Suppose you read that General Electric announces that it will increase its dividend payment. Under the classical theory of asset prices, which of the answers that follows best explains how this news might affect GE's stock price?

Question 7 options:

A)	The stock price will increase because increased dividends signal increased expected earnings.

B)	The stock price will increase because the firm is using its cash to reward investors.

C)	The stock price will fall because the increase in dividends signals reduced expected earnings.

D)	The news won't have any effect because dividends are not related to stock prices.

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Question 8 (2 points)

Which of the following assets is the least liquid?

Question 8 options:

A)

a car

B)	a checking account

C)	a savings account

D)	a U.S. Treasury bond

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Question 9 (2 points)

When a firm issues bonds instead of stocks it is lessening the problem of ________ because bonds ________.

Question 9 options:

A)	adverse selection; pay a given amount as long as the firm does not default

B)	moral hazard; pay dividends depending on the profits the firm makes

C)	inflation; are indexed to inflation

D)	uncertainty; have less moral hazard

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Question 10 (2 points)

Which of the following statements about the link between the savings rate and the financial system is true?

Question 10 options:

A)	A low savings rate and an underdeveloped financial system will create economic growth.

B)	A high savings rate and a strong financial system can create economic growth.

C)	A high savings rate and an underdeveloped financial system will create economic growth.

D)	All of the answers are correct.

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Question 11 (2 points)

Rumors about a huge budget deficit and the impossibility of the government being able to raise taxes will _______ the country's sovereign debt's risk of default, making it _____ to issue (i.e., sell) government bonds.

Question 11 options:

A)	increase; easier

B)	increase; more difficult

C)	decrease; more difficult

D)	decrease; easier

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Question 12 (2 points)

What is the present value of the following income stream: $1050 paid in one year and $1102.50 paid in 2 years, assuming the interest rate is 5 percent?

Question 12 options:

A)

$2152.50

B)

$2000.00

C)

$1957.50

D)

$2050.00