Question 1

The nominal interest rate is the

Accepted Answer

A) interest rate in current dollars, unadjusted for expected inflation. 
B) real interest rate minus the expected inflation rate. 
C) interest rate determined in the loanable funds market. 
D) a and c 
E) all of the above 
A) interest rate in current dollars, unadjusted for expected inflation. 
B) real interest rate minus the expected inflation rate. 
C) interest rate determined in the loanable funds market. 
D) a and c 
E) all of the above

Question 2

If the nominal rate of interest is 5 percent and the expected rate of inflation is 6 percent, then the real rate of interest is

Accepted Answer

A) 6 percent. 
B) -1 percent. 
C) 1 percent. 
D) 7.5 percent. 
A) 6 percent. 
B) -1 percent. 
C) 1 percent. 
D) 7.5 percent.

Question 3

Exhibit 29-2
  
-Refer to Exhibit 29-2. The interest and interest rate for loan 2 are, respectively,

Accepted Answer

A) $500 and 25.0 percent. 
B) $2,500 and 25.0 percent. 
C) $500 and 12.5 percent. 
D) $2,500 and 12.5 percent. 
E) none of the above 
A) $500 and 25.0 percent. 
B) $2,500 and 25.0 percent. 
C) $500 and 12.5 percent. 
D) $2,500 and 12.5 percent. 
E) none of the above

Question 4

Exhibit 29-3
  
-Refer to Exhibit 29-3. The real interest rate in year 5 is

Accepted Answer

A) -15 percent. 
B) 5 percent. 
C) 15 percent. 
D) -5 percent. 
E) -10 percent. 
A) -15 percent. 
B) 5 percent. 
C) 15 percent. 
D) -5 percent. 
E) -10 percent.

Question 5

Exhibit 29-4
​
  
-Refer to Exhibit 29-4. Assume a per acre tax, T, is imposed on land use. The rent (per acre) of land services will

Accepted Answer

A) rise from R1 to R1 + T. 
B) fall from R1 to R1 - T. 
C) remain unchanged at R1. 
D) fall to 0. 
A) rise from R1 to R1 + T. 
B) fall from R1 to R1 - T. 
C) remain unchanged at R1. 
D) fall to 0.

Question 6

An artificial rent is an economic rent that would not exist without government.

Accepted Answer

A) True 
 B)False

Question 7

As interest rates increase, present values __________, and firms will buy __________ capital goods.

Accepted Answer

A) increase; fewer 
B) decrease; fewer 
C) increase; more 
D) decrease; more 
A) increase; fewer 
B) decrease; fewer 
C) increase; more 
D) decrease; more

Question 8

The supply of loanable funds curve is

Accepted Answer

A) upward sloping. 
B) downward sloping. 
C) perfectly elastic. 
D) perfectly inelastic. 
A) upward sloping. 
B) downward sloping. 
C) perfectly elastic. 
D) perfectly inelastic.

Question 9

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 10

The present value of $100,000 two years in the future at a 7 percent interest rate is approximately

Accepted Answer

A) $114,000. 
B) $97,087. 
C) $8,700. 
D) $87,344. 
A) $114,000. 
B) $97,087. 
C) $8,700. 
D) $87,344.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Lawrence earns $X in his current job. If he weren't working at his current job, he would be working at another job earning $Y. It follows that

Accepted Answer

A) Lawrence is not earning any economic rent in his current job. 
B) Lawrence is earning economic rent in his current job if $X - $Y is a positive dollar amount. 
C) Lawrence is earning economic rent in his current job if $X - $Y is a negative dollar amount. 
D) Lawrence is earning pure economic rent in his current job. 
E) Lawrence is definitely earning some economic rent in his current job. 
A) Lawrence is not earning any economic rent in his current job. 
B) Lawrence is earning economic rent in his current job if $X - $Y is a positive dollar amount. 
C) Lawrence is earning economic rent in his current job if $X - $Y is a negative dollar amount. 
D) Lawrence is earning pure economic rent in his current job. 
E) Lawrence is definitely earning some economic rent in his current job.

Question 13

The term "present value" refers to

Accepted Answer

A) how much something costs today relative to what it could be sold for in the future after it depreciates in value. 
B) how much you would be willing to pay for a good today if you are not sure that the good will be available in the future. 
C) the current worth of some future dollar amount of income. 
D) how much your savings are worth today after having been invested for a certain number of years. 
E) the difference between the price you pay for a good and the costs of producing that good. 
A) how much something costs today relative to what it could be sold for in the future after it depreciates in value. 
B) how much you would be willing to pay for a good today if you are not sure that the good will be available in the future. 
C) the current worth of some future dollar amount of income. 
D) how much your savings are worth today after having been invested for a certain number of years. 
E) the difference between the price you pay for a good and the costs of producing that good.

Question 14

If the return on capital is 12 percent and the price for loanable funds is 9 percent, then

Accepted Answer

A) firms will not be willing to borrow loanable funds until either the return on capital decreases or the price for loanable funds increases, because the market for loanable funds is not in equilibrium and businesses will be wary of further investment. 
B) firms will realize that if they borrow loanable funds and invest in capital goods, it will cause the return on capital to decrease, so they won't want to borrow the funds. 
C) savers will realize that they can earn more if they invest their savings in capital, so they will withdraw their savings and supply them to firms at 14 percent. 
D) none of the above 
A) firms will not be willing to borrow loanable funds until either the return on capital decreases or the price for loanable funds increases, because the market for loanable funds is not in equilibrium and businesses will be wary of further investment. 
B) firms will realize that if they borrow loanable funds and invest in capital goods, it will cause the return on capital to decrease, so they won't want to borrow the funds. 
C) savers will realize that they can earn more if they invest their savings in capital, so they will withdraw their savings and supply them to firms at 14 percent. 
D) none of the above

Question 15

The nominal interest rate is determined in the loanable funds market.

Accepted Answer

A) True 
 B)False

Question 16

Economist David Ricardo argued that land rent was high because grain prices were high.

Accepted Answer

A) True 
 B)False

Question 17

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 18

As the interest rate falls, firms are more inclined to buy capital goods because the

Accepted Answer

A) present value of the stream of returns the goods will provide in the future increases. 
B) present value of the stream of returns the goods will provide in the future decreases. 
C) future value of the money paid for the capital goods decreases. 
D) none of the above 
A) present value of the stream of returns the goods will provide in the future increases. 
B) present value of the stream of returns the goods will provide in the future decreases. 
C) future value of the money paid for the capital goods decreases. 
D) none of the above

Question 19

A person who greatly prefers present consumption to future consumption has a(n) __________ rate of time preference.

Accepted Answer

A) low 
B) high 
C) efficient 
D) roundabout 
A) low 
B) high 
C) efficient 
D) roundabout

Question 20

An increase in the anticipated (or expected) rate of inflation will cause the nominal interest rate to

Accepted Answer

A) increase by less than the change in the anticipated inflation rate. 
B) increase by the same amount as the change in the anticipated inflation rate. 
C) decrease by more than the change in the anticipated inflation rate. 
D) decrease by the same amount as the change in the anticipated inflation rate. 
E) stay the same. 
A) increase by less than the change in the anticipated inflation rate. 
B) increase by the same amount as the change in the anticipated inflation rate. 
C) decrease by more than the change in the anticipated inflation rate. 
D) decrease by the same amount as the change in the anticipated inflation rate. 
E) stay the same.

Exam 29: Interest Rent and Profit

The nominal interest rate is the

If the nominal rate of interest is 5 percent and the expected rate of inflation is 6 percent, then the real rate of interest is

Exhibit 29-2 -Refer to Exhibit 29-2. The interest and interest rate for loan 2 are, respectively,

Exhibit 29-3 -Refer to Exhibit 29-3. The real interest rate in year 5 is

Exhibit 29-4 ​ -Refer to Exhibit 29-4. Assume a per acre tax, T, is imposed on land use. The rent (per acre) of land services will

An artificial rent is an economic rent that would not exist without government.

As interest rates increase, present values __________, and firms will buy __________ capital goods.

The supply of loanable funds curve is

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

The present value of $100,000 two years in the future at a 7 percent interest rate is approximately

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

Lawrence earns $X in his current job. If he weren't working at his current job, he would be working at another job earning $Y. It follows that

The term "present value" refers to

If the return on capital is 12 percent and the price for loanable funds is 9 percent, then

The nominal interest rate is determined in the loanable funds market.

Economist David Ricardo argued that land rent was high because grain prices were high.

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?

As the interest rate falls, firms are more inclined to buy capital goods because the

A person who greatly prefers present consumption to future consumption has a(n) __________ rate of time preference.

An increase in the anticipated (or expected) rate of inflation will cause the nominal interest rate to

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Exhibit 29-4 -Refer to Exhibit 29-4. Assume a per acre tax, T, is imposed on land use. The rent (per acre) of land services will

As interest rates increase, present values , and firms will buy capital goods.