Exam 16: Interest Rates, Investments, and Capital Markets

If a firm needs one machine to produce a product,and must replace the machine when it wears out,then the firm should pick a durability level of the machine that

A recent purchaser of a bond that agrees to pay an annual nominal amount would hope that interest rates do not rise.

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 $2.The current and next year prices of the resource are $12 and $13,respectively.At what interest rate the owner of the resource will be indifferent between selling it today or in the next period?

If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause

In the later part of the twentieth century,the price of crude oil began to increase after decades of relatively steady prices,which of the following could explain this phenomenon?

Interest rates are positive because inflation makes purchases more expensive in the future than today.

Suppose life becomes more unpredictable and households decide to increase their precautionary savings.In this case,the loanable funds model predicts that

If extraction technology continues to improve over time,

Government debt increases the interest rate and private investment.

How does a decrease in government budget deficits affect the equilibrium interest rate in the loanable funds model?

Technological improvements in coal mining will

Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,will the firm make the investment?

Suppose we know that 10 Spanish Galleons sunk in the Atlantic Ocean carrying approximately 50 tons of gold,but the exact location of these shipwrecks is unknown.Would this gold add to the world reserve?

During the Iraq War,the U.S.government continued to borrow funds and yet the interest rate was steady or slightly declined.What could explain this?

A financial services company offers to pay you $1,000 a year for life in exchange for $20,000 today.What factors affect your decision to take this offer?

If the interest rate is 10%,then $1 received one year from now is worth how much today?

An investment is profitable as long as its internal rate of return is equal to the rate of interest.

Individuals who lease a new car

If an exhaustible resource is scarce,has constant marginal cost over time,and is sold in a competitive market,then

The Net Present Value approach to investment results in an investment being undertaken only if