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Albert Einstein once referred to compounding as


A) "an obsession among economists that defies explanation."
B) "the greatest mathematical discovery of all time."
C) his own discovery.
D) John Maynard Keynes's greatest contribution.

E) A) and D)
F) None of the above

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Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is


A) $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B) $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C) $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D) $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.

E) B) and C)
F) None of the above

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If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of


A) $110.00 two years from today.
B) $112.49 three years from today.
C) $116.00 four years from today.
D) $123.67 five years from today.

E) All of the above
F) A) and B)

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Jarrod says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. Simon says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.


A) Jarrod and Simon are both correct.
B) Jarrod and Simon are both incorrect.
C) Only Jarrod is correct.
D) Only Simon is correct.

E) All of the above
F) C) and D)

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From the standpoint of the economy as a whole, the role of insurance is


A) to entice risk-loving people to become risk averse.
B) to promote the phenomenon of adverse selection.
C) not to eliminate the risks inherent in life, but to spread them around more efficiently.
D) not to spread risks, but to eliminate them for individual policy holders.

E) B) and D)
F) B) and C)

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According to the efficient market hypothesis


A) changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds.
B) changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds.
C) changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds.
D) changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

E) B) and C)
F) A) and D)

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Which of the following is not consistent with the efficient market hypothesis?


A) Stock prices should follow a random walk.
B) Index funds should typically outperform highly managed funds.
C) News has no effect on stock prices.
D) There is little point in spending many hours studying the business pages looking for undervalued stocks.

E) A) and B)
F) A) and C)

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Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?


A) $3,180.00
B) $3,182.70
C) $3,183.62
D) None of the above are correct to the nearest cent.

E) A) and C)
F) B) and D)

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Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied


A) rise, and investment spending rise.
B) rise, and investment spending fall.
C) fall, and investment spending rise.
D) fall, and investment spending fall.

E) A) and D)
F) None of the above

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Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's


A) marginal utility diminishes as wealth rises, so he must be risk averse.
B) marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse.
C) marginal utility increases as wealth rises, so he must be risk averse.
D) marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

E) A) and D)
F) A) and B)

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Risk


A) can be reduced by placing a large number of small bets rather than a small number of large bets.
B) can be reduced by increasing the number of stocks in a portfolio.
C) Both A and B are correct.
D) Neither A nor B are correct.

E) C) and D)
F) B) and C)

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Figure 27-2. The figure shows a utility function for Britney. Figure 27-2. The figure shows a utility function for Britney.   -Refer to Figure 27-2. From the appearance of the utility function, we know that A)  Britney is risk averse. B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. C)  the property of diminishing marginal utility applies to Britney. D)  All of the above are correct. -Refer to Figure 27-2. From the appearance of the utility function, we know that


A) Britney is risk averse.
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C) the property of diminishing marginal utility applies to Britney.
D) All of the above are correct.

E) A) and B)
F) A) and C)

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Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?


A) 3.5 percent
B) 4.5 percent
C) 5 percent
D) 7 percent

E) A) and B)
F) All of the above

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Stock market fluctuations


A) often go hand in hand with fluctuations in the economy more broadly.
B) rarely have anything to do with fluctuations in the economy more broadly.
C) have few, if any, macroeconomic implications.
D) are attributable to the widespread belief that the efficient markets hypothesis is correct.

E) B) and C)
F) B) and D)

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Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?


A) $1,157.90
B) $1,168.65
C) $1,176.00
D) None of the above are correct to the nearest cent.

E) B) and C)
F) B) and D)

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Which of the following games might a risk-averse person play?


A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1
D) All of the above are correct.

E) B) and D)
F) A) and C)

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If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

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The presen...

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A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

A) True
B) False

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Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is


A) no less than 9.48 percent.
B) no greater than 9.48 percent.
C) no less than 10.83 percent.
D) no greater than 10.83 percent.

E) A) and B)
F) C) and D)

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Which of the following is correct?


A) Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market hypothesis.
B) Managed funds typically have a higher return than indexed funds. This tends to support the efficient market hypothesis.
C) Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market hypothesis.
D) Index funds typically have a higher rate of return than managed funds. This tends to support the efficient market hypothesis.

E) B) and C)
F) A) and D)

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