Answer

The application states that "high energy prices may encourage firms to invest in energy-efficient equipment and technologies." Therefore, the choice of energy-saving technology is the best option for increasing investment spending in response to high energy prices. The other options (energy reduction ad campaigns, low calorie energy drinks, and worker training) are not mentioned or are not directly related to investment spending in response to energy prices.

Quiz 12: Investment and Financial Markets

The real interest rate is:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -The application cited the decrease in oil prices from per barrel in 2008 to a year later as an example of the uncertainty in energy prices that energy producers face.

A "bank run" occurs when panicky depositors simultaneously:

Which of the following is generally procyclical?

If the price of a stock equals the present value of expected future dividend payments, then the price of the firm's stock would be expected to decrease when:

When using the formula PV = K/(1+i) ^tto calculate the present value of a future payment, t represents:

Which of the following is an investment (broadly defined) ?

Which of the following assets is the least liquid?

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:

With a higher interest rate, the opportunity cost of keeping your money as cash is:

Because investment is generally procyclical, it usually _ when the economy _.

Which of the following increases the real interest rate?

The investment rule states that you should invest in a project as long as:

A rise in the interest rate:

Figure 12.1 -Refer to Figure 12.1. Which of the following causes a movement from Point A to Point B?

The existence of deposit insurance indirectly led to the U.S. savings and loan crisis in the 1980s because it:

If Andrew is paid an interest rate of 10% on his savings account, but the inflation rate is 20%, the real (effective) value of his savings account is

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

The accelerator theory describes the impact of:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -According to the application, high energy prices may encourage investment spending in:

Quiz 12: Investment and Financial Markets

The real interest rate is:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -The application cited the decrease in oil prices from per barrel in 2008 to a year later as an example of the uncertainty in energy prices that energy producers face.

A "bank run" occurs when panicky depositors simultaneously:

Which of the following is generally procyclical?

If the price of a stock equals the present value of expected future dividend payments, then the price of the firm's stock would be expected to decrease when:

When using the formula PV = K/(1+i) t to calculate the present value of a future payment, t represents:

Which of the following is an investment (broadly defined) ?

Which of the following assets is the least liquid?

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:

With a higher interest rate, the opportunity cost of keeping your money as cash is:

Because investment is generally procyclical, it usually _______ when the economy _______.

Which of the following increases the real interest rate?

The investment rule states that you should invest in a project as long as:

A rise in the interest rate:

Figure 12.1 -Refer to Figure 12.1. Which of the following causes a movement from Point A to Point B?

The existence of deposit insurance indirectly led to the U.S. savings and loan crisis in the 1980s because it:

If Andrew is paid an interest rate of 10% on his savings account, but the inflation rate is 20%, the real (effective) value of his savings account is

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

The accelerator theory describes the impact of:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -According to the application, high energy prices may encourage investment spending in:

When using the formula PV = K/(1+i) ^tto calculate the present value of a future payment, t represents:

Because investment is generally procyclical, it usually _ when the economy _.