Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries

Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries

A. Political reform
B. Capitalism
C. Corruption
D. Communism


Answer: A. Political reform

The new growth theory differs from the growth theory developed by Robert Solow, since

The new growth theory differs from the growth theory developed by Robert Solow, since

A. the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
B. the new growth theory says that physical capital is nonrival and nonexcludable and the Solow growth theory states that knowledge capital is nonrival and nonexcludable and is a key determinant of economic growth.
C. the Solow growth theory says that the rate of technological change is influenced by how individuals and firms respond to economic incentives, whereas the new growth theory leaves technological change unexplained.
D. the new growth theory focuses on technological change and the quantity of capital available to workers whereas the Solow growth theory states that accumulation of knowledge capital is a key determinant of economic growth.


Answer: A. the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.

The new growth theory states that

The new growth theory states that

A. firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change.
B. knowledge capital is subject to decreasing returns at the level of the whole economy but increasing returns at the firm level.
C. firms will add to an economy's stock of physical capital leading to increases in real GDP but at a increasing rate.
D. growth in labor productivity is a significant factor in bringing about long-run growth in real GDP per capita.


Answer: A. firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change.

Have poor countries been catching up to rich countries

Have poor countries been catching up to rich countries 

A. There has been catch-up by some poor but industrialized countries.
B. There has been catch-up among all poor countries.
C. The rich countries are getting poorer and going down to the level of poor countries.
D. There has been no catch-up by any of the poor countries.


Answer: A. There has been catch-up by some poor but industrialized countries.

The economic growth model predicts that the

The economic growth model predicts that the

A. level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.
B. level of per capita GDP in rich countries will increase so fast that it will be difficult for poor countries with low income per capita to ever catch up with the rich countries.
C. rich countries will have stagnant growth and will catch up with the poor countries, so that there will be a convergence toward a "poverty trap."
D. level of per capita GDP in poor countries will decrease over time and the poor nations will not be able to catch up with the rich nations.


Answer: A. level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.

Which of the following is a way in which governments can directly promote savings and investment

Which of the following is a way in which governments can directly promote savings and investment

A. Governments can promote vaccinations for children and improve access to clean water.
B. Governments can expand primary and secondary schools.
C. Governments can create tax incentives for both businesses and individuals.
D. Governments can limit foreign competition by imposing tariffs and quotas on trade


Answer: C. Governments can create tax incentives for both businesses and individuals.

Which one of the following expressions shows the investment-saving equality

The total value of saving in the economy must equal the total value of investment. Assume a closed economy, where:


I = Investment,
S = Spvt + Spub,
Spvt = Private Saving,
Spub = Public Saving,
C = Consumption Expenditure,
G = Government Expenditure ,
Y = GDP,
TR = Government Transfers.

Which one of the following expressions shows the investment-saving equality

A. S = Y + T - TR - G
B. I = Y + TR - C - T
C. S = Y - C - G
D. I = Y + TR - C - G


Answer: C. S = Y - C - G

Along the per-worker production function, what happens to real GDP per hour worked as capital per hour worked increases

Along the per-worker production function, what happens to real GDP per hour worked as capital per hour worked increases

A. Real GDP per hour worked increases at an increasing rate.
B. Real GDP per hour worked decreases at a decreasing rate.
C. Real GDP per hour worked decreases at an increasing rate.
D. Real GDP per hour worked increases at a decreasing rate.


Answer: D. Real GDP per hour worked increases at a decreasing rate.

What term describes the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

What term describes the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

A. the capital-labor function
B. the output growth function
C. the per-worker production function
D. the production possibilities frontier


Answer: C. the per-worker production function

Which of the following is a way in which governments can increase productivity through health and education

Which of the following is a way in which governments can increase productivity through health and education

A. Governments can limit foreign competition by imposing tariffs and quotas on trade.
B. Governments can strengthen property rights and enforce laws.
C. Governments can promote vaccinations for children and improve access to clean water.
D. Governments can create tax incentives for both businesses and individuals.


Answer: C. Governments can promote vaccinations for children and improve access to clean wate

An economy that does not experience increases in technological progress

An economy that does not experience increases in technological progress

A. will not be able to create economic growth unless the country has an increase in the labor force, either by population growth or immigration.
B. can sustain strong levels of economic growth as long as the economy continues to increase capital.
C. will not be able to experience any economic growth even with increases in capital.
D. can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow.


Answer: D. can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow.

The Chinese government doubles its spending on university research. This will cause a (shift of/movement along) China's per-worker production function.

The Chinese government doubles its spending on university research. This will cause a (shift of/movement along) China's per-worker production function.

Answer: shift of

The government policy that does not increase economic growth is

The government policy that does not increase economic growth is

A. better health and education policies that provide free childhood vaccination, water purification, and K-12 public education.
B. policy concerning property rights and rules of law that can free the country from corruption and political instability.
C. foreign trade policy that favors imposing a high tariff on imported high-tech goods.
D. incentives to firms in the form of investment tax credits that can take the economy out of a low saving-investment trap.


Answer: C. foreign trade policy that favors imposing a high tariff on imported high-tech goods.

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)

A. 10.2%
B. 0.8%
C. 5.5%
D. 4.7%


Answer: B. 0.8%

The difference between the nominal interest rate and the real interest rate is

The difference between the nominal interest rate and the real interest rate is

A. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate plus the inflation rate.
B. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.
C. the real interest rate is the stated interest rate whereas the nominal interest rate is the real interest rate minus the inflation rate.
D. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate divided by the inflation rate.


Answer: B. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.

The nominal interest rate is 10%. The inflation rate is 4%. The real interest rate is equal to

The nominal interest rate is 10%. The inflation rate is 4%.
The real interest rate is equal to

Answer: 6%

Inflation can affect the distribution of income because

Inflation can affect the distribution of income because

A. people with fixed incomes, such as retired persons who may be receiving a pension of a fixed number of dollars each year, are not affected by the inflation rate, but people with varying incomes are.
B. people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.
C. when inflation is fully anticipated, mortgage lenders face very high default risk.
D. people with incomes rising slower than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more quickly than the rate of inflation are hurt by a decreasing purchasing power.


Answer: B. people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.

In this situation, investors _________ and borrowers _________.

In this situation, investors _________ and borrowers _________.

Answer: lose, win

Since nominal incomes increase with inflation,

Since nominal incomes increase with inflation,

A. unexpected inflation does not affect the purchasing power of the average consumer.
B. expected inflation increases the purchasing power of the average consumer.
C. expected inflation reduces the purchasing power of the average consumer.
D. expected inflation does not affect the purchasing power of the average consumer.


Answer: D. expected inflation does not affect the purchasing power of the average consumer.

Nominal incomes generally increase with inflation because

Nominal incomes generally increase with inflation because

A. when inflation is anticipated, average nominal incomes also increase by the same percentage as the rate of inflation.
B. even anticipated inflation causes average nominal incomes to fall as prices increase.
C. when inflation is anticipated, real incomes also increase by the same percentage as inflation.
D. when inflation is unanticipated, average nominal incomes also increase by the same percentage as inflation.


Answer: A. when inflation is anticipated, average nominal incomes also increase by the same percentage as the rate of inflation.

An average of the prices of the goods and services purchased by a typical family is the:

An average of the prices of the goods and services purchased by a typical family is the:

A. producer price index (PPI).
B. inflation rate index.
C. consumer price index (CPI).
D. aggregate price level index.


Answer: C. consumer price index (CPI).

Which one of the following accurately describes the relationship between frictional unemployment and job search

Which one of the following accurately describes the relationship between frictional unemployment and job search

A. People are said to be frictionally unemployed when their skills do not match job requirements.
B. People are said to be frictionally unemployed when they are between jobs due to the seasonal variations.
C. People are said to be frictionally unemployed when they are laid off because of a recession.
D. People are said to be frictionally unemployed when they are between jobs and searching for new jobs.


Answer: D. People are said to be frictionally unemployed when they are between jobs and searching for new jobs.

The type of unemployment most likely to result in hardship for the people who are unemployed is

The type of unemployment most likely to result in hardship for the people who are unemployed is

A. structural because this type of unemployment requires retraining to acquire new job skills.
B. cyclical and frictional because these two types are closely related.
C. frictional because people need to find a new job in the labor market.
D. cyclical because people have to wait for a recession to end.


Answer: A. structural because this type of unemployment requires retraining to acquire new job skills.

The three types of unemployment are

The three types of unemployment are

A. natural, unnatural, and cyclical unemployment.
B. frictional, structural, and cyclical unemployment.
C. full, frictional, and involuntary unemployment.
D. voluntary, structural, and cyclical unemployment.


Answer: B. frictional, structural, and cyclical unemployment.

An efficiency wage

An efficiency wage

A. increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied.
B. decreases the unemployment rate since it increases the labor productivity.
C. decreases the unemployment rate since firms pay a lower-than-market wage that decreases the quantity of labor supplied.
D. has no impact whatsoever on the unemployment rate.


Answer: A. increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied.

The effect of labor unions on overall unemployment is (large/small) since only a (large/small) percentage of the labor force outside the government is unionized.

The effect of labor unions on overall unemployment is (large/small) since only a (large/small) percentage of the labor force outside the government is unionized.

Answer: small, small

The minimum wage law

The minimum wage law

A. increases cyclical unemployment in the economy.
B. has a significant effect on the unemployment rate since a large part of the labor force earns the minimum wage.
C. increases the unemployment rate among highly skilled workers.
D. has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage


Answer: D. has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage

The natural rate of unemployment tends to be lower when

The natural rate of unemployment tends to be lower when

A. a greater percentage of the work force is unionized.a greater percentage of the work force is unionized.
B. the efficiency wage is higher.the efficiency wage is higher.
C. the minimum wage is higher than the market wage.the minimum wage is higher than the market wage.
D. unemployment insurance benefits are lower.


Answer: D. unemployment insurance benefits are lower.

When the economy is at full employment,

When the economy is at full employment,

A. all remaining unemployment is either frictional or structural.
B. the unemployment rate is greater than zero.
C. the natural rate of unemployment prevails.
D. All of the above.


Answer: D. All of the above.

Which of the following is an example of structural unemployment

Which of the following is an example of structural unemployment

A. Autoworkers lose jobs due to globalization and must retrain to find new jobs.
B. A student graduates from college and searches for a first job.
C. Workers at ski resorts in Colorado are laid off during the summer.Workers at ski resorts in Colorado are laid off during the summer.
D. During a recession comma aircraft assemblers are laid off but expect to be recalled as the economy improves.


Answer: A. Autoworkers lose jobs due to globalization and must retrain to find new jobs.

When an unemployed person drops out of the labor force, it

When an unemployed person drops out of the labor force, it

A. does not affect the unemployment rate.
B. does not affect the employment-population ratio.
C. does not affect the labor force participation rate.
D. affects the employment-population ratio.


Answer: B. does not affect the employment-population ratio.

When an unemployed person drops out of the labor force, the unemployment rate

When an unemployed person drops out of the labor force, the unemployment rate

A. becomes more reliable as all the potential erroneous data are removed.
B. understates the true degree of joblessness in the economy.
C. overstates the true degree of joblessness in the economy.
D. is not affected by the existence of such workers.


Answer: B. understates the true degree of joblessness in the economy.

The employment-population ratio measures the

The employment-population ratio measures the

A. percentage of the working age population that is employed.
B. portion of the total population that is employed.
C. percentage of the working age population that is not employed.
D. percentage of the working age population that is in the labor force.


Answer: A. percentage of the working age population that is employed.

When the economy is at full employment, unemployment is equal to

When the economy is at full employment, unemployment is equal to 

A. the natural rate of unemployment.
B. cyclical unemployment - seasonal unemployment.
C. normal rate of unemployment - abnormal rate of unemployment.
D. zero.


Answer: A. the natural rate of unemployment.

The natural rate of unemployment is

The natural rate of unemployment is

A. the sum of cyclical unemployment and frictional unemployment.
B. the sum of structural unemployment and frictional unemployment.
C. the sum of seasonal unemployment and cyclical unemployment.
D. the sum of structural unemployment and cyclical unemployment


Answer: B. the sum of structural unemployment and frictional unemployment.

Which of the following is not one of the conditions someone needs to meet to be counted as unemployed

Which of the following is not one of the conditions someone needs to meet to be counted as unemployed

A. They had worked only one hour per week during the previous four weeks.
B. They must not have worked in the week previous to the survey week.
C. They were available for work in the week previous to the survey week.
D. They had actively looked for work at some time during the previous four weeks.


Answer: A. They had worked only one hour per week during the previous four weeks.

The unemployment rate is calculated as follows:

The unemployment rate is calculated as follows:

A. Unemployment Rate = (Number of Unemployed / Population) x 100.
B. Unemployment Rate = (Number of Unemployed / Labor Force) x 100.
C. Unemployment Rate = [(Number of Unemployed) / (Number of Employed+Labor Force)].
D. Unemployment Rate = (Number of Unemployed /
Number of Employed) x 100.


Answer: B. Unemployment Rate = (Number of Unemployed / Labor Force) x 100.

When a firm pays a wage that is higher than the market wage in order to increase worker productivity, the wage is called

When a firm pays a wage that is higher than the market wage in order to increase worker productivity, the wage is called

A. a compensating differential.
B. a minimum wage.
C. an ideal wage.
D. an efficiency wage.


Answer: D. an efficiency wage.

The unemployment rate

The unemployment rate

A. shows the percentage of the population that is considered unemployed.
B. shows the percentage of the labor force that is considered unemployed.
C. is the amount of people in the population that are not working.
D. is the amount of the labor force that is not working.


Answer: B. shows the percentage of the labor force that is considered unemployed.

The payment of government unemployment insurance reduces the severity of recessions by

The payment of government unemployment insurance reduces the severity of recessions by

A. adding to the level of frictional and structural unemployment.
B. preventing a huge drop in income and spending for the unemployed.
C. giving extra income to everyone and thus increasing consumption spending.
D. prolonging the job search period for unemployed workers.


Answer: B. preventing a huge drop in income and spending for the unemployed.

Government unemployment insurance tends to

Government unemployment insurance tends to

A. decrease the unemployment rate by lowering the opportunity cost of job search.
B. increase the unemployment rate by lowering the opportunity cost of job search.
C. increase the unemployment rate by increasing the opportunity cost of job search.
D. have no direct effect on the unemployment rate.


Answer: B. increase the unemployment rate by lowering the opportunity cost of job search.

Which of the following is an example of cyclical unemployment

Which of the following is an example of cyclical unemployment

A. In an economic downturn, a manufacturing plant reduces production and temporarily lays off workers.
B. Workers at ski resorts in Colorado are laid off during the summer.
C. Autoworkers lose jobs due to globalization and must retrain to find new jobs.
D. A worker moves to California and searches for a new job.


Answer: A. In an economic downturn, a manufacturing plant reduces production and temporarily lays off workers.

The labor force participation rate is calculated by

The labor force participation rate is calculated by

A. the percentage of the labor force that is in the working-age population or [(Working-age population) / Labor force] x 100
B. the percentage of the working-age population that is in the labor force or (Labor force / Working-age population) x 100
C. the percentage of the retired population that is in the labor force or (Retired people / Labor force) x 100
D. the percentage of the employed workers that is in the labor force or (Employed / Labor force) x 100


Answer: B. the percentage of the working-age population that is in the labor force or (Labor force / Working-age population) x 100

A politician makes the following argument: "The economy would operate more efficiently if frictional unemployment were eliminated. Therefore, a goal of government policy should be to reduce the frictional rate of unemployment to the lowest possible level." Eliminating all frictional unemployment

A politician makes the following argument:
"The economy would operate more efficiently if frictional unemployment were eliminated. Therefore, a goal of government policy should be to reduce the frictional rate of unemployment to the lowest possible level."
Eliminating all frictional unemployment

A. will not be good for the economy since the presence of frictional unemployment decreases job creation.
B. will not be good for the economy since the presence of frictional unemployment increases economic efficiency.
C. will be good for the economy since the presence of frictional unemployment increases job destruction.
D. will be good for the economy because the total unemployment will fall.


Answer: B. will not be good for the economy since the presence of frictional unemployment increases economic efficiency.

If the GDP deflator in 2012 has a value of 98.0, then

If the GDP deflator in 2012 has a value of 98.0, then

A. prices have increased 9.8 percent between the base year and 2012.
B. prices have decreased 2 percent between the base year and 2012.
C. the inflation rate in 2012 is 2 percent.
D. the inflation rate in 2012 is -2 percent.


Answer: B. prices have decreased 2 percent between the base year and 2012.

In calculating GDP, which levels of government spending are included in government purchases

In calculating GDP, which levels of government spending are included in government purchases

A. spending by governments only on national security, social welfare, and other national programs
B. spending by the federal government only
C. spending by federal, state, and local governments
D. spending by the federal government and some state governments, but not local governments


Answer: C. spending by federal, state, and local governments

Which of the following is included in the economist's definition of investment

Which of the following is included in the economist's definition of investment

A. the purchase of a share of stock
B. the purchase of a rare coin or a deposit in a savings account
C. the purchase of new machines, factories, or houses
D. All of the above.


Answer: C. the purchase of new machines, factories, or houses

The following question in about the required reading from my website, Is High Fructose Corn Syrup Included in GDP.

The following question in about the required reading from my website, Is High Fructose Corn Syrup Included in GDP.

a. What item was I consuming that made me think of writing this post
A. Rice Krispies Treats
B. Pepsi
C. Lays Potato Chips
D. Snickers

b. In this post I talked about how I shared a economics-related joke on social media. Which social media outlet did I use
A. Facebook
B. Twitter
C. LinkedIn
D. Instagram
a. --> A. Rice Krispies Treats
b. --> B. Twitter

Why is GDP an imperfect measurement of total production in the economy

Why is GDP an imperfect measurement of total production in the economy

A. The BEA does not include the value of new houses in GDP.
B. GDP does not include household production or production from the underground economy.
C. GDP measures total income paid to the factors of production, not production.
D. The official measure of GDP does not include intermediate goods and services.


Answer: B. GDP does not include household production or production from the underground economy.

How is the GDP Deflator calculated

How is the GDP Deflator calculated

A. GDP Deflator = (Nominal GDP - Real GDP) x 100
B. GDP Deflator = (Nominal GDP / Real GDP) x 100
C. GDP Deflator = (Real GDP / Nominal GDP) x 100
D. GDP Deflator = (Nominal GDP + Real GDP) x 100


Answer: B. GDP Deflator = (Nominal GDP / Real GDP) x 100

"In years when people buy few shares of stock, investment will be low and, therefore, so will gross domestic product (GDP)."

"In years when people buy few shares of stock, investment will be low and, therefore, so will gross domestic product (GDP)."

A. Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.
B. Disagree: While GDP will be low in this case, it is the result of a decrease in consumer expenditure on stocks, not investment spending.
C. Agree: GDP = C + I + G + NX.  Therefore, as "I" (Investment) decreases, GDP decreases.
D. Agree: When investment is low, people must have less money to spend.  Therefore, GDP decreases.


Answer: A. Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.

The business cycle exists because

The business cycle exists because

A. exports and imports do not always increase and decrease at the same rate which causes cyclical movements in net exports.
B. total production experiences periods of increases and periods of decreases.
C. the price level tends to increase over some periods and decrease over others.
D. there are changes in the level of government expenditures, sometimes they increase and sometimes they decrease.


Answer: B. total production experiences periods of increases and periods of decreases.

A recession occurs when an economy experiences a period in which there is

A recession occurs when an economy experiences a period in which there is

A. a negative amount of net exports.
B. a decrease in total production.
C. an increase in total employment.
D. a decrease in the inflation rate


Answer: B. a decrease in total production.

What are the four major components of expenditures in GDP

What are the four major components of expenditures in GDP

A. Consumption, Intermediate Goods, Goods and Services, and Net Exports
B. Consumption, Intermediate Goods, Government Purchases, and New Expenditures
C. Consumption, Investment, Government Purchases, and Net Exports
D. Consumption, Investment, Government Purchases, and Non-Durable Expenditures


Answer: C. Consumption, Investment, Government Purchases, and Net Exports

Which equation represents the relationship between GDP and the four major expenditure components

Which equation represents the relationship between GDP and the four major expenditure components

A. Y = (C + I) - (G + NX)
B. Y = [(C + I) / (G + NX)]
C. Y = C + I + G + NX
D. Y = C(I + G + NX)


Answer: C. Y = C + I + G + NX

"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."

"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."

A. Disagree. If nominal GDP declined between 2008 and 2009, then the GDP deflator could have gone up.
B. Disagree. If real GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
C. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
D. Disagree. If nominal GDP increased between 2008 and 2009, then the GDP deflator must have remained the same.


Answer: C. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.

"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."

"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."

A. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.
C. Agree. If prices fall, real GDP and nominal GDP will both fall if output increases.
D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.


Answer: A. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.

"Whenever real GDP declines, nominal GDP must also decline."

"Whenever real GDP declines, nominal GDP must also decline."

A. Agree. Both real GDP and nominal GDP decline if price falls and output remains constant.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
C. Agree. Both real GDP and nominal GDP decline if output falls and prices remain constant.
D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.


Answer: B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

"If nominal GDP is less than real GDP, then the price level must have fallen during the year."

"If nominal GDP is less than real GDP, then the price level must have fallen during the year."

A. Agree. Nominal GDP will be less than real GDP if the price level falls and is higher than the base year's prices.
B. Agree. Real GDP will be less than nominal GDP if the price level falls and is lower than the base year's prices.
C. Disagree. Real GDP will be equal to nominal GDP if the price level increases and is equal to the base year's prices.
D. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.


Answer: D. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.

This question is related to the TED talk you watched: What the Social Progress Index can reveal about your country.

This question is related to the TED talk you watched: What the Social Progress Index can reveal about your country. 

a. The economist mentioned in the TED talk who gave a report titled National Income, 1929 - 1932 was named:
A. Simon Kuznets
B. Paul Krugman
C. Milton Freidman

Answer: D. John Maynard Keynes

b. The country in the world with the highest social progress is:
A. Canada
B. USA
C. Switzerland

Answer: D. New Zealand

c. The country in the world with the lowest social progress is:
A. Senegal
B. Costa Rica
C. Kuwait

Answer: D. Chad

d. When looking at the trend line of the relationship between the SPI and GDP, we see that for poorer countries, the line is:
A. Steeper
B. Flatter


Answer:

a. --> A. Simon Kuznets
b. --> D. New Zealand
c. --> D. Chad
d. --> A. Steeper

This question is in regards to the WSJ article you read about the Gross National Happiness index.

This question is in regards to the WSJ article you read about the Gross National Happiness index.

a. What country did this article focus on
A. Bhutan
B. India
C. Bangladesh


Answer: D. Japan

b. Which year did this country compute its first happiness index
A. 2010
B. 1980
C. 2011

Answer: D. 1970

c. The biggest decline in the most recent GNH survey was:
A. satisfaction with government performance.
B. reported income above a threshold of around $350 per person a year.
C. getting enough sleep.

Answer: D. complaints of deer, boars and elephants damaging crops.

d. In towns and cities, youth unemployment in the country that this article focuses on is:
A. around 10%
B. not a problem
C. around 25%
D. around 50%

Answer: a. --> A. Bhutan
b. --> A. 2010
c. --> A. satisfaction with government performance.
d. --> C. around 25%

Assuming that inflation has occurred over? time, what is the relationship between nominal GDP and real GDP in each of the following? situations?

Assuming that inflation has occurred over? time, what is the relationship between nominal GDP and real GDP in each of the following? situations?

A. In years after the base? year, nominal GDP _____ real GDP.
B. In the base? year, nominal GDP _____ real GDP.
c. In years prior to the base? year, nominal GDP _____ real GDP.


Answer:


A. is greater than
B. is equal to
C. is less than

Which of the following transactions is not counted in? GDP?

Which of the following transactions is not counted in? GDP?

A. The state government pays for highway construction.
B. A consumer purchases a trip to California.
C. A consumer repairs her own car.
D. A retailer hires a contractor to paint the ourside of the store.


Answer: C. A consumer repairs her own car.

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the? present, what would be true of the relationship between nominal GDP and real GDP?

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the? present, what would be true of the relationship between nominal GDP and real GDP?

A. RGDP? = NGDP because prices are stable.
B. RGDP? < NGDP because prices are rising.
C. RGDP? > NGDP because prices are falling.
D. The relationship is uncertain without more information on prices.


Answer: B. RGDP? < NGDP because prices are rising.

Even if GDP included these types of? production, why would it still be an imperfect measure of economic? well-being?

Even if GDP included these types of? production, why would it still be an imperfect measure of economic? well-being?

A. The value of leisure is not included in GDP.
B. GDP is not adjusted for pollution and it does not account for unequal income distribution.
C. GDP is not adjusted for crime or other social problems.
D. All of the above.
E. A and C only.


Answer: D. All of the above.

GDP is an imperfect measure of economic? well-being because it fails to measure what types of? production?

GDP is an imperfect measure of economic? well-being because it fails to measure what types of? production?

A. Household production and foreign production.
B. Foreign production and the government sector.
C. Business investment and foreign production.
D. Household production and the underground economy.


Answer: D. Household production and the underground economy.

Which of the following is considered to be a problem in using GDP as a measure of national ?well-being??

Which of the following is considered to be a problem in using GDP as a measure of national ?well-being??

A. Items included in U.S. GDP are valued in current dollars.
B. GDP does not include the value of illegal goods, such as drugs.
C. GDP does not include products that you produce for yourself.
D. GDP is not adjusted for changes in the environment.


Answer: D. GDP is not adjusted for changes in the environment.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
B) The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C) The annual percentage rate indicates the amount of simple interest earned in one year.
D) The annual percentage rate indicates the amount of interest including the effect of compounding.


Answer: D

You have an $8,000 balance on your credit card, which charges 12% interest annually (1% per month). If you can afford to pay $100 per month, how many months will it take to pay the credit card in full?

You have an $8,000 balance on your credit card, which charges 12% interest annually (1% per month). If you can afford to pay $100 per month, how many months will it take to pay the credit card in full?

A) 170 months
B) 14 months
C) 162 months
D) You will never get the card paid off at that rate.


Answer: C) PV= 8000 FV= 0 I= 1 PMT= -100 Compute N= 161.75

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. The Internal Rate of return of this project is closest to:

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now.
The Internal Rate of return of this project is closest to:

A) 10.2%
B) 12.2%
C) 14.2%
D) 16.2%

Answer: C) NPV = 0 = -1,000,000 + 250,000/(1.142)1+ 450,000/(1.142)2+ 650,000/(1.142)3

You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15 year fixed rate mortgage (180 months) at 9% APR (0.75% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to:

You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15 year fixed rate mortgage (180 months) at 9% APR (0.75% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to:

A) $2,585
B) $660
C) $2,535
D) $1,390


Answer: C) PV = 250000 I= 0.75 N= 180 FV = 0 Compute payment = $2535.67

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years. The IRR of this opportunity is closest to:

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years. The IRR of this opportunity is closest to:

A) 7.25%
B) 7.50%
C) 10.00%
D) 15.00%


Answer: A) IRR= blank - 1= .072381

If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

A) $18,519
B) $45,761
C) $9,818
D) $20,000

Answer: C) PV = C/r (1 - (1 + r)-N

Which of the following statements regarding growing annuities is FALSE?

Which of the following statements regarding growing annuities is FALSE?

A) A growing annuity is a stream of N growing cash flows, paid at regular intervals.
B) We assume that g < r when using the growing annuity formula.
C) PV of a growing annuity = C ×
D) A growing annuity is like a growing perpetuity that never comes to an end.


Answer: D) An annuity does end.

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. If the appropriate interest rate is 10%, then the NPV of this opportunity is closest to:

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now.
If the appropriate interest rate is 10%, then the NPV of this opportunity is closest to:

A) ($88,000)
B) $88,000
C) $300,000
D) $1,300,000


Answer: B) NPV = -1,000,000 + 250,000/(1.10)^1+ 450,000/(1.10)^2+ 650,000/(1.10)^3= 87,528.17

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) FV = PV/(1+r)^n
B) PV =
C) FV = Cn × (1 + r)n
D) Most investment opportunities have multiple cash flows that occur at different points in time.


Answer: A

An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. What is the NPV of this project if the film maker invests his own money and does not issue the new security? What is the NPV if the film maker issues the new security?

An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%.
What is the NPV of this project if the film maker invests his own money and does not issue the new security? What is the NPV if the film maker issues the new security?

A) $1.7 million; $1.7 million
B) $1.7 million; $2.7 million
C) $2.7 million; $1.7 million
D) $2.7 million; $2.7 million


Answer: D) NPV(no security)= -20+25/ 1.1= 2.7mil; NPV(w/ Security) -10+(25-11)/1.1=2.7mil

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
B) A bond that trades at a premium is said to trade above par.
C) When a coupon-paying bond is trading at a premium, an investor's return from the coupons is diminished by receiving a face value less than the price paid for the bond.
D) Holding fixed the bond's yield to maturity, for a bond not trading at par, the present value of the bond's remaining cash flows changes as the time to maturity decreases.


Answer: A

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Bond prices converge to the bond's face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.
B) As interest rates and bond yields fall, bond prices will rise.
C) Bonds with higher coupon rates are more sensitive to interest rate changes.
D) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.


Answer: C

Assuming the appropriate YTM on the SASE bond is 7.5%, then the price that this bond trades for will be closest to:

Assuming the appropriate YTM on the SASE bond is 7.5%, then the price that this bond trades for will be closest to:

A) $1,045
B) $691
C) $1,000
D) $957


Answer: A)FV= 1000
I= 3.75 (7.5/2)
PMT= 40 (80/2)
N= 30 (15 × 2)
Compute PV= 1044.57

The SASE Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be?

The SASE Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.
How much will each semiannual coupon payment be?

A) $60
B) $40
C) $120
D) $80


Answer: B) Coupon = (coupon rate × face value)/number of coupons per year= (.08 × 1000)/2 = $40

Suppose that in the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market's expected return is 12%. The cost of capital for a project with the same beta as Merck's stock is closest to:

Suppose that in the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market's expected return is 12%.
The cost of capital for a project with the same beta as Merck's stock is closest to:

A) 11.2%
B) 12.8%
C) 12.4%
D) 11.6%


Answer: B) E[R] =Rf+Beta× Risk Premium = .04 + 1.1 × (.12 - .04) = .128

Suppose that in the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market's expected return is 12%. The cost of capital for a project with the same beta as Exxon Mobil's stock is closest to:

Suppose that in the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market's expected return is 12%.
The cost of capital for a project with the same beta as Exxon Mobil's stock is closest to:

A) 11.6%
B) 11.2%
C) 12.8%
D) 7.6%


Answer: B) E[R] =Rf+Beta× Risk Premium = .04 + .9× (.12 - .04) = .112

The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is:

The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is:

A) the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
B) the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.
C) the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.
D) the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.


Answer: C

The firm's unlevered (asset) cost of capital is:

The firm's unlevered (asset) cost of capital is:

A) the weighted average of the equity cost of capital and the debt cost of capital.
B) the weighted average of the levered cost of capital and the equity cost of capital.
C) the debt cost of capital minus the equity cost of capital.
D) the unlevered beta minus the cost of capital.


Answer: A

Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:

Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:

A) 5.25%
B) 6.00%
C) 6.75%
D) 7.50%


Answer: D) ri= rrf+ß(rm- rrf) = .03 + .75(.06) = .075 or 7.5%

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio.
B) Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment.
C) It is common practice to estimate beta based on the historical correlation and volatilities.
D) Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.


Answer: D) Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.

In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

A) Dow Jones Industrial Average
B) Wilshire 5000
C) S&P 500
D) U.S. Treasury Bill


Answer: C

The equity cost of capital for "Meenie" is closest to:

The equity cost of capital for "Meenie" is closest to:

A) 4.50%
B) 7.50%
C) 9.30%
D) 9.75%


Answer: B) rMeenie= 3% + 0.75(9% - 3%) = 7.5%

The equity cost of capital for "Miney" is closest to:

The equity cost of capital for "Miney" is closest to:

A) 6.30%
B) 7.50%
C) 9.30%
D) 9.75%


Answer: C) rMiney= 3% + 1.05(9% - 3%) = 9.3%

Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%. Which firm has the highest cost of equity capital?

Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
Which firm has the highest cost of equity capital?

A) Eenie
B) Meenie
C) Miney
D) Moe


Answer: D) Cost of capital is measured using the CAPM and is a linear function of beta. Therefore, the firm with the highest beta (Moe) has the highest cost of equity capital.

The volatility of the market portfolio is 10%, the expected return on the market is 12%, and the risk-free rate of interest is 4%. The beta for Taggart Transcontinental is closest to:

The volatility of the market portfolio is 10%, the expected return on the market is 12%, and the risk-free rate of interest is 4%.
The beta for Taggart Transcontinental is closest to:

A) 0.75
B) 0.80
C) 1.00
D) 1.10


Answer: C

SASE industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%. The beta for SASE's new project is closest to:

SASE industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%.
The beta for SASE's new project is closest to:

A) 1.25
B) 1.40
C) 0.70
D) 1.75


Answer: B

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Beta measures the sensitivity of a security to market wide risk factors.
B) Volatility measures total risk, while beta measures only systematic risk.
C) The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security.
D) Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market.


Answer: C) The beta is the expected percentage change in the excess return of a security fora 1% change in the excess return of the market portfolio.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Beta differs from volatility.
B) The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate.
C) Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries.
D) If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent unsystematic shocks to the economy.


Answer: D) If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Fluctuations of a stock's returns that are due to firm-specific news are common risks.
B) The volatility in a large portfolio will decline until only the systematic risk remains.
C) When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified.
D) The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk


Answer: A) Fluctuations of a stock's returns that are due to firm-specific news are not common risks.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.
B) Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.
C) The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.
D) Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.


Answer: A) Because investors are risk averse, they will demand a risk premium to hold systematic risk.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Firm specific news is good or bad news about the company itself.
B) Firms are affected by both systematic and firm-specific risk.
C) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.
D) The risk premium for a stock is affected by its idiosyncratic risk.


Answer: D) The risk premium for a stock is affected by its systematic risk

Which of the following types of risk doesn't belong?

Which of the following types of risk doesn't belong?

A) Idiosyncratic risk
B) Undiversifiable risk
C) Market risk
D) Systematic risk


Answer: A

Which of the following types of risk doesn't belong?

Which of the following types of risk doesn't belong?

A) Market risk
B) Unique risk
C) Idiosyncratic risk
D) Unsystematic risk


Answer: A

Which of the following is NOT a systematic risk?

Which of the following is NOT a systematic risk?

A) The risk that oil prices rise, increasing production costs
B) The risk that the Federal Reserve raises interest rates
C) The risk that the economy slows, reducing demand for your firm's products
D) The risk that your new product will not receive regulatory approval


Answer: D

Which of the following is NOT a diversifiable risk?

Which of the following is NOT a diversifiable risk?

A) The risk that oil prices rise, increasing production costs
B) The risk of a product liability lawsuit
C) The risk that the CEO is killed in a plane crash
D) The risk of a key employee being hired away by a competitor


Answer: A

The geometric average annual return on Stock A from 2000 to 2009 is closest to:

The geometric average annual return on Stock A from 2000 to 2009 is closest to:

A) 12.4%
B) 16.7%
C) 13.2%
D) 17.8%


Answer: A) Geometric Average = blank - 1=blank - 1 = 1.124476 - 1 = 0.124476

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The standard deviation is the square root of the variance.
B) Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semi-variance and the expected tail loss.
C) While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk.
D) While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves.


Answer: D) While the variance and the standard deviation both measure the variability of the returns, the standard deviation is easier to interpret because it is in the same units as the returns themselves

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) When an investment is risky, there are different returns it may earn.
B) In finance, the variance of a return is also referred to as its volatility.
C) The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities.
D) The variance is a measure of how "spread out" the distribution of the return is.


Answer: B) In finance, the standard deviation of a return is also referred to as its volatility.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues.
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones.
C) If the firm has no debt then rwacc = the risk-free rate of return.
D) When using the discounted free cash flow model, we forecast the firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.


Answer: C) If the firm has no debt then rwacc= the cost of equity

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The firm's weighted average cost of capital (WACC) denoted rwacc is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt.
B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model.
C) We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.
D) When using the discounted free cash flow model we should use the firm's equity cost of capital.


Answer: D) You would use the firm's weighted average cost of capital

If you want to value a firm but don't want to explicitly forecast its dividends, share repurchases, or its use of debt, what is the simplest model for you to use?

If you want to value a firm but don't want to explicitly forecast its dividends, share repurchases, or its use of debt, what is the simplest model for you to use?

A) Discounted free cash flow model
B) Dividend discount model
C) Enterprise value model
D) Total payout model


Answer: A

If you want to value a firm that has consistent earnings grow, but varies how it pays out these earnings to shareholders between dividends and repurchases, the simplest model for you to use is the:

If you want to value a firm that has consistent earnings grow, but varies how it pays out these earnings to shareholders between dividends and repurchases, the simplest model for you to use is the:

A) enterprise value model.
B) dividend discount model.
C) total payout model.
D) discounted free cash flow model


Answer: C

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the:

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the:

A) enterprise value model.
B) total payout model.
C) dividend discount model.
D) discounted free cash flow model.


Answer: C

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The total payout model allows us to ignore the firm's choice between dividends and share repurchases.
B) By repurchasing shares, the firm increases its share count, which decreases its earnings and dividends on a per-share basis.
C) The total payout model discounts the total payouts that the firm makes to shareholders, which is the total amount spent on both dividends and share repurchases.
D) In the dividend discount model we implicitly assume that any cash paid out to the shareholders takes the form of a dividend


Answer: B) By repurchasing shares, the firm decreases its share count, which increases its earning and dividends on a per-share basis

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor's expectations at the time the stock is purchased.
B) The capital gain is the difference between the expected sale price and the purchase price of the stock.
C) The sum of the dividend yield and the capital gain rate is called the total return of the stock.
D) We divide the capital gain by the expected future stock price to calculate the capital gain rate


Answer: D) The capital gains rate is the capital gain divided by the current stock price

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) We must discount the cash flows from stock based on the equity cost of capital for the stock.
B) The dividend yield is the percentage return the investor expects to earn from the dividend paid by the stock.
C) The firm might pay out cash to its shareholders in the form of a dividend.
D) The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.


Answer: D) The dividend yield is the annual dividend divided by the current price.

You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:

You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:

A) 6.0%
B) 7.5%
C) 4.5%
D) 3.0%


Answer: B) g= retention rate × return on new investment = (3.00-1.50) / 3.00 × 0.15 = 0.075 or 7.5%

Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

A) 3.0% and 7.0% respectively.
B) 3.0% and 10.0% respectively.
C) 4.0% and 6.0% respectively
D) 4.0% and 10.0% respectively


Answer: B) Dividend Yield = $0.75/$25 = .03 or 3% Equity cost of capital = 0.75/25.00 + (26.75 - 25.00)/25.00 = .03 + ..07 = .10 or 10%

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.
B) As firms mature, their growth slows to rates more typical of established companies.
C) The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
D) The simplest forecast for the firm's future dividends states that they will grow at a constant rate, g, forever.


Answer: A) A multistage model should be used

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Estimating dividends, especially for the distant future, is difficult.
B) A firm can only pay out its earnings to investors or reinvest their earnings.
C) Successful young firms often have high initial earnings growth rates.
D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate.


Answer: D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital adjusted by the growth rate.

Which of the following statements is false regarding profitable and unprofitable growth?

Which of the following statements is false regarding profitable and unprofitable growth?

A) If a firm wants to increase its share price, it must cut its dividend and invest more.
B) If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend.
C) A firm can increase its growth rate by retaining more of its earnings.
D) Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.


Answer: A) This will only increase the share price if the reinvested money is invested in positive NPV projects.

Which of the following is NOT a way that a firm can increase its dividend?

Which of the following is NOT a way that a firm can increase its dividend?

A) By increasing its retention rate
B) By decreasing its shares outstanding
C) By increasing its earnings (net income)
D) By increasing its dividend payout rate


Answer: A

Suppose a five-year bond with a 7% coupon rate and semiannual compounding is trading for a price of $951.58. Expressed as an APR with semiannual compounding, this bonds yield to maturity (YTM) is closest to:

Suppose a five-year bond with a 7% coupon rate and semiannual compounding is trading for a price of $951.58. Expressed as an APR with semiannual compounding, this bonds yield to maturity (YTM) is closest to:

A) 7.0%
B) 7.5%
C) 7.8%
D) 8.2%


Answer: D PMT = 35, FV = 1000, PV = -951.58, N = 10, Compute I = 4.099949 × 2 =8.199898%

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The amount of each coupon payment is determined by the coupon rate of the bond.
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
C) The simplest type of bond is a zero-coupon bond.
D) Treasury bills are U.S. government bonds with a maturity of up to one year.


Answer: B

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.
B) The bond certificate indicates the amounts and dates of all payments to be made.
C) The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.
D) Usually the face value of a bond is repaid at maturity


Answer: C

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A) Bonds are a securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
B) By convention the coupon rate is expressed as an effective annual rate.
C) Bonds typically make two types of payments to their holders.
D) The time remaining until the repayment date is known as the term of the bond.


Answer: B

Which of the following statements is correct?

Which of the following statements is correct?

1. Europe has always been much wealthier than Africa.
2. Life expectancies have not changed a great deal in the last 1000 years.
3. The Industrial Revolution initially started in China.
4. Average incomes hardly changed between 1 A.D. and 1000 A.D.


Answer: 4. Average incomes hardly changed between 1 A.D. and 1000 A.D.

Many of the reforms of the 1980s and early 1990s were designed to

Many of the reforms of the 1980s and early 1990s were designed to

1. ensure that a greater share of national income went to workers.
2. increase tax revenue so that social programmes could be funded.
3. introduce competition into markets to lower prices for consumers.
4. make financial markets more robust to avoid a 1930s style depression.


Answer: 3. introduce competition into markets to lower prices for consumers.

The response of many western governments to the oil price spike of the 1970s was to

The response of many western governments to the oil price spike of the 1970s was to

1. lower interest rates.
2. fix exchange rates to stabilise them.
3. borrow to increase government spending.
4. reduce taxes so consumers could continue to spend.


Answer: 3. borrow to increase government spending.

Whose writings provided the intellectual basis for communism as a form of government?

Whose writings provided the intellectual basis for communism as a form of government?

1. Adam Smith.
2. Thomas Malthus.
3. David Ricardo.
4. Karl Marx.


Answer: 4. Karl Marx.

The Industrial Revolution was made possible by

The Industrial Revolution was made possible by

1. vastly improved energy extraction methods such as steam engines.
2. a rapidly expanding population that needed to find work.
3. a shift to democratic government in European nations.
4. the discovery by Europeans of the continent of America.


Answer: 1. vastly improved energy extraction methods such as steam engines.

The consequence of Vasco De Gama rounding the Cape of Good Hope and opening up a sea route from Europe to the East was that

The consequence of Vasco De Gama rounding the Cape of Good Hope and opening up a sea route from Europe to the East was that

1. migration from Europe to the Americas could then take place.
2. Asian consumers could now purchase European spices.
3. goods such as silk and spices became cheaper in Europe.
4. the practice of domesticating animals spread across the world.


Answer: 3. goods such as silk and spices became cheaper in Europe.

During the reforms of the 1980s the New Zealand Government sold off a number of state enterprises. The intention of this was to

During the reforms of the 1980s the New Zealand Government sold off a number of state enterprises. The intention of this was to

1. reduce the number of people that the state employed.
2. broaden the tax base as state owned enterprises don't pay tax.
3. provide goods and services more efficiently to New Zealanders.
4. reduce the risk of a foreign currency crisis.


Answer: 3. provide goods and services more efficiently to New Zealanders.

In 1982, in an attempt to bring inflation under control, the Prime Minister, Robert Muldoon, introduced

In 1982, in an attempt to bring inflation under control, the Prime Minister, Robert Muldoon, introduced

1. the Reserve Bank Act.
2. the "Think Big" projects.
3. a wage/price freeze.
4. restrictions on petrol sales and car usage.


Answer: 3. a wage/price freeze.

Immediately following the First World War, developed countries attempted to

Immediately following the First World War, developed countries attempted to

1. devalue their currencies to boost exports.
2. return to the Gold Standard exchange rate system.
3. adopt the ideas of Keynes and raised government spending to promote employment.
4. introduce a single European currency.


Answer: 2. return to the Gold Standard exchange rate system.