Q: You invest $4,545 at a 10% annual interest rate. What is the value of your investment after two years?

$$4,545 \times (1 + 0.10)^2$ = 4,545 \times 1.21 = 5,499.45$$

Question 1

In macroeconomics, what is the primary difference between economic investment and financial investment?

Accepted Answer

Economic investment involves devoting current resources to increase future output, while financial investment involves purchasing financial assets.

Question 2

Which equation represents the calculation of GDP in a closed economy?

Accepted Answer

$$Y = C + I + G$$

Question 3

In a closed economy, what does the equation $$Y = C + I + G$$ imply about investment?

Accepted Answer

Investment equals total output minus consumption and government spending.

Question 4

How is national savings ($$S) $$defined in a closed economy?

Accepted Answer

$$S = Y - C - G$$

Question 5

Which formula correctly breaks national savings into private and public savings?

Accepted Answer

$$S = (Y - T - C) + (T - G)$$

Question 6

If the government’s tax revenue exceeds its spending, what is the government running?

Accepted Answer

A budget surplus

Question 7

In an open economy, which equation represents net capital inflow ($$NCI$$)?

Accepted Answer

$$NCI = Imports - Exports$$

Question 8

What is the relationship between national savings, net capital inflow, and investment in an open economy?

Accepted Answer

$$Investment = National\ Savings + Net\ Capital\ Inflow$$

Question 9

Which scenario would cause the demand for loanable funds to increase, leading to a higher equilibrium interest rate?

Accepted Answer

An increase in available technology

Question 10

What effect does a government budget deficit have on the supply of loanable funds?

Accepted Answer

It decreases the supply of loanable funds.

Question 11

Which of the following is a characteristic of bonds as financial securities?

Accepted Answer

They promise to repay a fixed amount of funds.

Question 12

What is the main advantage of diversification in investment?

Accepted Answer

It reduces risk by replacing a single large risk with smaller, unrelated risks.

Question 13

Which formula is used to calculate the future value ($$FV) of an $$investment?

Accepted Answer

$$FV = PV 	imes (1 + r)^n$$

Question 14

You invest $4,545 at a 10% annual interest rate. What is the value of your investment after two years?

Accepted Answer

$$4,545 	imes (1 + 0.10)^2$ = 4,545 	imes 1.21 = 5,499.45$$

Question 15

Which formula is best used for discounting a future sum of money to its present value ($$PV$$)?

Accepted Answer

$$PV = FV / (1 + r)^n$$

Question 16

A stock currently pays a dividend of $1 per share. Dividends are expected to increase at a rate of 5% per year, while the discount rate is 8%. What is the current price of the stock?

Accepted Answer

$$\frac{1}{0.08 - 0.05} = \frac{1}{0.03} = 33.33$$

Question 17

Which type of risk can be reduced through diversification?

Accepted Answer

Firm-specific risk

Question 18

According to the Efficient Market Hypothesis, what do current asset prices reflect?

Accepted Answer

All publicly available information about its value

Question 19

If you want to have $12,000 in two years and can earn 10% annual interest, how much do you need to invest today?

Accepted Answer

$$PV = \frac{12,000}{(1 + 0.10)^2$} = \frac{12,000}{1.21} = 9,917.36$$

Credit Markets: Investment, Savings, and the Financial System

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