Question 1

Which of the following is true?

Accepted Answer

A) The P/E ratio provides information on the price of a stock relative to its current earnings. 
B) The P/E ratio provides information on the price of a stock relative to its future earnings. 
C) The P/E ratio provides information on the price of a stock relative to its past earnings. 
D) The P/E ratio average from 1950-2008 was 26. 
A) The P/E ratio provides information on the price of a stock relative to its current earnings. 
B) The P/E ratio provides information on the price of a stock relative to its future earnings. 
C) The P/E ratio provides information on the price of a stock relative to its past earnings. 
D) The P/E ratio average from 1950-2008 was 26.

Question 2

If the interest rate were 10 percent, how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

Accepted Answer

A) $2 
B) $10 
C) $20 
D) $100 
A) $2 
B) $10 
C) $20 
D) $100

Question 3

Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?

Accepted Answer

A) Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market. 
B) No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks. 
C) Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market. 
D) No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market. 
A) Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market. 
B) No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks. 
C) Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market. 
D) No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market.

Question 4

Which of the following is an implication of the random walk theory?

Accepted Answer

A) Experts will be able to make money by picking and choosing the best stocks. 
B) There is a systematic pattern to the movement of prices in the stock market. 
C) Stock market investors can expect to earn a fairly steady real rate of return of about 7 percent annually. 
D) Even experts will be unable to predict the future movement of stock prices with any degree of accuracy. 
A) Experts will be able to make money by picking and choosing the best stocks. 
B) There is a systematic pattern to the movement of prices in the stock market. 
C) Stock market investors can expect to earn a fairly steady real rate of return of about 7 percent annually. 
D) Even experts will be unable to predict the future movement of stock prices with any degree of accuracy.

Question 5

The random walk theory implies that stock prices

Accepted Answer

A) go down, then up, and then down again. 
B) follow systematic trends. 
C) can be forecast accurately by experts who are knowledgeable about how the stock market works. 
D) will change as the result of unexpected factors that are virtually impossible to forecast accurately. 
A) go down, then up, and then down again. 
B) follow systematic trends. 
C) can be forecast accurately by experts who are knowledgeable about how the stock market works. 
D) will change as the result of unexpected factors that are virtually impossible to forecast accurately.

Question 6

The stock price of a firm is primarily a reflection of the

Accepted Answer

A) firm's current net earnings per share. 
B) firm's expected future net earnings per share. 
C) discounted value of the firm's expected future net earnings per share. 
D) firm's current net earnings per share multiplied by the interest rate. 
E) book value of the firm. 
A) firm's current net earnings per share. 
B) firm's expected future net earnings per share. 
C) discounted value of the firm's expected future net earnings per share. 
D) firm's current net earnings per share multiplied by the interest rate. 
E) book value of the firm.

Question 7

An indexed equity mutual fund

Accepted Answer

A) is directly tied to either the consumer price index or the GDP deflator. 
B) is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C) merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D) will have high operating costs because these funds engage in a substantial amount of stock trading. 
A) is directly tied to either the consumer price index or the GDP deflator. 
B) is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. 
C) merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. 
D) will have high operating costs because these funds engage in a substantial amount of stock trading.

Question 8

The present value of $1 million to be received in the future will

Accepted Answer

A) increase if the interest rate rises. 
B) increase if the payment is received at a more distant time in the future. 
C) be greater than $1 million. 
D) increase if the interest rate were to fall from 8 percent to 4 percent. 
A) increase if the interest rate rises. 
B) increase if the payment is received at a more distant time in the future. 
C) be greater than $1 million. 
D) increase if the interest rate were to fall from 8 percent to 4 percent.

Question 9

Which of the following is true?

Accepted Answer

A) Most stockholders own stock because they want to participate in the daily decision making of the firms that they own. 
B) The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C) The potential losses of shareholders are limited to the amount of their investment. 
D) Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits. 
A) Most stockholders own stock because they want to participate in the daily decision making of the firms that they own. 
B) The shareholders of a large well-established firm can be reasonably sure that they will earn a real rate of return of about 7 percent in the future. 
C) The potential losses of shareholders are limited to the amount of their investment. 
D) Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits.

Question 10

The theory that stock prices reflect all available information and that the future movement of stock prices is unpredictable is called the

Accepted Answer

A) random walk theory. 
B) inefficient market theory. 
C) technical analysis theory. 
D) charting theory. 
A) random walk theory. 
B) inefficient market theory. 
C) technical analysis theory. 
D) charting theory.

Question 11

Which of the following would be most likely to cause the price/earnings ratio of stocks to rise?

Accepted Answer

A) the expectation of a recession in the near future 
B) the expectation of inflation in the near future 
C) higher interest rates 
D) lower interest rates 
A) the expectation of a recession in the near future 
B) the expectation of inflation in the near future 
C) higher interest rates 
D) lower interest rates

Question 12

If the interest rate were 12.5 percent, how much would people be willing to pay for a stock that was certain to yield a $20 per share stream of net earnings continuously in the future?

Accepted Answer

A) $20 
B) $25 
C) $160 
D) $250 
A) $20 
B) $25 
C) $160 
D) $250

Question 13

To the extent that current profits are directly related to future profits, a high price/earnings ratio would indicate that stocks are

Accepted Answer

A) inexpensive. 
B) expensive. 
C) going to increase in value in the future. 
D) most likely to fall in value if interest rates decline. 
A) inexpensive. 
B) expensive. 
C) going to increase in value in the future. 
D) most likely to fall in value if interest rates decline.

Question 14

Jane is a 22-year-old college graduate. She has just started working at a job that pays her $75,000 per year. Since you have had an economics course, Jane asks you for advice on where to invest the money she is saving for her retirement. What do you recommend?

Accepted Answer

History indicates that the stock market

Question 15

Which of the following represents a method for a firm to obtain funds for growth and product development?

Accepted Answer

A) use of retained earnings 
B) borrowing money 
C) selling stock 
D) all of the above 
A) use of retained earnings 
B) borrowing money 
C) selling stock 
D) all of the above

Question 16

Which of the following types of mutual funds best describes one in which an "expert" seeks to pick the stock holdings in a way that maximizes the rate of return?

Accepted Answer

A) indexed equity mutual fund 
B) managed equity mutual fund 
C) supervised equity mutual fund 
D) marked equity mutual fund 
A) indexed equity mutual fund 
B) managed equity mutual fund 
C) supervised equity mutual fund 
D) marked equity mutual fund

Question 17

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.

Accepted Answer

A) 10 percent 
B) 20 percent 
C) 50 percent 
D) 80 percent 
A) 10 percent 
B) 20 percent 
C) 50 percent 
D) 80 percent

Question 18

Which of the following is true?

Accepted Answer

A) The stock market provides investors with an opportunity to own a fractional share of the firm's future profits. 
B) A new stock issue is often an excellent way for a firm to raise funds for future expansion. 
C) Changes in stock prices provide information about what investors think of various business decisions. 
D) All of the above are true. 
A) The stock market provides investors with an opportunity to own a fractional share of the firm's future profits. 
B) A new stock issue is often an excellent way for a firm to raise funds for future expansion. 
C) Changes in stock prices provide information about what investors think of various business decisions. 
D) All of the above are true.

Question 19

If an investor's primary stock holding is currently Exxon Mobil, the purchase of which of the following stocks would provide the investor with the largest reduction in risk?

Accepted Answer

A) BP / Amoco. 
B) Shell Oil Corporation. 
C) General Motors. 
D) Texaco. 
A) BP / Amoco. 
B) Shell Oil Corporation. 
C) General Motors. 
D) Texaco.

Question 20

Which of the following would tend to increase the value of a future stream of income?

Accepted Answer

A) an increase in the rate of inflation 
B) an increase in the interest rate 
C) a reduction in the interest rate 
D) a reduction in the size of the expected future income 
A) an increase in the rate of inflation 
B) an increase in the interest rate 
C) a reduction in the interest rate 
D) a reduction in the size of the expected future income

Exam 18: Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Which of the following is true?

If the interest rate were 10 percent, how much would people be willing to pay for a stock that was certain to yield a $2 per share stream of net earnings continuously in the future?

Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?

Which of the following is an implication of the random walk theory?

The random walk theory implies that stock prices

The stock price of a firm is primarily a reflection of the

An indexed equity mutual fund

The present value of $1 million to be received in the future will

Which of the following is true?

The theory that stock prices reflect all available information and that the future movement of stock prices is unpredictable is called the

Which of the following would be most likely to cause the price/earnings ratio of stocks to rise?

If the interest rate were 12.5 percent, how much would people be willing to pay for a stock that was certain to yield a $20 per share stream of net earnings continuously in the future?

To the extent that current profits are directly related to future profits, a high price/earnings ratio would indicate that stocks are

Jane is a 22-year-old college graduate. She has just started working at a job that pays her $75,000 per year. Since you have had an economics course, Jane asks you for advice on where to invest the money she is saving for her retirement. What do you recommend?

Which of the following represents a method for a firm to obtain funds for growth and product development?

Which of the following types of mutual funds best describes one in which an "expert" seeks to pick the stock holdings in a way that maximizes the rate of return?

Currently, about ____ of U.S. households own stock, either directly or through an equity mutual fund.

Which of the following is true?

If an investor's primary stock holding is currently Exxon Mobil, the purchase of which of the following stocks would provide the investor with the largest reduction in risk?

Which of the following would tend to increase the value of a future stream of income?

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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