Question 1

You grow poplar trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for poplar and a real interest rate of 3%,would you sell a 20-foot tree today?

Accepted Answer

The answer of You grow poplar trees.The lumber yard purchases...

Question 2

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His cost of going back to college is

Accepted Answer

A)  10,000 ×  . 
B)  20,000 ×  . 
C)  30,000 ×  . 
D)  40,000 ×  .

Question 3

If inflation turns out to be higher than was anticipated,

Accepted Answer

A)  debtors are helped. 
B)  debtors are hurt. 
C)  debtors are neither helped nor hurt. 
D)  The effect on debtors cannot be predicted.

Question 4

Bobby faces two choices.The first is to receive $600 on the spot.The other choice is to receive $800 a year from now.The interest rate is 5% per year.What could a possible explanation for Bobby choosing to receive $600 on the spot?

Accepted Answer

A)  Bobby finds that the present value of the $800 a year from now is less than $600. 
B)  Bobby may have time-inconsistent preferences. 
C)  Although Bobby chooses $600 on the spot, he is actually indifferent between the two options. 
D)  None of the above is correct.

Question 5

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be

Accepted Answer

A)  the nominal rate of interest. 
B)  the real rate of interest. 
C)  the rate of inflation. 
D)  zero.

Question 6

Consider a wine maker who has put her wine in bottles.The question is whether to store the wine for a marginal cost of $1 per year or to sell the wine today at a price of $10.If the interest rate is 6%,how much must the price of the wine increase in the next year to justify storing it?

Accepted Answer

A)  $1.66 
B)  $1.27 
C)  $0.72 
D)  $0.45

Question 7

Explain why a firm may rationally make an investment when its cash flow from the investment is not positive each year.

Accepted Answer

The answer of Explain why a firm may rationally make...

Question 8

Alchemy was the attempt to discover a process by which base metals,such as lead,could be turned into gold.If an alchemist had been successful,

Accepted Answer

A)  all the lead in the world would have been added to the world's gold supply. 
B)  all the lead in the world would have replaced the world's gold supply. 
C)  all the lead in the world would only have been added to the world's gold supply when it was converted to gold. 
D)  the alchemist would likely have been killed by the owners of real gold.

Question 9

A firm should make an investment if the expected return is greater than

Accepted Answer

A)  the marginal cost of the investment. 
B)  the fixed cost of the investment. 
C)  the opportunity cost of the investment. 
D)  the expected rate of inflation.

Question 10

You place $100 in a bank account that pays 8%.If you remove the interest you receive each year you can turn your stock into a flow of

Accepted Answer

A)  $108 per year. 
B)  $100 per year. 
C)  $80 per year. 
D)  $8 per year.

Question 11

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it less likely that Joe will decide to go back to college full-time?

Accepted Answer

A)  The extra income due to a college degree rises. 
B)  The rate of interest decreases. 
C)  The government enacts mandatory retirement at age 60. 
D)  Tuition decreases.

Question 12

If your bank pays you 6% interest on a savings account and inflation is 2%,your approximate real rate of interest is

Accepted Answer

A)  2%. 
B)  4%. 
C)  8%. 
D)  12%.

Question 13

Explain how continuing technical progress may cause the price of scarce,exhaustible resources to fall over time.

Accepted Answer

The answer of Explain how continuing technical progress may cause...

Question 14

Suppose government does not allow households to deduct their mortgage interest expenses from their income tax anymore.How this change is represented in the loanable funds model?

Accepted Answer

A)  The supply of funds curve shifts to the left. 
B)  The supply of funds curve shifts to the right. 
C)  The demand for funds curve shifts to the left. 
D)  The demand for funds curve shifts to the right.

Question 15

A firm has two projects.Project A has an internal rate of return of 6%.Project B's internal rate of return is 11%.If the firm's discount rate is 9.57%,

Accepted Answer

A)  both projects have a negative net present value. 
B)  only project A has a positive net present value. 
C)  only project B has a positive net present value. 
D)  both projects have a positive net present value.

Question 16

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.From an investment standpoint,Joe will go back full-time if

Accepted Answer

A)  10,000 ×  = 40,000 ×  . 
B)  10,000/r > 10,000 ×  . 
C)  10,000 ×  > 40,000 ×  . 
D)  10,000 ×  > 40,000 ×  .

Question 17

Suppose $100 is deposited in a bank account paying 5% compounded annually.If the interest earned is X after 5 years,then the interest earned will be 2X after 10 years.

Accepted Answer

A) True 
 B)False

Question 18

Assel grows mulberry trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for mulberry,at what interest rate would Assel be willing to sell a 10-foot tree today?

Accepted Answer

A)  3% 
B)  5% 
C)  8% 
D)  12%

Question 19

In an economy with no inflation,explain why interest rates are positive.

Accepted Answer

The answer of In an economy with no inflation,explain why...

Question 20

Suppose that your college offers you two payment plans.You may either pay tuition of $10,000 per year at the beginning of each of the next four years,or pay just $38,000 before the start of freshman year.If the interest rate is 10%,what would you do? If the interest rate were 2%,what would you do? Intuitively explain the difference in your answer.

Accepted Answer

The answer of Suppose that your college offers you two...

Exam 16: Interest Rates, Investments, and Capital Markets