Question 1

The only resource that cannot earn economic rent is labor.

Accepted Answer

A) True 
 B)False

Question 2

The nominal interest rate is

Accepted Answer

A) determined by the forces of supply and demand in the consumer goods market. 
B) the interest rate in current dollars, unadjusted for inflation. 
C) higher than the real interest rate even if the expected inflation rate is zero. 
D) lower than the real interest rate even if the expected inflation rate is zero. 
E) b and d 
A) determined by the forces of supply and demand in the consumer goods market. 
B) the interest rate in current dollars, unadjusted for inflation. 
C) higher than the real interest rate even if the expected inflation rate is zero. 
D) lower than the real interest rate even if the expected inflation rate is zero. 
E) b and d

Question 3

Profits may exist as the result of

Accepted Answer

A) uncertainty. 
B) alertness to arbitrage opportunities. 
C) innovation. 
D) all of the above 
E) none of the above 
A) uncertainty. 
B) alertness to arbitrage opportunities. 
C) innovation. 
D) all of the above 
E) none of the above

Question 4

Entrepreneurs

Accepted Answer

A) operate within markets. 
B) increase trade by satisfying an unmet demand for a good or service. 
C) increase trade by increasing the transaction costs of making trades. 
D) a and b 
E) a, b and c 
A) operate within markets. 
B) increase trade by satisfying an unmet demand for a good or service. 
C) increase trade by increasing the transaction costs of making trades. 
D) a and b 
E) a, b and c

Question 5

Pure economic rent can exist only when a factor has a demand curve that is perfectly inelastic.

Accepted Answer

A) True 
 B)False

Question 6

Abigail has a high rate of time preference while Cynthia has a low rate of time preference. If the interest rate payable on savings accounts increases from 5 percent to 7 percent, then

Accepted Answer

A) Abigail would find it easier than Cynthia to cut back on consumption and increase her savings. 
B) Cynthia would find it easier than Abigail to cut back on consumption and increase her savings. 
C) neither Abigail nor Cynthia would decrease her consumption and increase her savings because relative time preferences have little to do with the interest rate. 
D) Abigail and Cynthia would probably decrease their consumption and increase their savings by the same amount because the higher interest rate will affect them both to the same degree regardless of their time preferences. 
A) Abigail would find it easier than Cynthia to cut back on consumption and increase her savings. 
B) Cynthia would find it easier than Abigail to cut back on consumption and increase her savings. 
C) neither Abigail nor Cynthia would decrease her consumption and increase her savings because relative time preferences have little to do with the interest rate. 
D) Abigail and Cynthia would probably decrease their consumption and increase their savings by the same amount because the higher interest rate will affect them both to the same degree regardless of their time preferences.

Question 7

What is the present value of a future income stream of three $12,000 payments to be received one, two, and three years from today if the interest rate is 2.8 percent?

Accepted Answer

A) $32,799 
B) $34,074 
C) $28,134 
D) $11,046 
A) $32,799 
B) $34,074 
C) $28,134 
D) $11,046

Question 8

As the interest rate rises, the opportunity cost of

Accepted Answer

A) future consumption rises. 
B) present consumption rises. 
C) investing in roundabout methods of production rises. 
D) lending money rises. 
A) future consumption rises. 
B) present consumption rises. 
C) investing in roundabout methods of production rises. 
D) lending money rises.

Question 9

Which of the following statements is true?

Accepted Answer

A) Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus. 
B) Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus. 
C) Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus. 
D) Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus. 
A) Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus. 
B) Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus. 
C) Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus. 
D) Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus.

Question 10

Suppose that the price of loanable funds is greater than the return on capital. It follows that firms will

Accepted Answer

A) not borrow funds and eventually the capital stock will decrease and the return on capital will rise. 
B) borrow funds and, as a result, the capital stock will rise. 
C) not borrow funds and eventually the capital stock will increase and the return on capital will rise. 
D) borrow funds and, as a result, the price of credit will rise. 
E) none of the above 
A) not borrow funds and eventually the capital stock will decrease and the return on capital will rise. 
B) borrow funds and, as a result, the capital stock will rise. 
C) not borrow funds and eventually the capital stock will increase and the return on capital will rise. 
D) borrow funds and, as a result, the price of credit will rise. 
E) none of the above

Question 11

If the nominal interest rate is 8 percent and the real interest rate is 6 percent, then the expected rate of inflation is

Accepted Answer

A) 14 percent. 
B) 7 percent. 
C) 2 percent. 
D) -2 percent. 
E) impossible to determine from the data given. 
A) 14 percent. 
B) 7 percent. 
C) 2 percent. 
D) -2 percent. 
E) impossible to determine from the data given.

Question 12

Exhibit 29-3
  
-Refer to Exhibit 29-3. The real interest rate in year 4 is

Accepted Answer

A) -12 percent. 
B) 2 percent. 
C) 12 percent. 
D) -2 percent. 
E) -5 percent. 
A) -12 percent. 
B) 2 percent. 
C) 12 percent. 
D) -2 percent. 
E) -5 percent.

Question 13

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 14

If 1 percent inflation rather than zero percent inflation is expected by both the suppliers and demanders of loanable funds, then the nominal interest rate will

Accepted Answer

A) fall, ceteris paribus. 
B) remain constant. 
C) rise. 
D) rise, ceteris paribus. 
A) fall, ceteris paribus. 
B) remain constant. 
C) rise. 
D) rise, ceteris paribus.

Question 15

The interest rate on a loan will be lower,

Accepted Answer

A) the shorter the term of the loan. 
B) the less risk associated with the loan. 
C) the lower the processing costs of the loan. 
D) the lower the administrative costs of the loan. 
E) all of the above 
A) the shorter the term of the loan. 
B) the less risk associated with the loan. 
C) the lower the processing costs of the loan. 
D) the lower the administrative costs of the loan. 
E) all of the above

Question 16

The supply of loanable funds depends most directly on

Accepted Answer

A) investment expenditures. 
B) people's saving and newly created money. 
C) bond and stock activity. 
D) the profits of firms. 
A) investment expenditures. 
B) people's saving and newly created money. 
C) bond and stock activity. 
D) the profits of firms.

Question 17

Mario earns profits by developing a product that is unusual, unique, and greatly in demand. Which of the following theories of profit best describes the reason behind his success?

Accepted Answer

A) Uncertainty is the source of profits. 
B) Profit is the reward for alertness to arbitrage opportunities. 
C) Profit is the return to the entrepreneur as innovator. 
D) Profit is the return for being smart. 
E) Profit is the return for being in the right place at the right time. 
A) Uncertainty is the source of profits. 
B) Profit is the reward for alertness to arbitrage opportunities. 
C) Profit is the return to the entrepreneur as innovator. 
D) Profit is the return for being smart. 
E) Profit is the return for being in the right place at the right time.

Question 18

Which of the following is a theory of the source of profit?

Accepted Answer

A) uncertainty is the source of profit 
B) the alertness to broadly defined arbitrage opportunities is the source of profit 
C) the return to the entrepreneur for innovation is the source of profit 
D) a and c 
E) a, b and c 
A) uncertainty is the source of profit 
B) the alertness to broadly defined arbitrage opportunities is the source of profit 
C) the return to the entrepreneur for innovation is the source of profit 
D) a and c 
E) a, b and c

Question 19

Approximately how much is $25,000 to be received a year from now worth today at an interest rate of 11 percent?

Accepted Answer

A) $27,750 
B) $25,556 
C) $22,523 
D) $20,385 
A) $27,750 
B) $25,556 
C) $22,523 
D) $20,385

Question 20

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.

Exam 29: Interest Rent and Profit

The only resource that cannot earn economic rent is labor.

The nominal interest rate is

Profits may exist as the result of

Entrepreneurs

Pure economic rent can exist only when a factor has a demand curve that is perfectly inelastic.

Abigail has a high rate of time preference while Cynthia has a low rate of time preference. If the interest rate payable on savings accounts increases from 5 percent to 7 percent, then

What is the present value of a future income stream of three $12,000 payments to be received one, two, and three years from today if the interest rate is 2.8 percent?

As the interest rate rises, the opportunity cost of

Which of the following statements is true?

Suppose that the price of loanable funds is greater than the return on capital. It follows that firms will

If the nominal interest rate is 8 percent and the real interest rate is 6 percent, then the expected rate of inflation is

Exhibit 29-3 -Refer to Exhibit 29-3. The real interest rate in year 4 is

Risk is

If 1 percent inflation rather than zero percent inflation is expected by both the suppliers and demanders of loanable funds, then the nominal interest rate will

The interest rate on a loan will be lower,

The supply of loanable funds depends most directly on

Mario earns profits by developing a product that is unusual, unique, and greatly in demand. Which of the following theories of profit best describes the reason behind his success?

Which of the following is a theory of the source of profit?

Approximately how much is $25,000 to be received a year from now worth today at an interest rate of 11 percent?

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?

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand Theory

Prices Free Controlled and Relative

Supply Demand and Price Applications

Macroeconomic Measurements Part I Prices and Unemployment

Macroeconomic Measurements Part II 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

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice 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

The Economic Case for and Against Government Five Topics Considered

Stocks Bonds Futures and Options

Filters