Question 1

The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as   ,if the interest rate were to rise the budget line would

Accepted Answer

A)  shift to the left in a parallel fashion 
B)  shift to the right in a parallel fashion 
C)  rotate counter-clockwise pivoting on Y1, Y2 
D)  rotate clockwise pivoting on Y1, Y2 
A)  shift to the left in a parallel fashion 
B)  shift to the right in a parallel fashion 
C)  rotate counter-clockwise pivoting on Y1, Y2 
D)  rotate clockwise pivoting on Y1, Y2 D

Question 2

The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as   ,if the interest rate were to fall the budget line would

Accepted Answer

A)  shift to the left in a parallel fashion 
B)  shift to the right in a parallel fashion 
C)  rotate counter-clockwise pivoting on Y1, Y2 
D)  rotate clockwise pivoting on Y1, Y2 
A)  shift to the left in a parallel fashion 
B)  shift to the right in a parallel fashion 
C)  rotate counter-clockwise pivoting on Y1, Y2 
D)  rotate clockwise pivoting on Y1, Y2 C

Question 3

The present value of $1 payable in two years is

Accepted Answer

A)  $1. 
B)  $1/(1 + 2r). 
C)  $1/(1 - 2r). 
D)  $1/(1 + r)2. 
A)  $1. 
B)  $1/(1 + 2r). 
C)  $1/(1 - 2r). 
D)  $1/(1 + r)2. D

Question 4

Suppose a person's preferences are to "consumption smooth," which means they wish to get   for all incomes and interest rates.For any interest rate and   ,the person will ____ in the first period.

Accepted Answer

A)  borrow 
B)  save 
C)  neither borrow nor save 
D)  both borrow and save 
A)  borrow 
B)  save 
C)  neither borrow nor save 
D)  both borrow and save

Question 5

Accelerated depreciation laws may increase firms' investment in equipment because

Accepted Answer

A)  machines will wear out more rapidly. 
B)  profits will be increased. 
C)  the rental rate on capital will be lowered. 
D)  the price of machines will fall. 
A)  machines will wear out more rapidly. 
B)  profits will be increased. 
C)  the rental rate on capital will be lowered. 
D)  the price of machines will fall.

Question 6

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

Accepted Answer

A)  equal. 
B)  as large as possible. 
C)  equal to the price of the bond. 
D)  equal to the face value of the bond. 
A)  equal. 
B)  as large as possible. 
C)  equal to the price of the bond. 
D)  equal to the face value of the bond.

Question 7

The present value of $1 payable in the future decreases

Accepted Answer

A)  the higher r is and the sooner it is to be paid. 
B)  the lower r is and the sooner it is to be paid. 
C)  the higher r is and the longer time until it is paid. 
D)  the lower r is and the longer time until it is paid. 
A)  the higher r is and the sooner it is to be paid. 
B)  the lower r is and the sooner it is to be paid. 
C)  the higher r is and the longer time until it is paid. 
D)  the lower r is and the longer time until it is paid.

Question 8

If real extraction costs do not change,the relative price of a finite resource would be expected to

Accepted Answer

A)  fall over time. 
B)  remain constant over time. 
C)  rise at a rate given by the nominal rate of interest. 
D)  rise at a rate given by the real rate of interest. 
A)  fall over time. 
B)  remain constant over time. 
C)  rise at a rate given by the nominal rate of interest. 
D)  rise at a rate given by the real rate of interest.

Question 9

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The vertical (C2)intercept is

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 10

In a perfectly competitive market a firm's rental rate for a machine (v)will be given by: v = P(r + d)where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

Accepted Answer

A)  the present market price of the machine. 
B)  the initial purchase price of the machine (assuming this differs from its present market price. 
C)  the price of the firm's product. 
D)  the depreciated value of the machine. 
A)  the present market price of the machine. 
B)  the initial purchase price of the machine (assuming this differs from its present market price. 
C)  the price of the firm's product. 
D)  the depreciated value of the machine.

Question 11

Suppose you know a piece of land will be worth $1 million (real)in 2020,and the real interest rate is 5%.How much should you be willing to pay for the land today (2010)? (Assume no taxes).

Accepted Answer

A)  $610,000 
B)  $1 million 
C)  $1.89 million 
D)  $230.000 
A)  $610,000 
B)  $1 million 
C)  $1.89 million 
D)  $230.000

Question 12

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Accepted Answer

A)  0. 
B)  $1. 
C)  $1/(1 + r). 
D)  $r/(1 + r). 
A)  0. 
B)  $1. 
C)  $1/(1 + r). 
D)  $r/(1 + r).

Question 13

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The slope is

Accepted Answer

A)  r 
B)  −r 
C)  1 + r 
D)  −(1 + r) 
A)  r 
B)  −r 
C)  1 + r 
D)  −(1 + r)

Question 14

In the two-period utility maximization model the opportunity cost of one unit of C1 is

Accepted Answer

A)  one unit of C0. 
B)  1 + r units of C0. 
C)  1/(1 + r) units of C0. 
D)  cannot be determined without more information. 
A)  one unit of C0. 
B)  1 + r units of C0. 
C)  1/(1 + r) units of C0. 
D)  cannot be determined without more information.

Question 15

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C1 and C2).Any funds not spent in period 1 will earn interest (at the rate r),which will increase purchasing power in period 2.Consider four possible reactions to an increase in r:   Which of these is consistent with the hypothesis that both C1 and C2 are normal goods?

Accepted Answer

A)  II and III, but not I and IV. 
B)  I, II, and IV, but not III. 
C)  I, III, and IV, but not II. 
D)  I, II and III, but not IV. 
A)  II and III, but not I and IV. 
B)  I, II, and IV, but not III. 
C)  I, III, and IV, but not II. 
D)  I, II and III, but not IV.

Question 16

Suppose a person's preferences are to "consumption smooth," which means they wish to get   for all incomes and interest rates.For any interest rate and   ,the person will ____ in the first period.

Accepted Answer

A)  borrow 
B)  save 
C)  neither borrow nor save 
D)  both borrow and save 
A)  borrow 
B)  save 
C)  neither borrow nor save 
D)  both borrow and save

Question 17

Suppose Johnny Stroller sells 12,25,and 75 year-old scotch in under black,red,and blue labels.Suppose the storage costs are zero and the initial production costs are the same.What is the implied (approximate)interest rate if black sells for $18,red for $34 and blue for $388.

Accepted Answer

A)  2 
B)  5 
C)  8 
D)  10 
A)  2 
B)  5 
C)  8 
D)  10

Question 18

A rise in the real interest rate r

Accepted Answer

A)  creates income and substitution effects that reduce C0. 
B)  creates income effects that reduce C0, substitution effects that increase C0. 
C)  creates income effects that increase C0, substitution effects that reduce C0. 
D)  creates income and substitution effects that increase C0. 
A)  creates income and substitution effects that reduce C0. 
B)  creates income effects that reduce C0, substitution effects that increase C0. 
C)  creates income effects that increase C0, substitution effects that reduce C0. 
D)  creates income and substitution effects that increase C0.

Question 19

A fall in the real interest rate leads to

Accepted Answer

A)  an increase in the rental rate on a machine. 
B)  a decrease in the rental rate on a machine. 
C)  no change in the rental rate on a machine. 
D)  a fall in the marginal productivity of capital. 
A)  an increase in the rental rate on a machine. 
B)  a decrease in the rental rate on a machine. 
C)  no change in the rental rate on a machine. 
D)  a fall in the marginal productivity of capital.

Question 20

The rental rate approach to investment choices by firms and the present value approach

Accepted Answer

A)  always agree. 
B)  agree only if depreciation is 0. 
C)  agree only if the price of equipment does not change. 
D)  agree only when inflation rates are zero. 
A)  always agree. 
B)  agree only if depreciation is 0. 
C)  agree only if the price of equipment does not change. 
D)  agree only when inflation rates are zero.

The two-period budget line for incomes Y₁ and Y₂ and consumption C₁ and C₂ can be written as ,if the interest rate were to rise the budget line would

The two-period budget line for incomes Y₁ and Y₂ and consumption C₁ and C₂ can be written as ,if the interest rate were to fall the budget line would

The present value of $1 payable in two years is

Suppose a person's preferences are to "consumption smooth," which means they wish to get for all incomes and interest rates.For any interest rate and ,the person will ____ in the first period.

Accelerated depreciation laws may increase firms' investment in equipment because

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

The present value of $1 payable in the future decreases

If real extraction costs do not change,the relative price of a finite resource would be expected to

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁ and Y_2.The vertical (C₂)intercept is

In a perfectly competitive market a firm's rental rate for a machine (v)will be given by: v = P(r + d)where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

Suppose you know a piece of land will be worth $1 million (real)in 2020,and the real interest rate is 5%.How much should you be willing to pay for the land today (2010)? (Assume no taxes).

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁ and Y_2.The slope is

In the two-period utility maximization model the opportunity cost of one unit of C₁ is

Suppose a person's preferences are to "consumption smooth," which means they wish to get for all incomes and interest rates.For any interest rate and ,the person will ____ in the first period.

Suppose Johnny Stroller sells 12,25,and 75 year-old scotch in under black,red,and blue labels.Suppose the storage costs are zero and the initial production costs are the same.What is the implied (approximate)interest rate if black sells for $18,red for $34 and blue for $388.

A rise in the real interest rate r

A fall in the real interest rate leads to

The rental rate approach to investment choices by firms and the present value approach

Economic Models

Utility and Choice

Individual Demand Curves

Uncertainty

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

Exam 14: Capital and Time

The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as ,if the interest rate were to rise the budget line would

The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as ,if the interest rate were to fall the budget line would

The present value of $1 payable in two years is

Suppose a person's preferences are to "consumption smooth," which means they wish to get for all incomes and interest rates.For any interest rate and ,the person will ____ in the first period.

Accelerated depreciation laws may increase firms' investment in equipment because

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

The present value of $1 payable in the future decreases

If real extraction costs do not change,the relative price of a finite resource would be expected to

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The vertical (C2)intercept is

In a perfectly competitive market a firm's rental rate for a machine (v)will be given by: v = P(r + d)where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

Suppose you know a piece of land will be worth $1 million (real)in 2020,and the real interest rate is 5%.How much should you be willing to pay for the land today (2010)? (Assume no taxes).

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The slope is

In the two-period utility maximization model the opportunity cost of one unit of C1 is

Suppose a person's preferences are to "consumption smooth," which means they wish to get for all incomes and interest rates.For any interest rate and ,the person will ____ in the first period.

Suppose Johnny Stroller sells 12,25,and 75 year-old scotch in under black,red,and blue labels.Suppose the storage costs are zero and the initial production costs are the same.What is the implied (approximate)interest rate if black sells for $18,red for $34 and blue for $388.

A rise in the real interest rate r

A fall in the real interest rate leads to

The rental rate approach to investment choices by firms and the present value approach

Economic Models

Utility and Choice

Individual Demand Curves

Uncertainty

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

The two-period budget line for incomes Y₁ and Y₂ and consumption C₁ and C₂ can be written as ,if the interest rate were to rise the budget line would

The two-period budget line for incomes Y₁ and Y₂ and consumption C₁ and C₂ can be written as ,if the interest rate were to fall the budget line would

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁ and Y_2.The vertical (C₂)intercept is

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁ and Y_2.The slope is

In the two-period utility maximization model the opportunity cost of one unit of C₁ is