Question 1

Investment demand is downward sloping because

Accepted Answer

A)  an increase in investment demand causes interest rates to fall. 
B)  at lower interest rates, firms will undertake more investment. 
C)  at lower interest rates, firms will undertake less investment. 
D)  none of the above.

Question 2

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 3

What is the internal rate of return on a new $2,000 heater that would reduce your heating costs by $200 a year forever? Under what conditions would you make the purchase?

Accepted Answer

The answer of What is the internal rate of return...

Question 4

Suppose coal sells for $50 per ton and can be mined at a constant marginal cost of $20 per ton.Forecasters predict that the price of coal next year will be $55.If your marginal cost next year will still be $20 and the interest rate is 10%,do you sell coal today?

Accepted Answer

The answer of Suppose coal sells for $50 per ton...

Question 5

Using the Internal Rate of Return approach to investment,one would undertake an investment if the internal rate of return

Accepted Answer

A)  equals zero. 
B)  equals the interest rate. 
C)  exceeds the interest rate. 
D)  is less than the interest rate.

Question 6

If you invest $500 today,and the value one year from today is $1000,then the annual interest rate must be

Accepted Answer

A)  10%. 
B)  50%. 
C)  100%. 
D)  200%.

Question 7

Suppose households decide to reduce savings because they want to enjoy more present time than future time.In this case,the loanable funds model predicts that

Accepted Answer

A)  interest rate goes down, and quantity of borrowed funds increases. 
B)  interest rate goes down, and quantity of borrowed funds decreases. 
C)  interest rate goes up, and quantity of borrowed funds decreases. 
D)  interest rate goes up, and quantity of borrowed funds increases.

Question 8

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

Accepted Answer

A)  its price increases over time. 
B)  its price will not be a function of the interest rate. 
C)  its price moves independently of past prices. 
D)  its price equals marginal cost.

Question 9

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 10

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

Accepted Answer

A)  $1.10 
B)  $1.00 
C)  $0.91 
D)  $0.90

Question 11

A firm has to decide between two projects that cost $10,000 each.Project A will provide a revenue $10,700 one year from now,while Project B will provide a revenue of $12,200 two years from now.The interest rate is 10% per year.This firm

Accepted Answer

A)  chooses project A. 
B)  chooses project B. 
C)  rejects both projects. 
D)  is indifferent between projects A and B.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

For a given rate of interest,the total interest you receive from lending money

Accepted Answer

A)  increases with the frequency of compounding. 
B)  decreases with the frequency of compounding. 
C)  is independent of the frequency of compounding. 
D)  is greatest when there is no compounding.

Question 16

In reality,prices of non-renewable resources have not increased continually according to the model developed in Section 16.3 because of

Accepted Answer

A)  abundance of the resource. 
B)  technological progress changing marginal cost. 
C)  changing market power of producers. 
D)  All of the above.

Question 17

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

Accepted Answer

A)  interest rates to rise. 
B)  interest rates to decrease. 
C)  the demand curve for loanable funds to shift rightward. 
D)  that more investment is crowded out.

Question 18

As the interest rate increases,the present value of a future payment

Accepted Answer

A)  increases. 
B)  decreases. 
C)  does not change. 
D)  approaches infinity.

Question 19

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 20

Which of the following is most likely to cause interest rates to fall?

Accepted Answer

A)  Government borrows to finance a war. 
B)  All firms project higher future revenue streams for all of their projects. 
C)  All firms project lower future revenue streams for all of their projects. 
D)  Government institutes a high tax on savings.

Exam 16: Interest Rates, Investments, and Capital Markets