LC 9 & LC 10

All else equal, if consumer preferences changed so that they generally decided to borrow more, what would occur?

Demand in the market for loanable funds would increase, and the interest rate would rise.

____________ investment increases the standard of living and the rate of economic growth.

Higher

Pt 2:Which of the following statements is (are) TRUE? I. The efficient market hypothesis states that it is difficult for a mutual fund manager to beat the market. II. The efficient market hypothesis implies that market prices are always right. III. If the efficient market hypothesis is false, then the only way to consistently outperform the market is to use insider information.

I only

Interest rates and bond prices have a ___________ relationship.

negative

In order to counteract the decrease in investment demand during a recession, the government sometimes offers a:

temporary investment tax credit.

If the S&P 500 generally offers a higher return on investment than corporate bonds:

the S&P 500 must have higher risk than corporate bonds.

Treasury securities are particularly desirable for investors because:

the U.S. government is unlikely to fail to make a payment.

Miriam notices that the stock price of a particular stock in her portfolio is increasing relative to other firms' stock prices. The increasing stock price signals that:

the firm is making good investments for future profits.

The rule of 70 states that if the annual rate of return on investments is x%, then the:

value of the investment will double in 70 ÷ x years. - This is just an approximation, but the key concept is that when compounded, small differences in investment returns can have a large effect.

Pt 2: Financial intermediation may fail if something causes:

a reduction in the supply of savings.

Which event would cause the equilibrium interest rate in the market for loanable funds to increase?

a rightward shift in the demand for loanable funds

A certificate of ownership in a corporation is called:

a share of stock.

An investor invests in a mutual fund that has high management fees. In which type of fund is he investing?

active fund

Stocks:

are a means of raising capital for new investment.

Which condition could break the bridge between savers and borrowers?

bank failures and panics

All else equal, _____ interest rates usually result in more _____.

higher; savings

All else equal, higher _____ rates usually result in _____ savings.

interest; more

When General Motors decides to purchase a new assembly line in order to produce a new line of cars, this activity can be BEST categorized as:

investment.

Systematic problems in the banking system (evidenced by massive bank failures, for example) usually lead to ____________ economic crises.

large-scale

Technical analysis is a field of study that:

looks for patterns in stock and asset prices.

A mutual fund pools _____ from many customers and invests it in many securities in exchange for a management fee.

money

By ________ during the working years and dissaving during the retirement years, workers smooth their consumption.

saving

The income that is not spent on consumption goods is:

savings

______-_______ U.S. government securities tend to be the safest assets.

short-term

Megan has loaded historical stock prices for about 100 blue chip stocks into Excel. She is now analyzing the data for trends and patterns. What type of analysis is she conducting?

technical analysis

The ratio of debt to equity is:

the leverage ratio.

Suppose there are 200 stock market investors trying to predict whether the market will go up and down, and each year exactly half of them guess right. How many years will it take until fewer than 10 investors have been right every year?

5 200 × (0.5)5 = 200 × 0.03125 = 6.25.

Suppose there are 200 stock market investors trying to predict whether the market will go up or down, and each year exactly half of them guess right. How many of these investors, on average, will be right two years in a row?

50 [200 × (0.5)2 = 200 × 0.25 = 50]

One study looked at _____ strategies of technical analysis and found that none of them consistently beat the market over time.

7,846

All else equal, if consumer preferences changed so that they generally decided to borrow less, what would occur?

Demand in the market for loanable funds would decrease, and the interest rate would fall.

Which of the following statements is (are) TRUE? I. The Dow is an example of a stock index. II. The rule of 70 states that if the annual rate of return of an investment is x%, it will take (70 ÷ x) years for the value of the investment to triple. III. When investing, one should avoid investments and mutual funds with small fees.

I only The Dow is a stock index.

If a financial advisor tells you to buy stock in company Z, why should you be wary of this advice?

If buying stock in company Z is a true profit opportunity, other investors probably know that as well, so the price has probably already adjusted.

What can be concluded from the efficient market hypothesis?

Insider information is the only way to systematically outperform the market. - This is because the price already reflects all publicly available information.

___________ is the purchase of new capital goods.

Investment

Ricardo invests in a passive mutual fund. What can he expect?

It mimics a broad stock market index.

__________ can work in a firm's favor, because it takes only small increases in asset prices to lead to tremendous profits.

Leverage

A ____ _____ occurs when an investment bank no longer has enough operating funds and is forced to sell off assets quickly.

fire sale

Borrowing plays a valuable role in the economy, because:

the ability to borrow greatly increases the ability to invest.

If the efficient market hypothesis holds, and an investor is systematically outperforming the market, he or she must be using:

inside information.

When a firm's stock price is increasing relative to other firms' stocks, the increasing stock price signals that:

the firm is making good investments for future profits.

The desire to have goods and services sooner rather than later is called:

time preference

Individuals want to _____ over time.

smooth consumption

Suppose there are 200 stock market investors trying to predict whether the market will go up and down, and each year exactly half of them guess right. Approximately how many of these investors, on average, will be right four years in a row?

13 200 × (0.5)4 = 200 × 0.0625 ≅ 12.5.

Suppose there are 500 stock market investors trying to predict whether the market will go up and down, and each year exactly half of them guess right. Approximately how many of these investors, on average, will be right seven years in a row?

4 people 500 × (0.5)7 = 500 × 0.008 ≅ 4.

An inverse relationship occurring in bond markets means that when the price of a zero-coupon bond with a face value of $1,000 falls from $952 to $935, interest rates on other assets with equal risk:

rise from 5 percent to 7 percent.

When a firm's stock price is increasing, particularly relative to other firms' stock prices, it is an indication that the firm is ____ ____ and that it is making smart investments for future profits.

run well

Which statement is TRUE?

When interest rates rise, bond prices fall.

A ceiling on interest rates can:

create a shortage of savings.

All else equal, if consumers decide to borrow more, the:

demand curve in the market for loanable funds will shift to the right.

Increased government borrowing, shifts the _____ curve in the market for loanable funds to the right, causing the equilibrium interest rate to _____.

demand; rise

The Standard and Poor's 500 (S&P 500) indicates the:

prices of 500 stocks. It is a much broader index than the Dow and a better indicator of the market as a whole.

Suppose Ben and Jerry both invest $1,000 in mutual funds that offer 7.5% annual rates of return, but Ben pays 0.5% in fees annually while Jerry pays 1.9% in fees. After 50 years, Ben's investment will be worth approximately _____ more than Jerry's according to the rule of 70.

$16,000 Ben's investment grows at 7% per year, which means it doubles every 10 years, or 5 times in 50 years and grows to $32,000. Jerry's investment grows at 5.6%, which means it doubles every 12.5 years, or 4 times in 50 years and grows to only $16,000.

____________ are the suppliers in the market for loanable funds.

Savers

How can a speculative bubble hurt an economy after the collapse of the bubble?

Some workers may have to move from one sector to another because they lose their jobs.

The economy is experiencing a speculative bubble. Which of the following could be hurt after the collapse of this bubble?

Some workers may have to move from one sector to another because they lose their jobs.

Which of the following statements is TRUE?

Stocks do not pay a fixed rate of return.

Channing invests in a mutual fund in which a manager actively chooses the stock in the fund. In which type of fund is he investing?

active fund

Price ceiling

A legal maximum on the price at which a good can be sold

Price floor

A legal minimum on the price at which a good can be sold

Channing invests in a mutual fund that has high management fees. In which type of fund is he investing?

active fund

Financial intermediation may fail if any of the following occur except:

an increase in equilibrium interest rates.

The prices of traded assets, such as stocks and bonds, reflect all publicly available information. Unless an investor is trading on inside information, they will not systematically outperform the market as a whole over time.

efficient markets hypothesis

If the interest rates offered on savings accounts increases from 5 percent to 10 percent, then the price of an equally risky one-year maturity zero-coupon bond with a face value of $1,000 will:

fall from $952 to $909.

Clarissa is a firm believer in the investment strategy called buy and hold. When she sees the prices of some of her stocks begin to fall, Clarissa:

holds on to those stocks regardless of what happens in the short run.

Which condition would NOT lead financial intermediation to fail?

insufficient usury (the illegal action or practice of lending money at unreasonably high rates of interest) laws

In comparison to a low-risk company, if a risky company wishes to borrow money, it:

must promise a higher rate of interest because lenders demand compensation for default risk.

____ __ return for a zero-coupon bond = [(FV − price) ÷ price] × 100.

rate of