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Economics Unit 2 Exam > Economics Module 9 > Flashcards

Economics Module 9 Flashcards

1
Q

How many machines will the firm use if the cost of capital (the cost of each machine) is $8000?

A

2 machines

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2
Q

How many machines will the firm use if the cost of capital is $6000?

A

3 machines

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3
Q

How many machines will the firm use if the cost of capital is $4000?

A

4 machines

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4
Q

An increase in the marginal product of capital does what to the price and quantity of capital? Why?

A

Price and quantity will increase.

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5
Q

A decrease in demand for a product will do what to the price and quantity of the capital used in its production?

A

Price and quantity will decrease.

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6
Q

An increase in the cost of producing capital will do what to the price and quantity of capital produced?

A

Price will increase and quantity will decrease.

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7
Q

An increase in interest rates will cause which of the following?

A

Decrease the use of capital

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8
Q

An increase in the price of the good produced with capital will cause which of the following?

A

The price and quantity of capital will increase.

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9
Q

If an increase in the cost of producing capital occurs at the same time as the marginal product of capital increases, what will happen to the equilibrium quantity of capital used?

A

One cannot tell

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10
Q

If an increase in the cost of producing capital occurs at the same time as the marginal product of capital increases, what will happen to the equilibrium price of capital used?

A

Increase

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11
Q

If interest rates increase, what is likely to happen to the marginal product of capital?

A

The marginal product of capital will rise.

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12
Q

If the current price of a stock increases by 10% and the expected dividends and appreciation increase by 10%, will the expected rate of return increase, decrease, or stay the same?

A

Stay the same

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13
Q

What will happen to price of shares of Microsoft if expected profits increase, assuming nothing else changes? (Use the concept of normal profit of a competitive business as an opportunity cost, but apply the idea to an individual financial investor.)

A

The price of the stock will rise.

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14
Q

What will happen to equity prices if interest rates rise?

A

Equity prices will decrease.

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15
Q

What will happen to Microsoft’s share price if health insurance costs rise?

A

The price of the stock will fall.

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16
Q

What if Microsoft, with 11 billion outstanding shares, now issues an additional 1.1 billion shares and participants in the market believe that it will increase future profits by more than 10 percent?

A

The price of the stock will rise.

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17
Q

How will a decrease in the expected earnings of all other companies affect the price of a share of stock in a company whose expected earnings have not changed?

A

The price of the stock will rise.

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18
Q

In the previous question, what happens to the expected rate of return for the company?

A

The expected rate of return of the stock will fall.

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19
Q

How will a fall in the demand for the product of the company likely affect the price of a share of stock?

A

The price of the stock will fall.

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20
Q

What will happen to the price of asset C and then its rate of return?

A

The price of stock C will fall and its return will rise.

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21
Q

Suppose that lenders become more confident about future economic conditions and decide to increase their loans now. What will happen in the market for loans?

A

The supply of loans will increase.

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22
Q

Consider the previous question. If that is the only change, then the equilibrium interest rate will ______________ and the equilibrium amount of borrowing will ______________.

A

decrease; increase

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23
Q

Consider a bond that was issued 5 years ago for $1000. The price of that bond is now $600. If nothing else about the issuer has changed in the meantime, it is likely that interest rates have ______________ since the bond was issued.

A

increased

24
Q

Suppose that some people in the market face lower costs of buying and selling than others. Specifically, some people can buy and sell stocks with a cost of $.50 per share instead of $1. If everyone in the market knows about this, what will be the new price per share of this stock if the current price per share of this stock is $42?

A

$42.50

25
Q

What is the effect of the change in the exchange rate from the previous question on U.S. exports and U.S. imports?

A

Exports decrease and imports increase

26
Q

What happens to the value of the dollar when prices in the U.S. rise faster than prices in Thailand?

A

The value of the dollar will decrease.

27
Q

Calculate the value of the bond in the example provided in Section 9.11: “Your parents bought a newly issued bond ten years ago for $1,000. The bond matures 20 years from now and, in the meantime, pays $40 a year in interest.” Now they decide to sell the bond to help pay tuition. Assuming interest rates for this type of bond have increased since your parents purchased the bond, will this bond be more or less attractive to buyers?

A

Less attractive

28
Q

If you own a bond with a 3 percent coupon rate and new bonds are paying 8 percent, what will happen to your bond’s market price?

A

It will fall

29
Q

You have a bond that pays $60 per year in coupon payments. Coupon payments on newly-issued bonds fall to $40 per year. What will happen to the price of your bond in the secondary market?

A

It will increase

30
Q

Yusuf wins a lottery. When he goes to collect his prize, lottery officials tell him that he has two options: 1) collect $800,000 today or 2) be paid $100,000 today, plus $100,000 a year for the next 9 years. Yusuf likes the second option. He thinks, $100,000 times 10 payments is $1,000,000! Current interest rates are around 7%. As someone who understands net present value, how would you advise Yusuf?

A

Option #1

31
Q

Suppose that a small mom-and-pop business expects a new project to yield a profit $500 one year from now, $600 in two years, and then $750 in three years. The owners, Mom and Pop, have to borrow money to fund their project. The business’s cost of borrowing is 12 percent. If Mom and Pop have to borrow $1000 for their new project, would you advise them to go ahead with it or not?

A

Yes, go ahead.

32
Q

Demand for coal decreases. If nothing else changes, what will happen to the price of the machines used to extract coal and the quantity of machines bought and sold?

A

Price will decrease; quantity will decrease.

33
Q

The price of oil increases. If nothing else changes, what will happen to the price of the rigs used to extract oil and the quantity of oil rigs built?

A

Price will increase; quantity will increase.

34
Q

Suppose you have two choices for a financial investment. One is a company that expects to earn $10 per share per year – the Atlanta Bread Company (ABC). The other, the Chicago Bakery Company (CBC), has a 50 percent chance of earning no profit and a 50 change of earning $20 per share per year. If they were the same price, which one would you prefer? Why? Which one do you expect most persons to prefer?

A

Most people would prefer ABC, as there is less risk. Both will pay the same amount over time.

35
Q

Compare the likely prices of shares of stock in the Atlanta Bread Company and the Chicago Bakery Company in the previous question.

A

The ABC will likely have a higher price per share than CBC.

36
Q

Compare the likely rates of return of the two companies.

A

The CBC will likely have a higher rate of return than the ABC.

37
Q

Suppose that the expected dividends and capital gains for Apple stock increase by 10 percentage points. At the same time, the expected rate of return on all other stocks increases by 15 percentage points. What will happen to the price of Apple stock?

A

The price of Apple stock will fall by 5 percentage points.

38
Q

Suppose that the expected dividends and capital gains for Apple stock increase. At the same time, interest rates in the economy increase. What will happen to the price of Apple stock and stock prices in general?

A

We cannot tell what will happen to the price of Apple stock, but stock prices in general will fall.

39
Q

Suppose you have several choices for placing your savings in insured bank certificates of deposit. They all pay 5 percent per year – the going interest rate for bank deposits. Most observers expect interest rates to remain at 5 percent for some time to come. One is for 1 year, the second is for 5 years, and the third is for 10 years. Which of the following is the best financial investment?

A

The one-year certificate.

40
Q

Which of the following best describes the logic behind your answer for last question?

A

The shortest maturity certificate of deposit should have the lowest interest rate and the longest maturity should have the highest interest rate.

41
Q

Consider the market for loans. Suppose that the government institutes a new program to incentivize people to save more. What will be the impact on the interest rate and the quantity of loans borrowed?

A

The interest rate will fall and the amount borrowed will rise.

42
Q

Consider the market for loans. Suppose that homeowners come to expect that the prices of homes will fall. What will be the impact on the interest rate and the quantity of loans borrowed?

A

The interest rate will fall and the amount borrowed will fall.

43
Q

Suppose that someone offers you a choice: you can have $495 in a year or you can have $450 today. The interest rate on savings accounts is currently 8%. Which should you choose?

A

$495 in one year

44
Q

Suppose that in the previous question, the interest rate on savings accounts had been 10%. Which should you have chosen?

A

You should be indifferent between the two.

45
Q

Which of the following statements about diversification is not true?

A

Diversification can reduce market risk.

46
Q

The $80 that you hold today for the gift is worth more than the same amount of money a year from now because:

A

the money you hold today could be invested and earn interest.

47
Q

The time value of money today versus one year from now is:

A

The value of money to be held one year from now that would make you indifferent when comparing with holding an amount of money today.

48
Q

Based on the present value of the increased price, it makes more sense for you to:

A

Save money today in order to buy the gift next year.

49
Q

If interest is compounded, which of the following is true?

A

When you invest your money, you earn interest on both the initial amount of your investment and the interest you earn in each period.

50
Q

Which of the following calculations should you use to find the Present Value of the expected profits?

A

PV = 20 / (1 + 0.1)^4

51
Q

If you were to use a Future Value analysis to solve this problem, what information would you need? Choose all that apply

A

b
Initial cost to build
d
Interest rate
f
Length of time

52
Q

What criteria will help you decide whether to build the factory or not? Choose all that apply.

A

b
If the Present Value of the expected $20 million is more than the cost of building the factory, you should build it.
c
If the Future Value of the cost of building the factory is less than the expected profit, you should build the factory.

53
Q

Suppose the demand for wooden furniture increases. What will happen in the market for lumber mil

A

Demand for mills will rise.

54
Q

Suppose one asset has a much lower return given its risk than other assets. What will adjust to bring its risk-return tradeoff into line with the market?

A

Its prices will decrease.

55
Q

Suppose that consumers expect to be able to afford more homes due to an improved economy. What will happen in the market for loans?

A

The demand for loans increases.

56
Q

Suppose that people decide to start saving more. What will happen in the market for loans?

A

The supply of loans increases

57
Q

What happens in the market for dollars when foreign investors decide to invest more in the U.S.?

A

The demand for dollars increases.

Economics Unit 2 Exam (5 decks)

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