Exam 16: Interest Rates, Investments, and Capital Markets

Suppose an exhaustible resource can be sold only this period or in the next period.The marginal cost of extraction is constant and equal to $5.The current year price of the resource is $55,respectively.The interest rate is 10%.What is the minimum next year price required to make the sale of the resource profitable next year?

When a government turns a deficit into a surplus we would expect

Jerry wishes to retire in 5 years with $1 million in his bank account.If the account pays 4% and his current balance is $500,000,how much must he deposit at the beginning of each of the next five years for his wish to come true? The amount must be the same each year.

If an exhaustible resource is priced at marginal cost that remains constant over time,then

What is one reason for the high interest rates for home loans offered to those with low credit ratings?

Suppose an astronomer discovers gold on the moon.Would this gold add to the world reserves?

In developed industries,the interest rate tends to be lower than in newer industries.What could explain this?

Government borrowing may crowd out borrowing by private interests because

You can put your $100 in Bank A that pays 8% at the end of the year.You can also put your $100 in Bank B that pays 4% at the end of six months and then 4% again at the end of the year.You will keep your $100 and all interest in the bank.At the end of the year

Suppose two people with the same level of income and wealth have different discount rates.Joe has a very high discount rate and Jim has a very low discount rate.Which one of the following is TRUE?

If inflation is 10% and the nominal interest rate equals 16.6% the real interest rate is equal to

Suppose that your college offers you two payment plans for your last two years of college.You may either pay tuition of $20,000 per year at the beginning of each of the next two years,or pay just $38,000 before the start of freshman year.What would the interest rate have to be for you to be indifferent between these two deals? Explain.

With respect to events like global warming some economists suggest using falling discount rates because

Four banks are offering the same interest rate of 4%.Where do you invest?

Suppose there is no inflation,and the current interest rate is 5% per year.Sarah plans to open a savings account and deposit $100 annually for the next 14 years.At the end of the period,the balance of her savings account will be

Suppose a new cost-saving device will generate $1,000 net savings per year to a firm.The device costs $10,000.Should the firm purchase the device?

If an asset has a future value of $120,a present value of $30,and an interest rate of 4%,how many periods of compounding are there?

A bond issuer agrees to pay a stated nominal amount each year.An increase in the nominal interest rate will cause

If a non-renewable resource is scarce,has constant marginal cost of production and is sold in a competitive market,

Suppose an exhaustible resource can be sold only this period or next period.The resource owner is considering selling 100 tons of the resource this period.The future value of the resource when 100 tons are sold this period is less than the present value of the 100 tons sold this period multiplied by one plus the interest rate.What should the resource owner do?