Question 1

If an investment projects offers to pay $200 in year 1 and $200 in year 2, and the interest rate is 5%, the investment rule states that you should invest in the project as long as the cost is less than:

Accepted Answer

To determine the cost of the investment, we need to calculate the present value of the cash flows using the interest rate of 5%.

PV of cash flow in year 1 = $200/(1+0.05)^1 = $190.48

PV of cash flow in year 2 = $200/(1+0.05)^2 = $181.41

Total cost of investment = $190.48 + $181.41 = $371.89

Therefore, the cost of the investment is less than option B, so we should invest in the project.

Question 2

The nominal interest rate is always _______ than the real interest rate when inflation is positive.

Accepted Answer

Nominal interest rate includes inflation, so it will be greater than the real interest rate, which does not include inflation.

Question 3

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions:
-According to the application, "subprime" loans are loans that are:

Accepted Answer

According to the application, "subprime" loans are offered to borrowers who would not qualify for loans using traditional criteria.

Question 4

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions:
-According to the application, the reason why investors were lured into purchasing securities comprised of "subprime" loans was that:

Accepted Answer

The application states that investors were lured into purchasing securities comprised of "subprime" loans because the securities were so new that investors did not completely understand the risks.

Question 5

The existence of deposit insurance can prevent a bank run because:

Accepted Answer

Deposit insurance guarantees that depositors with accounts less than $100,000 will receive their deposits in the event the bank fails. This reduces the likelihood of a bank run because depositors feel more secure in keeping their funds in the bank knowing that they are protected up to a certain limit.

Question 6

Which of the following is generally not procyclical?

Accepted Answer

Unemployment is generally countercyclical, meaning it tends to decrease during economic expansions and increase during economic recessions. The other choices, investments, interest rates, and consumption expenditures, are generally procyclical, meaning they tend to increase during economic expansions and decrease during economic recessions.

Question 7

Recall Application 3, "Underwater Homes: Bets Gone Wrong" to answer the following questions:
-According to the application, in which state are the underwater homes most prevalent?

Accepted Answer

Nevada had a significant number of underwater homes due to the housing market crash and the subsequent decline in property values, particularly in areas like Las Vegas.

Question 8

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

Accepted Answer

The formula PV = K/(1+i)^n implies that as i increases, the denominator (1+i)^n also increases, which leads to a decrease in the present value (PV). Therefore, a higher i implies a lower present value.

Question 9

Recall Application 2, "Options for a Lottery Winner," to answer the following questions:
-According to the application, the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating

Accepted Answer

The application states that the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating the present value of the annual payments and comparing it with the lumpsum value.

Question 10

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions:
-According to the Application, most of the economy's financial woes can be traced back to a new innovation called:

Accepted Answer

According to the Application, most of the economy's financial woes can be traced back to securitization.

Question 11

Bank runs occur when:

Accepted Answer

Bank runs occur when depositors simultaneously withdraw large amounts of deposits from banks, typically due to concerns about the bank's financial stability. This can lead to a liquidity crisis for the bank, as it may not have enough cash on hand to meet all of the withdrawal requests.

Question 12

The formula to calculate the present value of a future payment is:

Accepted Answer

The formula for present value (PV) of a future payment is given by PV = K/(1+i)^t where K is the future payment, i is the discount rate and t is the time period in which the payment is expected. Option B is the correct formula which follows this formula. Option A, C and D do not provide the correct formula for calculating present value.

Question 13

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions:
-According to the application, uncertainty in future oil prices usually cause firms to

Accepted Answer

The application states that uncertainty in future oil prices usually causes firms to delay investment until uncertainty is removed.

Question 14

The nominal interest rate is:

Accepted Answer

The nominal interest rate is both unadjusted for the effects of inflation and the interest rate quoted in financial markets.

Question 15

Recall Application 2, "Options for a Lottery Winner," to answer the following questions:
-The present value of annual payments depends primarily on the

Accepted Answer

The present value of annual payments depends on both the number of annual payments received and the interest rate. Therefore, the best choice is D, as it acknowledges both factors as important considerations in deciding on options for a lottery winner.

Question 16

If the inflation rate is smaller than the nominal interest rate, the real interest rate is:

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If the inflation rate is smaller than the nominal interest rate, the real interest rate will be positive. This means that the purchasing power of the money invested will increase over time.

Question 17

Which of the following is a way in which a firm can add to its capital stock?

Accepted Answer

Building a new plant and equipment is a way in which a firm can add to its capital stock. Purchasing raw materials and expanding its labor force are not ways to add to its capital stock. Unplanned inventory depletion is a loss rather than a way to add to capital stock.

Question 18

Recall Application 2, "Options for a Lottery Winner," to answer the following questions:
-According to the application, with any interest rate higher than _______ percent, it is better to choose the lumpsum payment over 20 annual payments.

Accepted Answer

The answer of Recall Application 2, "Options for a Lottery...

Question 19

You want to make a 5% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 6%. You should charge a nominal interest rate of:

Accepted Answer

To calculate the nominal interest rate, we add the real return to the inflation rate. In this case, the nominal interest rate would be 5% (real return) + 6% (inflation) = 11%.

Question 20

According to the neoclassical theory of investment, the important determinant of investment spending is:

Accepted Answer

According to the neoclassical theory of investment, taxes and the real interest rate are the most important determinants of investment spending. This is because taxes reduce the after-tax return on investment, while the real interest rate represents the opportunity cost of investing in physical capital rather than other assets. Therefore, when taxes are high or the real interest rate is low, firms are less likely to invest in new equipment, machinery, and other physical capital.

Quiz 12: Investment and Financial Markets

If an investment projects offers to pay $200 in year 1 and $200 in year 2, and the interest rate is 5%, the investment rule states that you should invest in the project as long as the cost is less than:

The nominal interest rate is always _______ than the real interest rate when inflation is positive.

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the application, "subprime" loans are loans that are:

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the application, the reason why investors were lured into purchasing securities comprised of "subprime" loans was that:

The existence of deposit insurance can prevent a bank run because:

Which of the following is generally not procyclical?

Recall Application 3, "Underwater Homes: Bets Gone Wrong" to answer the following questions: -According to the application, in which state are the underwater homes most prevalent?

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

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the Application, most of the economy's financial woes can be traced back to a new innovation called:

Bank runs occur when:

The formula to calculate the present value of a future payment is:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -According to the application, uncertainty in future oil prices usually cause firms to

The nominal interest rate is:

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -The present value of annual payments depends primarily on the

If the inflation rate is smaller than the nominal interest rate, the real interest rate is:

Which of the following is a way in which a firm can add to its capital stock?

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, with any interest rate higher than _______ percent, it is better to choose the lumpsum payment over 20 annual payments.

You want to make a 5% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 6%. You should charge a nominal interest rate of:

According to the neoclassical theory of investment, the important determinant of investment spending is:

Quiz 12: Investment and Financial Markets

If an investment projects offers to pay $200 in year 1 and $200 in year 2, and the interest rate is 5%, the investment rule states that you should invest in the project as long as the cost is less than:

The nominal interest rate is always _______ than the real interest rate when inflation is positive.

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the application, "subprime" loans are loans that are:

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the application, the reason why investors were lured into purchasing securities comprised of "subprime" loans was that:

The existence of deposit insurance can prevent a bank run because:

Which of the following is generally not procyclical?

Recall Application 3, "Underwater Homes: Bets Gone Wrong" to answer the following questions: -According to the application, in which state are the underwater homes most prevalent?

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

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, the best way to determine whether a lottery winner should take the lumpsum value or the annual payments is by calculating

Recall Application 4, "Securitization: the Good, the Bad, and the Ugly," to answer the following questions: -According to the Application, most of the economy's financial woes can be traced back to a new innovation called:

Bank runs occur when:

The formula to calculate the present value of a future payment is:

Recall Application 1, "Energy Price Uncertainty Reduces Investment Spending," to answer the following questions: -According to the application, uncertainty in future oil prices usually cause firms to

The nominal interest rate is:

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -The present value of annual payments depends primarily on the

If the inflation rate is smaller than the nominal interest rate, the real interest rate is:

Which of the following is a way in which a firm can add to its capital stock?

Recall Application 2, "Options for a Lottery Winner," to answer the following questions: -According to the application, with any interest rate higher than _______ percent, it is better to choose the lumpsum payment over 20 annual payments.

You want to make a 5% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 6%. You should charge a nominal interest rate of:

According to the neoclassical theory of investment, the important determinant of investment spending is:

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