Question 1

Which of the following statements is true?

Accepted Answer

A) Interest rates charged to well-known corporations are higher than rates charged to individuals because corporations can afford it. 
B) If people expect higher rates of inflation, the market interest rate will decrease because fewer people will borrow. 
C) Interest rates in unstable countries are lower than rates in stable countries. 
D) The risk cost of doing business in a high-crime area is greater and the cost of borrowing is, therefore, greater there. 
E) The lower the tax rate, the greater the cost of borrowing. 
A) Interest rates charged to well-known corporations are higher than rates charged to individuals because corporations can afford it. 
B) If people expect higher rates of inflation, the market interest rate will decrease because fewer people will borrow. 
C) Interest rates in unstable countries are lower than rates in stable countries. 
D) The risk cost of doing business in a high-crime area is greater and the cost of borrowing is, therefore, greater there. 
E) The lower the tax rate, the greater the cost of borrowing.

Question 2

If we assume that a unit of capital will last indefinitely, the marginal rate of return on investment equals the marginal revenue product of capital divided by its marginal resource cost.

Accepted Answer

A) True 
 B)False

Question 3

If the interest rate increases from 6 percent to 10 percent per year, each $100 saved will earn

Accepted Answer

A) $4 per year more than before 
B) $6 per year more than before 
C) $10 per year more than before 
D) $16 per year more than before 
E) $60 per year more than before 
A) $4 per year more than before 
B) $6 per year more than before 
C) $10 per year more than before 
D) $16 per year more than before 
E) $60 per year more than before

Question 4

If the discount rate is 5 percent, the present value of annual $100, 000 payments in perpetuity (i.e., continued indefinitely into the future)is

Accepted Answer

A) $2, 000, 000 
B) $1, 246, 296 
C) $1, 000, 000 
D) $976, 463 
E) infinite 
A) $2, 000, 000 
B) $1, 246, 296 
C) $1, 000, 000 
D) $976, 463 
E) infinite

Question 5

Exhibit 13-9   In the market for loanable funds depicted in Exhibit 13-9, what is the equilibrium amount of loanable funds exchanged?

Accepted Answer

A) $4 million 
B) $5 million 
C) $6 million 
D) $7 million 
E) $8 million 
A) $4 million 
B) $5 million 
C) $6 million 
D) $7 million 
E) $8 million

Question 6

If you will receive $3, 000 three years from today and the discount rate is 7 percent, the present value of the $3, 000 is

Accepted Answer

A) $2, 779 
B) $3, 770 
C) $1, 658 
D) $1, 962 
E) $2, 449 
A) $2, 779 
B) $3, 770 
C) $1, 658 
D) $1, 962 
E) $2, 449

Question 7

If you hold a bond at a time when market interest rates are increasing, you will find that the bond's value has

Accepted Answer

A) remained the same since the interest payment remains constant 
B) increased 
C) increased only if the market interest rate exceeds the interest rate payable on the bond 
D) declined because you will receive a lower price when you sell the bond 
E) increased only if the interest payable on the bond exceeds the market interest rate 
A) remained the same since the interest payment remains constant 
B) increased 
C) increased only if the market interest rate exceeds the interest rate payable on the bond 
D) declined because you will receive a lower price when you sell the bond 
E) increased only if the interest payable on the bond exceeds the market interest rate

Question 8

The present value of receiving M dollars in year t when the prevailing interest rate is i is equal to

Accepted Answer

A) M - it 
B) M ´ (1 - i)t 
C) M/(1 + i)t 
D) M ´ it 
E) M/it 
A) M - it 
B) M ´ (1 - i)t 
C) M/(1 + i)t 
D) M ´ it 
E) M/it

Question 9

A payment of $105 next year can be more valuable than a payment of $100 now.

Accepted Answer

A) True 
 B)False

Question 10

If a firm can borrow or lend at a 10 percent annual interest rate, it will

Accepted Answer

A) buy all units of capital with a marginal rate of return above 10 percent 
B) buy all units of capital with an average rate of return above 10 percent 
C) buy all units of capital with a marginal rate of return below 10 percent 
D) buy all units of capital with an average rate of return below 10 percent 
E) select only the unit of capital with the highest marginal rate of return, assuming it is above 10 percent 
A) buy all units of capital with a marginal rate of return above 10 percent 
B) buy all units of capital with an average rate of return above 10 percent 
C) buy all units of capital with a marginal rate of return below 10 percent 
D) buy all units of capital with an average rate of return below 10 percent 
E) select only the unit of capital with the highest marginal rate of return, assuming it is above 10 percent

Question 11

A perpetuity is an annuity with a fixed term.

Accepted Answer

A) True 
 B)False

Question 12

As the interest rate increases, the opportunity cost of

Accepted Answer

A) both c and e are correct 
B) past consumption decreases 
C) saving increases 
D) current consumption increases 
E) borrowing decreases 
A) both c and e are correct 
B) past consumption decreases 
C) saving increases 
D) current consumption increases 
E) borrowing decreases

Question 13

Goods and activities typically are more highly valued the sooner they can be enjoyed, other things constant,

Accepted Answer

A) only when interest rates are positive 
B) because interest rates are positive 
C) only when people save 
D) because people save 
E) because people have positive rates of time preference 
A) only when interest rates are positive 
B) because interest rates are positive 
C) only when people save 
D) because people save 
E) because people have positive rates of time preference

Question 14

Which of the following does not reflect a positive rate of time preference?

Accepted Answer

A) Concert-goers yell and scream when the stage is still dark an hour after the concert was scheduled to start. 
B) Borrowers have to pay interest on loans. 
C) A dieter, allowed three ounces of butter per day, spends the whole allotment on her toast at breakfast. 
D) A dieter, allowed three ounces of butter per day, promises himself some new clothes if he can break the habit of spending the whole allotment on his toast at breakfast. 
E) A student stays up late every night for a week to finish her term paper two months before it is due. 
A) Concert-goers yell and scream when the stage is still dark an hour after the concert was scheduled to start. 
B) Borrowers have to pay interest on loans. 
C) A dieter, allowed three ounces of butter per day, spends the whole allotment on her toast at breakfast. 
D) A dieter, allowed three ounces of butter per day, promises himself some new clothes if he can break the habit of spending the whole allotment on his toast at breakfast. 
E) A student stays up late every night for a week to finish her term paper two months before it is due.

Question 15

If financial intermediaries charge a higher rate of interest to lenders than they pay to borrowers, then

Accepted Answer

A) investing with borrowed funds involves a higher opportunity cost than investing with savings 
B) investing with saving involves a higher opportunity cost than investing with borrowed funds 
C) a firm is charged less interest to borrow than it can earn on savings 
D) the opportunity cost of investing with borrowed funds equals the opportunity cost of investing with savings 
E) a firm does not consider the market rate of interest when it makes investment decisions 
A) investing with borrowed funds involves a higher opportunity cost than investing with savings 
B) investing with saving involves a higher opportunity cost than investing with borrowed funds 
C) a firm is charged less interest to borrow than it can earn on savings 
D) the opportunity cost of investing with borrowed funds equals the opportunity cost of investing with savings 
E) a firm does not consider the market rate of interest when it makes investment decisions

Question 16

Administrative costs make small loans less profitable than large ones, other things equal.

Accepted Answer

A) True 
 B)False

Question 17

If the market interest rate is 5 percent, the opportunity cost of $100 worth of present consumption

Accepted Answer

A) is $105 today 
B) is $105 next year 
C) is $5 today 
D) is $5 next year 
E) cannot be determined unless we know the consumer's rate of time preference 
A) is $105 today 
B) is $105 next year 
C) is $5 today 
D) is $5 next year 
E) cannot be determined unless we know the consumer's rate of time preference

Question 18

Exhibit 13-7   In Exhibit 13-7, if the interest rate is 8 percent, investment will equal approximately

Accepted Answer

A) $1, 500, 000 
B) $500, 000 
C) $1, 000, 000 
D) $950, 000 
E) $1, 250, 000 
A) $1, 500, 000 
B) $500, 000 
C) $1, 000, 000 
D) $950, 000 
E) $1, 250, 000

Question 19

There is an inverse relationship between the present value of a future amount and the interest rate used for discounting.

Accepted Answer

A) True 
 B)False

Question 20

Suppose an investment will yield $1, 000 after one year and $2, 000 after two years.What is the present value of this investment if the discount rate is 8 percent?

Accepted Answer

A) $2, 479.34 
B) $2, 640.60 
C) $2, 727.27 
D) $3, 000 
E) $3, 520 
A) $2, 479.34 
B) $2, 640.60 
C) $2, 727.27 
D) $3, 000 
E) $3, 520

Exam 13: Capital, Interest, and Corporate Finance

Which of the following statements is true?

If we assume that a unit of capital will last indefinitely, the marginal rate of return on investment equals the marginal revenue product of capital divided by its marginal resource cost.

If the interest rate increases from 6 percent to 10 percent per year, each $100 saved will earn

If the discount rate is 5 percent, the present value of annual $100, 000 payments in perpetuity (i.e., continued indefinitely into the future)is

Exhibit 13-9 In the market for loanable funds depicted in Exhibit 13-9, what is the equilibrium amount of loanable funds exchanged?

If you will receive $3, 000 three years from today and the discount rate is 7 percent, the present value of the $3, 000 is

If you hold a bond at a time when market interest rates are increasing, you will find that the bond's value has

The present value of receiving M dollars in year t when the prevailing interest rate is i is equal to

A payment of $105 next year can be more valuable than a payment of $100 now.

If a firm can borrow or lend at a 10 percent annual interest rate, it will

A perpetuity is an annuity with a fixed term.

As the interest rate increases, the opportunity cost of

Goods and activities typically are more highly valued the sooner they can be enjoyed, other things constant,

Which of the following does not reflect a positive rate of time preference?

If financial intermediaries charge a higher rate of interest to lenders than they pay to borrowers, then

Administrative costs make small loans less profitable than large ones, other things equal.

If the market interest rate is 5 percent, the opportunity cost of $100 worth of present consumption

Exhibit 13-7 In Exhibit 13-7, if the interest rate is 8 percent, investment will equal approximately

There is an inverse relationship between the present value of a future amount and the interest rate used for discounting.

Suppose an investment will yield $1, 000 after one year and $2, 000 after two years.What is the present value of this investment if the discount rate is 8 percent?

The Art and Science of Economic Analysis

Appendix--Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Appendix--Price Elasticity and Tax Incidence

Consumer Choice and Demand

Appendix--Indifference Curves and Utility Maximization

Production and Cost in the Firm

A--Perfect Competition

B--Perfect Competition

A--Monopoly

B--Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Transaction Costs, Imperfect Information, and Behavioral Economics

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Externalities and the Environment

Income Distribution and Poverty

International Trade

International Finance

Economic Development

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