Final Econ
A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should A. lower the price and raise the present value of the corporation's stock. B. lower the price and lower the present value of the corporation's stock. C. raise the price and lower the present value of the corporation's stock. D. raise the price and raise the present value of the corporation's stock
B
Which of the following statements is not correct? A. The invisible hand can remedy all types of market failures. B. Market power can cause markets to be inefficient. C. Externalities can cause markets to be inefficient. D. An invisible hand leads buyers and sellers to an equilibrium that maximizes total surplus.
B
The maximum price that a buyer will pay for a good is called A. equilibrium. B. efficiency. C. willingness to pay. D. consumer surplus.
C
Speculative bubble
Speculative bubble - whenever the price of an asset rises significantly above what appears to be the value.
suppose a bottle of water costs 1.5 euros in france and costs 30 pesos in Mexico. What is the real exchange rate (from perspective of france) if the nom. exchange rate is 1.5 euros: 30 pesos
(1.5/30) X 1.5 = .075. .075/ 30 = .0025.
Which of the following are consistent with the efficient markets hypothesis? Check all that apply. Correct An average person in the market will believe that all stocks are fairly valued. Correct A positive news release about a company will increase the value and stock price for that firm. Correct Changes in stock prices can be accurately predicted by investors.
1,2
Which of the following best explain why the pain of losing $3,000 exceeds the pleasure of winning $3,000 for risk-averse people? Check all that apply. Correct The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar. Correct The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar. Correct The utility function of a risk-averse person exhibits the law of diminishing marginal utility. Correct Risk-averse people are relatively poor and cannot afford to lose any money.
1,3
Using the rule of 70, determine the number of years it will take the economy to double at each growth rate. Growth rate is 4,5,6
18, 14, 12
Which of the following are consistent with the efficient markets hypothesis? Check all that apply. Correct It is worth hiring a financial adviser to find cheap stocks to purchase. Correct The stock market is informationally efficient. Correct Changes in stock prices are impossible to predict.
2,3
Which of the following are consistent with the efficient markets hypothesis? Check all that apply. Correct You should spend several hours a day studying the business section of your local newspaper to determine which stocks to add to your investment portfolio. Correct At the market price, the number of people who believe the stock is overvalued exactly equals the number of people who think the stock is undervalued. Correct Stock markets reflect all available information about the value of stocks.
2,3
Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Correct Place the entirety of her portfolio in bonds Correct Accept a lower average annual rate of return Correct Sell some of her bonds and use the proceeds to purchase stocks Correct Sell some of her stocks and use the proceeds to purchase bonds
2,4
A person may be willing to pay more than the fundamental value of a stock today if he or she believes that someone else will pay even more for it in the near future. When many people purchase stocks based on this reasoning, the stock market can develop: A speculative bubble Moral hazard Informational efficiency
A
Economists typically measure efficiency using A. total surplus. B. profits to firms. C. the price paid by buyers. D. the quantity supplied by sellers.
A
For a risk averse person, A. the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. B. the utility function exhibits the property of increasing marginal utility. C. the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. D. the utility function gets steeper as wealth increases.
A
Diversifun, Inc., an insurance company, recently decided to offer boat insurance. Diversifun was concerned that the most likely boat insurance customers would be the least competent, highest-risk boat captains, because they stand to benefit most from boat insurance coverage. Since Diversifun cannot distinguish perfectly between high-risk and low-risk skippers, it decided to set its boat-insurance premiums a bit higher to account for the foolhardy sea captains. The economic problem in this story is known as: Moral hazard Screening Adverse selection Signaling
Adverse selection
What is economic efficiency and what is socially optimal
An allocation is considered efficient if it maximizes total surplus. May not be in best benefit of everyone. Optimal = maximize utility (happiness)
According to the efficient markets hypothesis, worse-than-expected news about a corporation will A. have no effect on its stock price. B. lower the price of the stock. C. raise the price of the stock. D. change the price of the stock in a random direction
B
If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90. a. TRUE b. FALSE
B
pareto efficient
no way to make everyone better off without harming one person.
What does that financial advisers should act as fiduciaries when advising?
required by law to act in the best interest of the client. Employees typically win over firms. Many firms have had suits brought against them for the menu of financial plans offered to employees.
If NX increases, what happens to savings?
It increases (ceteris paribus)
Why do stocks typically earn a greater rate of return than bonds?
It is safer to hold a bond than stock. Stocks = not always guaranteed money, bonds are most likely to receive back payment. Shareholders take the risk of losing entire investment, yet, stocks can appreciate.
PPP
Purchasing Power Parity. You should expect to buy the same quantity of goods in different places in the world. Real value is same, nominal value could differ.
Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock. a. TRUE b. FALSE
T
Historically, stocks have offered higher rates of return than bonds. a. TRUE b. FALSE
T
Suppose you deposit $200 today into a bank account with a variable interest rate and will receive a payment in one year. True or False: If during the year the interest rate rises, this increases the future value of your investment.
T
True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. True False
T
What is one thing that is guaranteed to happen when the dollar appreciates relative to the British pound?
The pound depreciates in value.
Consumer surplus
amount the buyer is willing to pay - the amount the buyer actually pays for it.
Producer surplus
amount the seller is paid - cost of production
Van and Amy are building their portfolios. Van purchases shares in a mutual fund and pays fees to a manager who actively manages the mutual fund's portfolio. He does so because he believes that the manager can identify inexpensive stocks that will rise in value. Amy is not convinced. She buys shares in an index fund—a type of mutual fund that simply buys all of the stocks in a given stock index rather than actively managing a portfolio. Amy builds her portfolio based on the notion that: Stock analysts can use fundamental analysis to identify undervalued stocks. All stocks are overvalued. The stock market exhibits informational efficiency.
C
Yakov and Ana are building their portfolios. Yakov purchases shares in a mutual fund and pays fees to a manager who actively manages the mutual fund's portfolio. He does so because he believes that the manager can identify inexpensive stocks that will rise in value. Ana is not convinced. She buys shares in an index fund—a type of mutual fund that simply buys all of the stocks in a given stock index rather than actively managing a portfolio. Yakov builds his portfolio on the supposition that: The stock market exhibits informational efficiency. Stock prices follow a random walk. Stock analysts can use fundamental analysis to identify undervalued stocks.
C
An example of normative analysis is studying A. how market forces produce equilibrium. B. income distributions. C. surpluses and shortages. D. whether equilibrium outcomes are socially desirable.
D
By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can A. reduce the standard deviation of his or her portfolio to zero. B. benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. C. eliminate market risk. D. benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
D
If you believe that stock prices follow a random walk, then probably you A. believe that it is a good idea to engage in fundamental analysis. B. do not believe that stock prices reflect all available information. C. do not believe that there is positive relationship between risk and return. D. believe in the validity of the efficient markets hypothesis
D
Which of the following statements is correct? A. Buyers always want to pay more and sellers always want to be paid less. B. Buyers always want to pay less and sellers always want to be paid less. C. Buyers always want to pay more and sellers always want to be paid more. D. Buyers always want to pay less and sellers always want to be paid more.
D
Suppose you will receive a payment of $500 one year from now. True or False: If during the year the interest rate falls, this decreases the present value of your future payment.
F
True or False: Increasing the number of stocks in a portfolio reduces market risk. True False
F
T/F it is important to have a diversified portfolio b/c of the systematic risk that investors face?
F. Diversified portfolios reduce diversifiable risks. One firm may do well when another suffers. Return may be reduced as well.
Consumer or producing surplus or neither? Even though I was willing to pay up to $56 for a used textbook, I bought a used textbook for only $49. I sold a jersey sweater for $37, even though I was willing to go as low as $27 in order to sell it. I sold a used laptop for $100 on eBay last week. This week, someone offered me $37 for it.
consumer, producer, neither
How do we know what is socially optimal?
define utility, have to agree on a function. FInd social optimal through gov. transfers to poorer individuals is to determine who is poor, disabled, etc.
Major factors that determine the interest rate of a bond
how company is doing, years it will be held (term)
How do you typically determine willingness to pay
how much people are willing to pay for goods.
efficient market hypothesis
investment theory that states it is impossible to beat the market because stocks are already accurately priced and show all information. Theoretically impossible to make money from any trading strategy. If true, investors should place all in index funds so that they will earn the same returns as the overall market.
Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,800 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today. At an interest rate of 9% per year, the winner would be better off accepting the ----- , since it has the greater present value.
lump sum.
Real exchange rate =
nom. exchange rate X domestic price / foreign price.
What is the equity premium puzzle
refers to the fact that the average return on stocks outpaces the return on government bonds by an amount that is greater than can be explained by theory. It is supposed to reflect the relative risk of stocks compared to "risk-free" government bonds, but the puzzle arises because this unexpectedly large percentage implies a suspiciously high level of risk aversion among investors.
Why would the real exchange rate not equal 1?
transportation fee, amount of supplies, tariffs, customs, perishable goods. Adds to cost.
Market power
A firm can influence the market price is said to have market power. Since firms with market power produce less output at a higher price than a competitive market would, market power is a source of inefficiency, i.e. an inefficient allocation of resources.
externality
A firm that pollutes imposes a negative externality by harming people who are not market participants. An externality causes market failure because it forces resources to be allocated inefficiently. For resources to be allocated efficiently, the equilibrium output should be lower in order to reflect the costs that pollution exacts on local wildlife and residents.
bond
Basically an IOU between borrower and lender. Longer held bond = higher interest rater because there is a greater risk of default.
If the efficient markets hypothesis is correct, then A. the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. B. stock prices never follow a random walk. C. the stock market is informationally efficient. D. All of the above are correct.
C
When Joe didn't have car insurance, he drove very cautiously, because he knew he would have to pay for any damage to his car. Now that he has car insurance, he tends to speed more, because he knows that even if he gets into an accident, his insurance will cover it. The economic problem in this story is known as: Moral hazard Signaling Adverse selection Screening
Moral
NX = NCO
Net exports = net capital outflow. NCO is the purchase of foreign assets minus the purchase of domestic assets by foreigners.
Why did Milton Friedman advocate for insider trading?
process of trading a stock based upon confidential information. If hidden, public can't make efficient decisions and efficient allocation of resources
Nominal exchange rate
rate at which a person can trade the currency of one country for the currency of another.
