Question 1

Exhibit 30-3
  
-Refer to Exhibit 30-3.The real interest rate in year 3 is

Accepted Answer

A)  5 percent. 
B)  -5 percent. 
C)  0 percent. 
D)  -10 percent. 
E)  10 percent. 
A)  5 percent. 
B)  -5 percent. 
C)  0 percent. 
D)  -10 percent. 
E)  10 percent.

Question 2

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate)is expected by both suppliers and demanders in the loanable funds market,then

Accepted Answer

A)  the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward. 
B)  the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward. 
C)  both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward. 
D)  both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward. 
A)  the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward. 
B)  the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward. 
C)  both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward. 
D)  both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward.

Question 3

If the price for loanable funds is greater than the return on capital,then firms will

Accepted Answer

A)  borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises. 
B)  borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls. 
C)  not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall. 
D)  not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise. 
A)  borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises. 
B)  borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls. 
C)  not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall. 
D)  not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

Question 4

As interest rates decrease,present values decrease and firms will purchase more capital goods.

Accepted Answer

A) True 
 B)False

Question 5

Suppose you borrow $1,000 today with the promise to pay back $1,100 one year from today.Then the interest rate is __________,and the interest is __________.

Accepted Answer

A)  1 percent; $60 
B)  10 percent; $1,100 
C)  5 percent; $100 
D)  $100; 10 percent 
E)  10 percent; $100 
A)  1 percent; $60 
B)  10 percent; $1,100 
C)  5 percent; $100 
D)  $100; 10 percent 
E)  10 percent; $100

Question 6

If a firm is incurring a loss,the loss is a signal that

Accepted Answer

A)  the firm is not a monopolist. 
B)  the firm has never enjoyed profits. 
C)  consumers would rather have some of the resources used by the loss maker be used to produce other goods. 
D)  the government has withdrawn its "protection" of the firm. 
A)  the firm is not a monopolist. 
B)  the firm has never enjoyed profits. 
C)  consumers would rather have some of the resources used by the loss maker be used to produce other goods. 
D)  the government has withdrawn its "protection" of the firm.

Question 7

The administrative costs per dollar are lower for a large loan than for a small loan.

Accepted Answer

A) True 
 B)False

Question 8

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent.Before you pay back the $1,000 principal and $50 interest,the inflation rate increases to 10 percent.Does anyone lose from this situation?

Accepted Answer

A)  Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation. 
B)  You lose, because the dollars that you have borrowed are worth more the higher the inflation rate. 
C)  The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed. 
D)  Both the banker and you lose, for the reasons in answers b and c 
E)  There is not enough information to answer the question. 
A)  Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation. 
B)  You lose, because the dollars that you have borrowed are worth more the higher the inflation rate. 
C)  The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed. 
D)  Both the banker and you lose, for the reasons in answers b and c 
E)  There is not enough information to answer the question.

Question 9

Jones has a high rate (of positive)time preference and Smith has a low rate (of positive)time preference.Which man is more likely to take out a loan to buy a car now?

Accepted Answer

A)  Smith, because he prefers earlier availability of goods to later availability of goods. 
B)  Jones, because he prefers earlier availability of goods to later availability of goods. 
C)  Smith, because he prefers earlier availability of goods more than Smith prefers earlier availability of goods. 
D)  Jones, because he prefers earlier availability of goods more than Smith prefers earlier availability of goods. 
E)  There is not enough information to answer the question. 
A)  Smith, because he prefers earlier availability of goods to later availability of goods. 
B)  Jones, because he prefers earlier availability of goods to later availability of goods. 
C)  Smith, because he prefers earlier availability of goods more than Smith prefers earlier availability of goods. 
D)  Jones, because he prefers earlier availability of goods more than Smith prefers earlier availability of goods. 
E)  There is not enough information to answer the question.

Question 10

Risk is

Accepted Answer

A)  different than uncertainty in that the probability of an uncertain event can be estimated whereas the probability of a risky event cannot be. 
B)  the source of all economic rent. 
C)  considered a major factor in the theory of profit that emphasizes the entrepreneur as innovator. 
D)  equal to the probability that an event will occur divided by the probability that the event will not occur. 
E)  none of the above 
A)  different than uncertainty in that the probability of an uncertain event can be estimated whereas the probability of a risky event cannot be. 
B)  the source of all economic rent. 
C)  considered a major factor in the theory of profit that emphasizes the entrepreneur as innovator. 
D)  equal to the probability that an event will occur divided by the probability that the event will not occur. 
E)  none of the above

Question 11

The nominal interest rate is determined

Accepted Answer

A)  by the Federal Reserve system. 
B)  in the loanable funds market. 
C)  by the U.S. Treasury. 
D)  by the average rate of change in the price of capital goods. 
A)  by the Federal Reserve system. 
B)  in the loanable funds market. 
C)  by the U.S. Treasury. 
D)  by the average rate of change in the price of capital goods.

Question 12

Describe what the term positive rate of time preference means. Explain the difference between having a high rate of time preference and a low rate of time preference. State who would be more likely to save money and who would be more likely to borrow money based upon their degree of time preference.

Accepted Answer

The term positive rate of time preferenc

Question 13

The perspective from which a factor is viewed matters in terms of determining if,and how much,economic rent it receives.Which of the following examples illustrates this?

Accepted Answer

A)  Smith currently earns $80,000 as an accountant. If he works as an accountant at another firm, he would earn $76,000. 
B)  Jones currently earns $66,000 as an attorney for a large law firm. If he were to work instead at a small law firm, he would earn $55,000. 
C)  Smith currently earns $80,000 as an accountant. If he works as an accountant at another firm, he would earn $78,000, but if he works at a job outside accounting, he would earn $60,000. 
D)  Jones will pay Smith more to work for him than Brown will pay Smith to work for her. 
E)  a and b 
A)  Smith currently earns $80,000 as an accountant. If he works as an accountant at another firm, he would earn $76,000. 
B)  Jones currently earns $66,000 as an attorney for a large law firm. If he were to work instead at a small law firm, he would earn $55,000. 
C)  Smith currently earns $80,000 as an accountant. If he works as an accountant at another firm, he would earn $78,000, but if he works at a job outside accounting, he would earn $60,000. 
D)  Jones will pay Smith more to work for him than Brown will pay Smith to work for her. 
E)  a and b

Question 14

If there is a decrease in the expected inflation rate,then,

Accepted Answer

A)  the nominal interest rate will increase. 
B)  the nominal interest rate will decrease. 
C)  the real interest rate will increase. 
D)  a and c 
E)  b and c 
A)  the nominal interest rate will increase. 
B)  the nominal interest rate will decrease. 
C)  the real interest rate will increase. 
D)  a and c 
E)  b and c

Question 15

The present value of $100,000 two years in the future at a 3 percent interest rate is approximately

Accepted Answer

A)  $94,260. 
B)  $97,087. 
C)  $9,434. 
D)  $106,090. 
A)  $94,260. 
B)  $97,087. 
C)  $9,434. 
D)  $106,090.

Question 16

The two ways in which the word "interest" is used in economics are as the price for

Accepted Answer

A)  loanable funds and the return earned by entrepreneurship. 
B)  loanable funds and the return earned by capital as an input in the production process. 
C)  money and the return for risk taking. 
D)  loanable funds and the return for risk taking. 
A)  loanable funds and the return earned by entrepreneurship. 
B)  loanable funds and the return earned by capital as an input in the production process. 
C)  money and the return for risk taking. 
D)  loanable funds and the return for risk taking.

Question 17

A vertical supply curve of a factor indicates that

Accepted Answer

A)  the demand for the factor will vary directly with the price of the factor. 
B)  the supply of the factor is perfectly elastic. 
C)  the factor has zero opportunity cost. 
D)  a government restriction has been imposed on the purchase of the factor. 
A)  the demand for the factor will vary directly with the price of the factor. 
B)  the supply of the factor is perfectly elastic. 
C)  the factor has zero opportunity cost. 
D)  a government restriction has been imposed on the purchase of the factor.

Question 18

A new delivery van will cost a catering firm $40,000 (including all associated taxes and fees). The catering firm plans to pay cash for this van and the van will generate $8,000 (net of any costs associated with maintaining the van)worth of services each year for five years.At the end of the fifth year,the van can be sold for an estimated value of $10,000.If the interest rate is 6 percent,should the catering firm buy the new delivery van? If the interest rate were to suddenly rise to 8 percent,would this change the firm's decision? Explain your answer,using present value calculations to support your conclusions.

Accepted Answer

The present value of the future stream o

Question 19

When the expected inflation rate is zero,then it follows that the

Accepted Answer

A)  real interest rate is greater than the nominal interest rate. 
B)  demand for loanable funds is equal to the supply of loanable funds. 
C)  demand for loanable funds is greater than the supply of loanable funds. 
D)  real interest rate is less than the nominal interest rate. 
E)  none of the above 
A)  real interest rate is greater than the nominal interest rate. 
B)  demand for loanable funds is equal to the supply of loanable funds. 
C)  demand for loanable funds is greater than the supply of loanable funds. 
D)  real interest rate is less than the nominal interest rate. 
E)  none of the above

Question 20

Approximately how much money would you need to place in a savings account today to accumulate $5,000 five years from now if the savings account pays an interest rate of 6.5 percent per year?

Accepted Answer

A)  $3,649 
B)  $4,740 
C)  $3,077 
D)  $3,411 
E)  $3,887 
A)  $3,649 
B)  $4,740 
C)  $3,077 
D)  $3,411 
E)  $3,887

Exam 30: Interest, Rent, and Profit

Exhibit 30-3 -Refer to Exhibit 30-3.The real interest rate in year 3 is

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate)is expected by both suppliers and demanders in the loanable funds market,then

If the price for loanable funds is greater than the return on capital,then firms will

As interest rates decrease,present values decrease and firms will purchase more capital goods.

Suppose you borrow $1,000 today with the promise to pay back $1,100 one year from today.Then the interest rate is __________,and the interest is __________.

If a firm is incurring a loss,the loss is a signal that

The administrative costs per dollar are lower for a large loan than for a small loan.

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent.Before you pay back the $1,000 principal and $50 interest,the inflation rate increases to 10 percent.Does anyone lose from this situation?

Jones has a high rate (of positive)time preference and Smith has a low rate (of positive)time preference.Which man is more likely to take out a loan to buy a car now?

Risk is

The nominal interest rate is determined

The perspective from which a factor is viewed matters in terms of determining if,and how much,economic rent it receives.Which of the following examples illustrates this?

If there is a decrease in the expected inflation rate,then,

The present value of $100,000 two years in the future at a 3 percent interest rate is approximately

The two ways in which the word "interest" is used in economics are as the price for

A vertical supply curve of a factor indicates that

When the expected inflation rate is zero,then it follows that the

Approximately how much money would you need to place in a savings account today to accumulate $5,000 five years from now if the savings account pays an interest rate of 6.5 percent per year?

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, Controlled, and Relative

Supply, Demand, and Price: Applications

Macroeconomic Measurements: Prices and Unemployment

Macroeconomic Measurements: GDP and Real GDP

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self Regulating Economy

Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money, Banking,and the Financial System

The Federal Reserve System

Money and the Economy

Monetary Policy

Expectations Theory and the Economy

Economic Growth: Resources, Technology, Ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice: Maximizing Utility and Behavioral Economics

Production and Costs

Perfect Competition

Monopoly

Monopolistic Competition, Oligopoly, and Game Theory

Government and Product Markets: Antitrust and Regulation

Factor Markets: With Emphasis on the Labor Market

Wages,Unions,and Labor

The Distribution of Income and Poverty

Market Failure: Externalities, Public Goods, and Asymmetric Information

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case For and Against Government: Five Topics Considered

Stocks, Bonds, Futures, and Options

Agriculture: Problems, Policies, and Unintended Effects

Filters

Suppose you borrow $1,000 today with the promise to pay back $1,100 one year from today.Then the interest rate is ,and the interest is .