Econ 2 Ch. 27 – Flashcards

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Which of the following is correct if the interest rate is 6 percent?

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

The problem of moral hazard arises because

A risk-averse person has

If a person is risk averse, then as wealth increases, total utility of wealth

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

Over the past two centuries, the average annual rates of return were about

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Which of the following actions best illustrates adverse selection?

Fundamental analysis is

Can insurance be thought of as diversification? Defend your answer.

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

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.

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.