Question 1

Use the following statements to answer this question: I. Corporate paper rates are typically less than one percent higher than Treasury bill rates.
II) Treasury bill rates may be viewed a short-term, risk-free rates.

Accepted Answer

Both statements are true. Statement I indicates that corporate paper rates are slightly higher than Treasury bill rates. Statement II suggests that Treasury bill rates are considered safe, short-term investments.

Question 2

What is the difference between the corporate paper rate and the corporate bond rate?

Accepted Answer

The corporate paper rate refers to short-term high-quality corporate bonds, while the corporate bond rate refers to long-term corporate bonds that may have varying quality or risk. Therefore, option E is correct as it identifies the differences between both rates accurately. Options A and B are incorrect as they contradict each other, and option D is incorrect as it only covers one correct statement.

Question 3

If average Americans start to pay off the huge credit card debt they now hold, then

Accepted Answer

Paying off credit card debt reduces the demand for loanable funds, which, in turn, causes interest rates to fall due to decreased competition for those funds.

Question 4

Your aunt owns a gold mine. The marginal extraction cost of gold is $25 and remains constant over time. The current market price of a unit of gold is $200. Your aunt's appropriate discount rate is 12%. Next year, your aunt expects the price of a unit of gold to be $222. Should your aunt extract any gold from the mine this year?

Accepted Answer

The answer of Your aunt owns a gold mine. The...

Question 5

As firms' expected profit from new capital projects falls,

Accepted Answer

When firms expect lower profits from new capital projects, they are less likely to borrow money for these projects, leading to a decrease in the demand for loanable funds, which is represented by a leftward shift in the demand curve.

Question 6

Which of the following is NOT true about commercial paper?

Accepted Answer

Commercial paper typically pays a rate slightly higher than Treasury bills due to higher risk, but not necessarily double.

Question 7

If technological breakthroughs in the computer and software industries cause large numbers of firms to consider investment projects they hadn't previously thought of,

Accepted Answer

Technological breakthroughs in the computer and software industries may cause firms to consider investment projects they had not previously thought of, leading to an increase in the demand for loanable funds. Therefore, the demand for loanable funds will shift rightward.

Question 8

If we start to think that Medicare will pay for all of our medical needs as we age, then our likely actions will lead to:

Accepted Answer

The answer of If we start to think that Medicare...

Question 9

If firms are uncertain about future returns and delay business investments,

Accepted Answer

When firms are uncertain about future returns and decide to delay business investments, they will demand fewer loans. This leads to a leftward shift in the demand for loanable funds.

Question 10

If technological breakthroughs in the Internet cause large numbers of firms to consider investment projects they hadn't previously thought of, then:

Accepted Answer

If large numbers of firms consider investment projects they hadn't previously thought of, then there will be an increase in demand for loanable funds. This will cause interest rates to rise as lenders will want to offer loans at higher rates to earn more money.

Question 11

When the government runs a large deficit,

Accepted Answer

When the government runs a large deficit, it needs to borrow more to finance this deficit, increasing the demand for loanable funds, which shifts the demand curve rightward.

Question 12

The demand for loanable funds slopes:

Accepted Answer

The demand for loanable funds slopes downward because as interest rates rise, the net present value (NPV) of investment projects falls, making fewer projects viable and reducing the quantity of funds demanded.

Question 13

If individuals start paying off the large amount of credit card debt they now hold,

Accepted Answer

The answer of If individuals start paying off the large...

Question 14

If individuals decide to save more for retirement,

Accepted Answer

When individuals save more, they are increasing the supply of loanable funds. This is because they have more money available to invest in financial markets. As a result, the supply of loanable funds shifts rightward, leading to a lower interest rate and potentially more investment and economic growth.

Question 15

If individuals are convinced that the government will take care of all their medical needs after they retire, then:

Accepted Answer

If individuals are convinced that the government will take care of all their medical needs after they retire, they will most likely save less for their retirement. This will cause a decrease in the supply of loanable funds, shifting the supply curve leftward. Therefore, the correct answer is B) the supply of loanable funds will shift leftward.

Question 16

The prime rate:

Accepted Answer

The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers.

Question 17

If the U.S. government retires the national debt, then

Accepted Answer

Retiring the national debt means the government will no longer need to borrow money, leading to a decrease in the demand for loanable funds. With a decrease in demand, interest rates are likely to fall.

Question 18

Interest rates are determined by the supply and demand for:

Accepted Answer

Interest rates are determined by the supply and demand for loanable funds. This includes money that institutions and individuals have available to lend or borrow, including savings deposits, bonds, and other financial assets. The greater the supply of loanable funds, the lower the interest rates will be, while a relatively low supply of loanable funds will drive interest rates up.

Question 19

The demand for xenite ore is fixed over time and is given as:
q = 40 - P
where q is the number to tons of ore produced and P is the price per ton of xenite ore. The marginal extraction cost is $15 per ton and is also constant over time. The total quantity of the resource currently known to exist is 53.29 tons. The interest rate is 10 percent. Using the Hotelling rule for an exhaustible resource, complete the following table.
Time Period Price Marginal Cost q Cumulative
Production
Today 15
1 Year 15
2 Years 15
3 Years 15
4 Years 15
5 Years 15
6 Years 15
7 Years 40.00 15 0 53.29

Accepted Answer

The answer of The demand for xenite ore is fixed...

Question 20

The difference between a Treasury bill and a Treasury bond is that the bill

Accepted Answer

The best choice is E because Treasury bills are short-term securities with maturity dates of one year or less, whereas Treasury bonds have longer maturity dates ranging from 10 to 30 years. The other choices are incorrect: A is false as both bills and bonds can be purchased by anyone, B is false as both bills and bonds are backed by the full faith and credit of the U.S. government, C is false as typically, Treasury bonds pay higher interest rates than bills due to their longer maturity, and D is false as both bills and bonds pay interest, although bills may have lower yields due to their shorter maturity.

Quiz 15: Investment, Time, and Capital Markets

Use the following statements to answer this question: I. Corporate paper rates are typically less than one percent higher than Treasury bill rates. II) Treasury bill rates may be viewed a short-term, risk-free rates.