Question 1

The value of a stock depends primarily on investors' assessments of its value in the past.

Accepted Answer

The value of a stock depends on a variety of factors, including the financial performance of the company, economic conditions, industry trends, and investors' expectations of future growth. While past performance can play a role in investors' assessments, it is not the primary factor determining the value of a stock.

Question 2

Suppose the federal government has a budget deficit and the economy is closed. Using the savings-investment spending identity, explain how this affects investment spending.

Accepted Answer

The answer of Suppose the federal government has a budget...

Question 3

Banks are nonprofit financial intermediaries that collect the savings of their members and invest those funds in a diversified portfolio of assets to provide income to members when they retire.

Accepted Answer

Banks are financial intermediaries that collect deposits from their customers and use those funds to lend to borrowers or invest in assets to generate profit. While some banks may offer retirement products, they are not inherently focused on providing income to members when they retire. Additionally, many banks are for-profit institutions.

Question 4

You have contracted to borrow $2,000 from the bank for one year. The nominal rate of interest is 8.5% and the real interest rate is 6%. At the end of the year, inflation was 1%. How does this affect the borrower (you) and the lender (the bank)? Who is better off?

Accepted Answer

The answer of You have contracted to borrow $2,000 from...

Question 5

Some economists have challenged the efficient markets hypothesis because they believe that stocks may be incorrectly priced when markets behave irrationally.

Accepted Answer

Economists who challenge the efficient markets hypothesis believe that stock prices can be driven by irrational behavior in the markets, leading to incorrect pricing.

Question 6

The market for loanable funds is in equilibrium. All else equal, the federal deficit is growing. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds.

Accepted Answer

The answer of The market for loanable funds is in...

Question 7

By doing research on the companies in their portfolios, mutual funds reduce transactions costs for their investors.

Accepted Answer

Mutual funds research the companies in their portfolios to make informed investment decisions, which can lead to lower transaction costs for investors in the long run.

Question 8

The market for loanable funds is in equilibrium. All else equal, the federal government has eliminated taxes on interest earned from savings. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds.

Accepted Answer

The answer of The market for loanable funds is in...

Question 9

Explain what the Fisher effect implies. What does this effect tell us about the relationship between inflation expectations and the market for loanable funds?

Accepted Answer

The answer of Explain what the Fisher effect implies. What...

Question 10

The purchaser of a share of stock receives interest each year from the stock and then receives the purchase price of the stock at its maturity.

Accepted Answer

A shareholder does not receive interest on their stock, but instead receives dividends (if the company pays them) and the potential for capital appreciation. The shareholder may sell their stock at any time, not just at maturity, and will receive the current market price rather than the original purchase price.

Question 11

The efficient markets hypothesis says that asset prices embody all publicly available information.

Accepted Answer

The efficient markets hypothesis (EMH) is a theory that states that asset prices always fully reflect all publicly available information. This means that it is impossible to consistently achieve returns that are better than average in the long run. The EMH has been widely debated and criticized by some experts, but it remains a cornerstone of modern financial theory.

Question 12

Implicit rent is an estimate of the amount that homeowners would pay if they had to rent their home and is also an estimate of the benefit of owning a home.

Accepted Answer

Implicit rent is indeed an estimate of the amount that homeowners would pay if they had to rent their home and is also an estimate of the benefit of owning a home.

Question 13

A bubble is a large decrease in asset prices caused by unrealistic expectations about future prices.

Accepted Answer

The answer of A bubble is a large decrease in...

Question 14

Suppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign citizens. Using the savings-investment spending identity, explain how this affects investment spending.

Accepted Answer

The answer of Suppose the federal government has a balanced...

Question 15

The table that follows shows four possible physical investment projects, the expected revenue from each project, and the expected cost of each project. You may assume that each project, once completed, lasts only one year. Complete the empty column in the table by computing the rate of return on each project.

Accepted Answer

The answer of The table that follows shows four possible...

Question 16

Life insurance companies are financial intermediaries that sell policies to savers and guarantee a payment to the policyholder's beneficiaries when the policyholder dies.

Accepted Answer

Life insurance companies indeed sell policies to savers, receive premiums, invest the funds, and pay out death benefits to the beneficiaries of the insureds.

Question 17

If the price of a share of stock is expected to rise, then demanders will demand more of it today, owners will be less willing to sell it today, and its price will rise today.

Accepted Answer

When the expected price of a share of stock is set to rise, the demand for the stock will increase, as demanders try to buy the stock before the price increases further. This increased demand will lead to a rise in the stock's price as sellers hold back from selling their stocks, anticipating that they may be able to sell their shares for a higher price in the future. Therefore, the statement is true.

Question 18

Changes in the prices of stock are the result of changes in the supply and demand for stocks of investors.

Accepted Answer

The prices of stocks are determined by the forces of supply and demand in the market. When there is more demand for a stock than there is supply, the price will rise, and when the opposite is true, the price will fall. This is based on the basic principles of economics, where the price of a good or service is set by the equilibrium between its supply and demand.

Question 19

Assume that an economy is open to capital inflows and that the inflows are equal to imports minus exports (IM - X). Answer the following questions.
a. Budget balance = -$20; X = $60; IM = $90; Private saving = $150. Calculate investment spending.
b. Private saving = $200; Investment = $220; Budget balance = -$30. Calculate (IM - X).

Accepted Answer

The answer of Assume that an economy is open to...

Question 20

Fundamentals are the underlying determinants of a company's future profits.

Accepted Answer

Fundamentals such as revenue growth, profitability, and financial health are important factors that drive a company's future profits.

Quiz 24: Savings, Investment Spending