Quiz 13: Capital, Interest, and Corporate Finance

The production of capital is a form of roundabout production.

If a person produces capital goods, she sacrifices current production of consumer goods in order to obtain the capability of producing more goods and services in the future.This is called roundabout production.

Saving is necessary for production because A)more roundabout production is better B)less roundabout production is better C)production takes time D)production is expensive E)production requires labor

Roundabout production occurs when A)entrepreneurs hire others to work for them, rather than taking the time to produce things themselves B)workers avoid intermediary entrepreneurs and cooperate to produce output themselves C)inefficient technology is used D)producers make capital goods instead of consumption goods E)a company takes time to market shares in the company

Exhibit 13-1 The movement from x to x' in Exhibit 13-1 represents a(n) A)increase in roundabout production; future ability to produce consumer goods will be higher as a result B)increase in roundabout production; future ability to produce consumer goods will be lower as a result C)decrease in roundabout production; future ability to produce consumer goods will be higher as a result D)decrease in roundabout production; future ability to produce consumer goods will be lower as a result E)decrease in roundabout production but one that does not have an effect on future ability to produce consumer goods

Which of the following is an example of roundabout production? A)A farmer switches from growing soybeans to growing wheat, getting fewer crops per year as a result. B)A farmer switches from growing soybeans to growing wheat, getting more crops per year as a result. C)A self-employed dressmaker becomes a wage worker at a factory that makes dresses. D)A coal mine is sold by its owners to its workers and run as a cooperative. E)A telemarketing firm declares a holiday for two days while a new phone system is installed.

Which of the following is an example of roundabout production? A)Paul pays Ringo to wash his car. B)A church has a bake sale to raise money for a new narthex. C)Jane saves her money to buy a stereo. D)Robinson Crusoe makes a fish net to help him catch more fish per day. E)Business owners in Minneapolis buy blocks of Minnesota Twins baseball tickets to help guarantee that the team will stay in town.

The production of capital goods, which are then used to produce consumer goods, is called A)efficient production B)intermediation C)time preferences D)roundabout production E)derived production

If an economy increases the amount of roundabout production today, A)more consumer goods can be produced in the present B)fewer consumer goods can be produced in the future C)more capital accumulates D)less capital accumulates E)fewer capital goods can be produced in the future

Saving is A)helpful for production but not necessary B)not useful for production because they imply a decrease in consumption C)required for production D)not useful for production because it is not a resource E)not useful for production because savers must be paid interest

Production cannot occur without A)saving B)government C)a market system D)low interest rates E)high interest rates

Another term for an investment good is A)interest B)savings C)capital D)rent E)production

The opportunity cost of producing capital is A)decreased current production of consumption goods B)increased future production of consumption goods C)the amount of roundabout production D)abundant capital accumulation E)the decreased amount of future capital available

The benefit of the production of capital is A)decreased current production of consumption goods B)increased future production of consumption goods C)the amount of roundabout production D)abundant capital accumulation E)the decreased amount of future capital available

Because present consumption is more highly valued higher than future consumption, interest is paid.

Increased saving today means A)more consumption today and in the future B)less consumption today and in the future C)more consumption today and less in the future D)less consumption today and more in the future E)more income today, but the net effect of increased income on the balance between consumption and saving cannot be determined in advance

For the typical consumer, present consumption is A)preferred to future consumption B)not preferred to future consumption C)preferred to future saving D)not preferred to future saving E)financed out of present saving

Goods and activities typically are more highly valued the sooner they can be enjoyed, other things constant, A)only when interest rates are positive B)because interest rates are positive C)only when people save D)because people save E)because people have positive rates of time preference

The rate of time preference is positive A)only when interest rates are positive B)because interest rates are positive C)only when people save D)because people save E)because people prefer goods now to the same goods later

Most companies that sell CDs by mail deliver in 1 to 2 weeks.Mosey Music, Inc., takes 4 weeks to deliver CDs.We should expect that Mosey Music A)will lose all its customers B)will not lose customers because the good in question is CDs, not the delivery date C)will have to charge more for its CDs to make up for the business it loses through slow delivery D)will have to charge less for its CDs to compete with firms that deliver CDs faster E)will be able to charge the same amount for its CDs as other firms do, as long as the CD quality is the same

Which of the following does not reflect a positive rate of time preference? A)People are willing to pay high prices to see new movies at first-run theaters. B)A bank pays interest on savings accounts. C)Ed puts money in his mattress for a rainy day. D)Dry cleaners that provide faster service can charge more. E)A college freshman parties all semester, then stays awake studying for 50 straight hours during final exam week.

Which of the following does not reflect a positive rate of time preference? A)Concert-goers yell and scream when the stage is still dark an hour after the concert was scheduled to start. B)Borrowers have to pay interest on loans. C)A dieter, allowed three ounces of butter per day, spends the whole allotment on her toast at breakfast. D)A dieter, allowed three ounces of butter per day, promises himself some new clothes if he can break the habit of spending the whole allotment on his toast at breakfast. E)A student stays up late every night for a week to finish her term paper two months before it is due.

Interest is a payment for deferred A)taxation B)saving C)consumption D)investment E)none of the above

The interest rate compensates A)bankers for their time spent on paperwork B)borrowers for their increased consumption today C)savers for consumption forgone today D)consumers for more consumption today E)the Fed for its efforts to control the money supply

A positive rate of time preference means that A)time is relative to consumption B)consumption in the future is more important than consumption today C)consumption today is valued less than consumption in the future D)consumption in the future is valued less than consumption today E)consumption in the future and consumption today are positively related

If people have a positive rate of time preference, they A)must be rewarded for saving B)are willing to pay more for a good that saves them money if they hold on to it a long time C)prefer to consume in the future when things are cheaper D)prefer time deposits to savings accounts E)prefer leisure over labor

If Arnold has a positive rate of time preference, he desires to A)save in case of inflation B)consume now rather than later C)invest in stocks and bonds D)invest in education E)plan for retirement

If the market interest rate increases, then A)the cost of borrowing increases and so saving falls B)the opportunity cost of consuming a good in the future increases and saving, therefore, increases C)the opportunity cost of consuming a good in the future increases and saving, therefore, falls D)the reward for saving diminishes and so present consumption increases E)the reward for saving increases and so saving increases

By saving, households A)are supplying loanable funds B)are demanding loanable funds C)are investing D)are acting as a financial intermediary E)must find a borrower

The reward for forgoing present consumption is A)rent B)profit C)roundabout production D)transfer payment E)interest

If the annual interest rate is 5 percent, A)$100 saved today will be worth $105 after one year B)$90 saved today will be worth $100 after one year C)$100 saved today will be worth $5 after one year D)$99 saved today will be worth $100 after one year E)$100 saved today will be worth $1, 000 after one year

If the annual interest rate is 4 percent, a consumer who spends $100 today A)will have to pay back $104 to the bank B)would have to pay $104 next year to get the same goods C)will receive $96 from the bank next year D)would have to pay $96 next year to get the same goods E)is giving up the ability to spend $104 on goods next year

If the interest rate increases from 6 percent to 10 percent per year, each $100 saved will earn A)$4 per year more than before B)$6 per year more than before C)$10 per year more than before D)$16 per year more than before E)$60 per year more than before

The old adage that "a bird in the hand is worth two in the bush" refers to A)a normal good B)opportunity cost C)scarcity D)a positive rate of time preference E)a willingness to forgo current consumption in order to achieve increased future consumption

The difference between income and consumption is A)rent B)profit C)saving D)opportunity cost E)roundabout consumption

The reward offered to households to refrain from spending their income on current consumption and instead save their income is A)rent B)credit C)utility D)interest E)forgone utility

If we assume that a unit of capital will last indefinitely, the marginal rate of return on investment equals the marginal revenue product of capital divided by its marginal resource cost.

In order to predict the marginal rate of return on investment, producers must forecast the interest rate.

A profit-maximizing firm invests up to the point at which the marginal rate of return on capital is greatest.

The marginal rate of return on investment is found by dividing the marginal resource cost per year by the marginal revenue product.

Exhibit 13-2 Given the data in Exhibit 13-2, the marginal product is A)positive for all copy machines B)positive for the first copy machine only C)positive for the first four copy machines only D)positive for the first five copy machines only E)never positive

Exhibit 13-2 The marginal product of the third copy machine listed in Exhibit 13-2 is A)4 copies B)6 copies C)24 copies D)28 copies E)52 copies

Exhibit 13-2 The marginal product of the seventh copy machine listed in Exhibit 13-2 is A)-5 copies B)5 copies C)25 copies D)135 copies E)165 copies

Exhibit 13-2 One reason for the decline in output with the seventh machine in Exhibit 13-2 could be that A)the increase in the company's power consumption when seven machines are being used causes its electricity bills to be much higher B)the increase in the company's power consumption when seven machines are being used causes fuses to blow more often C)no one uses the seventh machine; only six are necessary D)no one uses the seventh machine; only five are necessary E)workers no longer have to wait in line to make copies because more machines are available

Exhibit 13-2 Suppose that the data in Exhibit 13-2 describes a shop that sells photocopies at $0.10 each.At this price, the marginal revenue product of the fourth machine is A)$0.10 B)$0.40 C)$4 D)$40 E)$400

The concept of marginal productivity is applicable to A)all of the following B)capital C)entrepreneurial talent D)land E)labor

For a firm that is a price taker in the product market, all of the following are true except one.Which one is the exception? A)Marginal revenue product can be found by multiplying price by marginal product. B)Marginal revenue product is the change in total revenue that results from increasing the use of a resource by one unit, other things constant. C)Marginal revenue product is constant at the prevailing price. D)Increased output by the firm has no impact on the price of the product. E)The marginal revenue product curve declines because of diminishing marginal returns.

A marginal revenue product curve shows the change in A)total revenue caused by a one-unit change in output, other things constant B)total revenue caused by a one-unit change in an input, other things constant C)total product caused by a one-unit change in output, other things constant D)total product caused by a one-unit change in an input, other things constant E)total revenue product caused by a one-unit change in the price of the output, other things constant

Marginal revenue product for a price taker equals A)MP ´ P B)MP/MRC C)MP ´ MRC D)MRC/MP E)MP/P

All types of capital A)are forms of resources that can be used in future production B)require a physical existence C)earn an economic rent D)yield profits for their owners E)require obtaining more education and job skills

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 10 percent, the firm in Exhibit 13-3 should select A)the maximum number of tools available because price does not decrease as output increases B)the minimum number of tools available because price does not increase as output increases C)three tools D)four tools E)five tools

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 7 percent, the firm in Exhibit 13-3 should select A)the maximum number of tools available because price does not decrease as output increases B)the minimum number of tools available because price does not increase as output increases C)three tools D)four tools E)five tools

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At what interest rate would the firm in Exhibit 13-3 choose not to buy any machines? A)10% B)20% C)30% D)35% E)40%

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At what interest rate would the firm in Exhibit 13-3 choose to buy 3 machines? A)5% B)8% C)12% D)20% E)24%

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Given the data in Exhibit 13-4, Memo Co. A)must be a perfectly competitive seller of output B)must be a monopoly seller of output C)must be a perfectly competitive buyer of personal computers D)cannot be a perfectly competitive buyer of personal computers E)may or may not be a perfectly competitive buyer of personal computers

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Given the data in Exhibit 13-4, the price of personal computers must be A)$5, 000 each B)$500 each C)$250 each D)$200 each E)increasing as Memo Co.purchases more personal computers

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's output is expected to remain constant in the future.As the number of personal computers Memo Co.might purchase increases to 120, the marginal rate of return on that kind of capital will A)decrease from 24 percent and eventually become negative B)rise from 24 percent C)decrease from 24 percent but never become negative D)remain constant because the price of personal computers is constant E)remain constant because the increments being considered are constant

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's product is expected to remain constant in the future.The marginal rate of return on 60 personal computers is closest to A)19 percent B)24 percent C)30 percent D)52 percent E)520 percent

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's product is expected to remain constant in the future.Given the rate of interest, how many personal computers will Memo Co.select? A)40 B)60 C)80 D)100 E)120

If a firm can borrow or lend at a 10 percent annual interest rate, it will A)buy all units of capital with a marginal rate of return above 10 percent B)buy all units of capital with an average rate of return above 10 percent C)buy all units of capital with a marginal rate of return below 10 percent D)buy all units of capital with an average rate of return below 10 percent E)select only the unit of capital with the highest marginal rate of return, assuming it is above 10 percent

If a firm can borrow or lend at a 6 percent annual interest rate, it will A)buy more capital if it has the funds on hand than if it has to borrow them B)ignore the market rate of interest when making capital investment decisions C)buy less capital if it has the funds on hand than if it has to borrow them D)ignore the market rate of interest when making saving decisions E)buy the same amount of capital whether it has the funds on hand or has to borrow them

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.The marginal product of the machine with the three-quart mixing bowl is A)50 donuts per day B)100 donuts per day C)1, 000 donuts per day D)550 donuts per day E)5 percent

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.The marginal resource cost of the machine with the three-quart mixing bowl is A)$50 B)$100 C)$1, 000 D)$3, 000 E)$550

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future.The marginal rate of return on the machine with the three-quart bowl is A)1 percent B)5 percent C)10 percent D)20 percent E)55 percent

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future.If the market rate of interest is 8 percent, what size machine should the donut shop buy? A)none B)the machine with the one-quart bowl C)the machine with the two-quart bowl D)the machine with the three-quart bowl E)the answer can't be determined from the given data

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future.If the interest rate is 8 percent and the firm has $3, 000 on hand, what should it do? A)Buy the machine with the three-quart bowl, which costs $3, 000. B)Save $3, 000 at the interest rate of 8 percent. C)Buy the machine with the one-quart bowl and save the extra $2, 000. D)Buy the machine with the two-quart bowl and save the extra $1, 000. E)Buy two machines, with one-quart and two-quart bowls.

Exhibit 13-6 In Exhibit 13-6, the marginal revenue product of the A)second sewing machine is $20 B)fourth sewing machine is $80 C)first sewing machine is $30 D)third sewing machine is $72 E)fifth sewing machine is $40

Exhibit 13-6 In Exhibit 13-6, assume that sewing machines last indefinitely, operating expenses are negligible and output is expected to be constant in the future.If sewing machines can be purchased for $720 each and the market interest rate is 10%, how many sewing machines should the firm purchase? A)one B)two C)three D)four E)five

Exhibit 13-6 In Exhibit 13-6, if the rental price of each sewing machine is $70, how many machines should be used? A)four B)three C)two D)one E)five

IBM's marginal rate of return on investment curve equals its A)supply of loanable funds curve B)supply of investment curve C)marginal revenue product curve D)marginal revenue cost curve E)investment demand curve

A firm's demand curve for investment is its A)marginal resource cost curve B)marginal product curve C)marginal revenue curve D)marginal rate of return on investment curve E)supply of loanable funds curve

The marginal rate of return on investment is equal to capital's A)MRC ´ MRP/2 B)MRC/MRP C)MRP/MRC D)MRC ´ MRP/2 E)MRC ´ MRP ´ the interest rate

Exhibit 13-7 In Exhibit 13-7, if the interest rate is 5 percent, investment will equal approximately A)$1, 500, 000 B)$700, 000 C)$1, 000, 000 D)$950, 000 E)$1, 250, 000

Exhibit 13-7 In Exhibit 13-7, if the interest rate is 8 percent, investment will equal approximately A)$1, 500, 000 B)$500, 000 C)$1, 000, 000 D)$950, 000 E)$1, 250, 000

Suppose that a firm's capital equipment is expected to last indefinitely, that operating expenses on the equipment are negligible, and that the price of the firm's product is expected to remain constant in the future.Under these circumstances, the firm's marginal rate of return on investment is equal to capital's A)marginal resource cost as a percentage of its marginal revenue product B)marginal product as a percentage of its marginal revenue product C)marginal revenue product as a percentage of its marginal product D)marginal resource cost as a percentage of the price of capital E)marginal revenue product as a percentage of its marginal resource cost

A firm's marginal rate of return on investment curve shows the amount A)saved by the firm at each alternative interest rate B)invested by the firm at each alternative interest rate C)saved by the firm at each alternative rate of time preference D)invested by the firm at each alternative marginal resource cost E)saved by the firm at each alternative marginal revenue product of investment

If financial intermediaries charge a higher rate of interest to lenders than they pay to borrowers, then A)investing with borrowed funds involves a higher opportunity cost than investing with savings B)investing with saving involves a higher opportunity cost than investing with borrowed funds C)a firm is charged less interest to borrow than it can earn on savings D)the opportunity cost of investing with borrowed funds equals the opportunity cost of investing with savings E)a firm does not consider the market rate of interest when it makes investment decisions

Each firm has a downward-sloping demand curve for loanable funds because its A)marginal resource cost curve slopes downward B)marginal revenue product curve slopes upward C)marginal rate of return on investment curve slopes downward D)marginal resource cost slopes upward E)marginal rate of return on investment curve slopes upward

If the marginal rate of return expected from a purchase of equipment is greater than the market interest rate, the firm should A)not purchase the equipment B)purchase the equipment C)either purchase or not purchase the equipment, depending on the marginal resource cost D)inform stockholders that the company expects a decrease in earnings from the purchase E)seek government assistance in raising market interest rates

When the marginal rate of return expected from a purchase of equipment is less than the market interest rate, then the firm should A)seek government assistance in decreasing the market interest rate B)inform stockholders that the company can expect increased earnings from the purchase C)either purchase or not purchase the equipment depending on the marginal resource cost of the equipment D)purchase the equipment E)not purchase the equipment

The market interest rate A)typically increases from one year to the next B)represents the demand for investment C)represents the opportunity cost of funds D)represents the supply of loanable funds E)is not affected by the demand for investment

Interest provides an incentive for households to defer current consumption

An increase in the interest rate tends to increase the demand for loanable funds.

If consumers elect to postpone consumption so they can have a more enjoyable future, the supply of loanable funds would increase and the market rate of interest would fall.

As defined by economists, interest is A)only the amount earned by productive capital as a resource B)only the amount earned by land as a resource C)only the amount earned by lending money D)both the amount earned by productive capital as a resource and the amount earned by lending money E)both the amount earned by land as a resource and the amount earned by lending money

If the interest rate increases from 3 percent to 4 percent, other things constant, individuals will want to A)save and borrow more B)save and borrow less C)save more and borrow less D)save less and borrow more E)borrow more but save the same amount

Financial intermediaries bring suppliers and demanders together in the market for A)checks B)loanable funds C)saving D)physical capital E)income

An increase in the marginal rate of return on bread-mixing machines would A)reduce the supply of loanable funds and reduce the equilibrium market interest rate B)reduce the supply of loanable funds and increase the equilibrium market interest rate C)increase the supply of loanable funds and reduce the equilibrium market interest rate D)increase the supply of loanable funds and increase the equilibrium market interest rate E)increase the demand for loanable funds and increase the equilibrium market interest rate

Market interest rates are determined by A)banks B)Wall Street C)the demand for loanable funds D)the supply of loanable funds E)the demand for and supply of loanable funds

The supply of loanable funds curve is A)upward sloping because fewer people are persuaded to forgo current consumption as the interest rate rises B)downward sloping, showing that more investment will be undertaken as inflation decreases C)upward sloping because the opportunity cost of goods and services that must be forgone increases D)downward sloping, showing that as more funds are made available, the risk cost of loaning funds decreases E)usually horizontal

Exhibit 13-8 In Exhibit 13-8, D₀ and S₀ represent the initial demand and supply of loanable funds.A technological breakthrough that increase the productivity of capital would result in a movement in this market from point a to A)point b B)point c C)point d D)point f E)point g

Exhibit 13-8 In Exhibit 13-8, D₀ and S₀ represent the initial demand and supply of loanable funds.An increase in the expected rate of inflation would shift the equilibrium in this market from point a to A)point b B)point c C)point d D)point f E)point g

Exhibit 13-8 In Exhibit 13-8, D₀ and S₀ represent the initial demand and supply of loanable funds.A decrease in the expected rate of inflation would shift the equilibrium in this market from point a to A)point b B)point c C)point d D)point f E)point g

Exhibit 13-8 In Exhibit 13-8, D₀ and S₀ represent the initial demand and supply of loanable funds.If consumers decide to save more in preparation for retirement it would shift the equilibrium in this market from point a to A)point b B)point c C)point d D)point f E)point h

Exhibit 13-8 In Exhibit 13-8, D₀ and S₀ represent the initial demand and supply of loanable funds.If the federal government borrows more money to fund a deficit it would shift the equilibrium in this market from point a to A)point b B)point c C)point d D)point f E)point h

The supply of loanable funds curve reflects A)the inverse relationship between the market interest rate and the quantity of borrowed funds B)the inverse relationship between the market interest rate and the quantity of saving C)the direct relationship between the market interest rate and the quantity of borrowed funds D)the direct relationship between the market interest rate and the quantity of saving E)the direct relationship between the market interest rate and the quantity of present consumption

In the loanable funds market, A)savers are suppliers of loanable funds, and borrowers are demanders of loanable funds B)the supply curve slopes downward, and the demand curve slopes upward C)the supply curve reflects the negative relation between the market rate of interest and the quantity of savings D)households play the role of financial intermediaries E)banks pay a higher interest rate on consumer savings than they could earn by lending these funds out

The loanable funds market brings together savers and borrowers to determine the A)marginal rate of return on investment B)rate of time preference C)market rate of interest D)marginal resource cost of investment E)marginal revenue product of investment

The market interest rate A)represents the opportunity cost of investing with borrowed funds B)has no impact on the firm's investment decision if the firm uses borrowed funds C)represents the opportunity cost of investing with savings D)has no impact on the firm's investment decision if the firm uses savings E)represents the opportunity cost of investing with either borrowed funds or savings

Which of the following would cause a rightward shift of the demand for loanable funds curve? A)a fall in the marginal rate of return on investment B)a fall in the value of the marginal product of capital C)a rise in the marginal product of capital D)a fall in the investment demand curve E)a fall in the price of the product capital produces

Which of the following would cause a fall in the market interest rate? A)an increase in the risk cost of investment B)an increase in the inflation rate C)an increase in the marginal rate of return on investment D)a decrease in the marginal product of capital E)none of the above

The market demand curve for loanable funds represents the demand by A)domestic firms B)domestic firms and domestic households C)domestic firms, households, and governments D)domestic firms and domestic governments E)domestic firms, households, governments, and the rest of the world

A technological breakthrough that increases the marginal productivity of capital would increase the A)demand for loanable funds, leading to a lower equilibrium market interest rate B)supply of loanable funds, leading to a lower equilibrium market interest rate C)demand for loanable funds, leading to a higher equilibrium market interest rate D)supply of loanable funds, leading to a higher equilibrium market interest rate E)supply of loanable funds but have no impact on the equilibrium market interest rate

As the interest rate increases, consumers will tend to increase their amount of saving due to A)increased profit B)their greater reliance on borrowing C)the lower opportunity cost of current consumption D)diminishing marginal utility E)the higher opportunity cost of current consumption

As the interest rate increases, the opportunity cost of A)both c and e are correct B)past consumption decreases C)saving increases D)current consumption increases E)borrowing decreases

The supply of loanable funds comes, in part, from A)consumer saving B)business investment C)the federal government D)current consumption E)future consumption

If consumers decide to increase their rate of saving, the A)supply of loanable funds will decrease B)supply of loanable funds will increase C)demand for loanable funds will decrease D)demand for loanable funds will increase E)interest rate will increase

If a change in technology improves the marginal productivity of capital, the A)supply of capital will increase B)supply of capital will decrease C)demand for loanable funds will increase D)demand for loanable funds will decrease E)supply of loanable funds will increase

The interest rate charged on a risk-free loan exceeds the rate on a risky loan.

Administrative costs make small loans less profitable than large ones, other things equal.

Generally, the longer the maturity on a bond, the lower the interest rate.

Which of the following statements is true? A)Interest rates charged to well-known corporations are higher than rates charged to individuals because corporations can afford it. B)If people expect higher rates of inflation, the market interest rate will decrease because fewer people will borrow. C)Interest rates in unstable countries are lower than rates in stable countries. D)The risk cost of doing business in a high-crime area is greater and the cost of borrowing is, therefore, greater there. E)The lower the tax rate, the greater the cost of borrowing.

If you hold a bond at a time when market interest rates are increasing, you will find that the bond's value has A)remained the same since the interest payment remains constant B)increased C)increased only if the market interest rate exceeds the interest rate payable on the bond D)declined because you will receive a lower price when you sell the bond E)increased only if the interest payable on the bond exceeds the market interest rate

The administration costs of a loan as a proportion of the total cost of the loan typically A)decrease as the size of the loan increases.Therefore, the larger the loan, other things constant, the lower the interest rate B)decrease as the size of the loan increases.Therefore, the larger the loan, other things constant, the higher the interest rate C)increase as the size of the loan increases.Therefore, the larger the loan, other things constant, the lower the interest rate D)increase as the size of the loan increases.Therefore, the larger the loan, other things constant, the higher the interest rate E)increase as the size of the loan increases, but this has no impact on the interest rates charged for large loans compared to small loans

Which of the following affects the interest rate on a loan? A)all of the following B)the duration of the loan C)the tax treatment of the loan D)the administrative cost of the loan E)the risk of default on the loan

The term structure of interest rates describes the relationship between the rate of interest charged and the A)length of time until repayment of the loan B)amount of the loan C)riskiness of the borrower D)identity of the borrower E)age of the lender

Which of the following does not contribute to differences in interest rates? A)Different loans are for different periods of time. B)Large loans generate more administrative costs per dollar than smaller loans. C)Different loans are subject to different tax rules. D)Loans to established businesses are evaluated differently from loans to new businesses. E)The longer the period of repayment, the greater the risk of higher-than-expected inflation.

If the interest rate increases, the A)cost of saving will increase B)cost of borrowing will increase C)firm should decrease the amount of capital it owns by selling capital D)firm should acquire more capital E)supply of loanable funds will increase

Intellectual property is A)a special form of capital B)a type of labor C)a special type of service D)cheap to produce, but expensive to transmit E)a kind of entrepreneurial ability

Intellectual property A)requires copyright protection that is expensive to obtain, but cheap to enforce B)usually ends up being owned by the government C)is costly to produce, but can be transmitted at low cost D)cannot be owned by anyone E)is usually located on college campuses

The Internet has created some special problems of intellectual property.One problem is that the A)Internet is a monopoly, so the price of intellectual property exceeds marginal cost B)Internet market has not yet reached equilibrium C)property that can be downloaded, modified, and then re-sold D)marginal cost of enforcing property rights exceeds the marginal benefit E)price of intellectual property usually exceeds the marginal benefit

One problem associated with intellectual property is that A)only one person can use it at a time B)the patent system reduces incentives to create new intellectual property C)the cost of producing it usually exceeds the benefit D)encryption software creates monopoly power E)the original producer has difficulty preventing non-paying beneficiaries from consuming the property

The patent and copyright systems A)reduce the cost of duplicating intellectual property B)help make the market for intellectual property more competitive C)are forms of intellectual property D)help increase the incentives to create new intellectual property E)help reduce the incentives to create new intellectual property

A labor union is a group of A)employees who join together to improve their working conditions B)firms that join together to hire workers C)firms that work together to negotiate better prices in the market D)farmers who work together to receive better prices for their agricultural products E)workers and firm owners who join together to improve working conditions

A payment of $105 next year can be more valuable than a payment of $100 now.

The present value of a promise to pay $100 one year from now would be greater if the interest rate were higher.

The present value of a promise to pay $100 one year from now is approximately $90.91 if the interest rate is 10 percent.

If the market interest rate is 5 percent, the opportunity cost of $100 worth of present consumption A)is $105 today B)is $105 next year C)is $5 today D)is $5 next year E)cannot be determined unless we know the consumer's rate of time preference

If the interest rate is 8 percent, $54 next year is worth __________ today. A)$62 B)$50.68 C)$50 D)$62 E)$4.32

The procedure of determining the present value of payments to be received in the future is known as A)compounding B)amortizing C)perpetuating D)nominalizing E)discounting

The present value of receiving $200 one year from now when the prevailing rate of interest is 8 percent is A)$192 B)$185.19 C)$200 D)$208 E)$160

The present value of receiving $200 one year from now when the prevailing rate of interest is 8 percent is less than the present value of receiving $200 two years from today when the prevailing rate of interest is 8%

The present value of receiving $200 one year from now when the prevailing rate of interest is 8 percent is less than the present value of receiving $200 one year from today when the prevailing rate of interest is 10%

The present discounted value of $100 to be received in one year and with an interest rate of 10 percent is closest to A)$100 B)$10 C)$110 D)$91 E)$80

There is an inverse relationship between the present value of a future amount and the interest rate used for discounting.

The present value of $200 to be paid to you at the end of two years, if the market interest rate is 5 percent, is A)$181.41 B)$190.00 C)$210.00 D)$225.78 E)cannot be determined from the information given

If you are to receive a payment of $200 at the end of the first year and a payment of $250 at the end of the second year and the market interest rate is 5 percent, the present value of this income stream is A)$400.37 B)$417.23 C)$450.00 D)$475.37 E)$490.13

The present value of a given payment will be lower A)if the payment comes sooner than expected B)the lower the prevailing interest rate C)the further in the future the payment is to be received D)the sooner the payment is to be received E)if the payment is made in cash

The present value of receiving M dollars two years from now when the prevailing interest rate is i is equal to A)M - i² B)M ´ i² C)M/i D)M/(1 - i) E)M/(1 + i)²

If you will receive $5, 000 two years from today, what is its present value if the discount rate is 5 percent? A)$5, 025 B)$4, 500 C)$3, 429 D)$4, 535 E)$4, 762

The present value of receiving M dollars in year t when the prevailing interest rate is i is equal to A)M - i^t B)M ´ (1 - i)^t C)M/(1 + i)^t D)M ´ i^t E)M/i^t

The present value of an annuity that pays $100 each year indefinitely (i.e., a perpetuity)is $2, 000 if the interest rate is 5 percent.

A firm is considering the purchase of a piece of equipment that will add $200 per year to the firm's revenue forever.If the interest rate is 10 percent, the firm will purchase the equipment so long as it costs less than A)$1, 000 B)$2, 000 C)$4, 000 D)$6, 000 E)$8, 000

If the discount rate is 5 percent, the present value of annual $100, 000 payments in perpetuity (i.e., continued indefinitely into the future)is A)$2, 000, 000 B)$1, 246, 296 C)$1, 000, 000 D)$976, 463 E)infinite

You buy a bond for $1, 000 from the federal government, which guarantees that you will receive $70 a year forever.Thus, 7 percent was the market rate of interest when you bought the bond.Suppose that immediately after you buy the bond, the market rate of interest goes to 10 percent.The market value of your bond A)could be more or less than $1, 000 B)will be less than $1, 000 C)will be more than $1, 000 D)will remain unchanged E)will be $1, 000

The Great Homebody Nationwide Sweepstakes promises its winners a choice between $200, 000 now or $120, 000 now and $100, 000 next year.The winners should take the $200, 000 now A)no matter what the interest rate is B)no matter what the interest rate is, if their rate of time preference is high C)no matter what the interest rate is, if their rate of time preference is low D)only if the interest rate is above 25 percent E)only if the interest rate is below 25 percent

If a person saves $1, 000, how much will she have at the end of three years if the market interest rate is 6 percent? A)$1, 060 B)$1, 135 C)$1, 156 D)$1, 191 E)$1, 600

If you will receive $3, 000 three years from today and the discount rate is 7 percent, the present value of the $3, 000 is A)$2, 779 B)$3, 770 C)$1, 658 D)$1, 962 E)$2, 449

Suppose the star pitcher on a university's baseball team, who is now a sophomore, decides to finish college instead of joining a major league team.In doing this, he is giving up a $40, 000 salary for each of the next two years.At an interest rate of 10 percent, the total value of this sacrifice is approximately A)$46, 000 B)$77, 777 C)$69, 420 D)$80, 000 E)$88, 000

If a company offers a consultant the following five alternatives, which should she choose? A)to be paid $50, 000 now B)to be paid $30, 000 now and $20, 000 when the project in question is completed C)to be paid $25, 000 now and $25, 000 when the project in question is completed D)to be paid $10, 000 now and $40, 000 when the project in question is completed E)to be paid $50, 000 when the project in question is completed

Suppose an investment will yield $1, 000 after one year and $2, 000 after two years.What is the present value of this investment if the discount rate is 8 percent? A)$2, 479.34 B)$2, 640.60 C)$2, 727.27 D)$3, 000 E)$3, 520

If you are receiving $2, 000 per year forever, the present value of that income stream when the prevailing interest rate is 7 percent is equal to A)$20, 000 B)$62, 472 C)$100, 087 D)$27, 000 E)$28, 571

The present value of a promise to pay $5, 000 every year forever when the prevailing interest rate is 10 percent equals A)$5, 000 B)$50, 000 C)$100, 000 D)$250, 000 E)$500, 000

A cheerleader-turned-pop-vocalist is offered a choice by her producer of either a lump sum of $20 million for all future work or a stipend of $1 million per year, payable to her and her heirs forever.She should choose the $1 million A)no matter what the interest rate is B)if the interest rate is greater than 20 percent C)if the interest rate is less than 20 percent D)if the interest rate is greater than 5 percent E)if the interest rate is less than 5 percent

If Andre Preneur puts together a company that yields a profit of $40, 000 per year and this profit stream is expected to continue indefinitely, what price can he sell the company for if the discount rate equals 8 percent? A)$40, 000 B)$60, 000 C)$100, 000 D)$250, 000 E)$500, 000

A given sum of money received each year for a specific number of years is called a(n) A)bond B)perpetuity C)debt D)discount E)annuity

You expect to rent out a vacation home on Sanibel Island for $800 a month as an investment.Upkeep is estimated at $3, 000 a year.If the current market interest rate is 5 percent, you are willing to pay __________ for the house. A)$132, 000 B)$100, 000 C)$160, 000 D)$192, 000 E)$800, 000

A $100 annuity is A)$100 received in a single year B)$100 received each year forever C)more or less than $100, dependent on the interest rate, received for a certain number of years D)$100 received each year for a certain number of years E)more or less than $100, dependent on the interest rate, received until an upper limit is reached

If the interest rate is 8 percent, a person who is offered the opportunity to buy an annuity paying $30, 000 per year forever should A)do so if the price is greater than $375, 000 B)do so if the price is less than $375, 000 C)be willing to pay only $37, 037 for it D)be willing to pay $77, 037 for it E)be willing to pay no more than $300, 000 for it

If you own a perpetuity of $100 and if the discount rate is 5 percent, then its present value A)cannot be determined unless we know the number of years B)is $95.21 C)is $105 D)is $2, 000 E)is infinite

The payment of a given sum of money each year that continues indefinitely into the future is known as A)a perpetuity B)a lottery C)a term payment D)a permanent annuity E)an indefinite annuity

A perpetuity is an annuity with a fixed term.

Corporations can acquire funds for investment projects through A)both c and e B)all of the following C)borrowing (e.g., from banks) D)issuing bonds E)issuing stock

If 900 million shares of stock are traded on the New York Stock Exchange today at an average price of $100, then the total amount of money raised today by the corporations whose stock traded on this exchange would be $90 billion.

Corporations can obtain investment funds by A)buying government securities B)selling stock C)increasing dividends D)purchasing more capital E)buying back stock

If ABC Corp.is profitable, A)it must pay dividends to its stockholders B)pretax profits are either paid as dividends or reinvested in the corporation C)after-tax profits are either paid as dividends or reinvested in the corporation D)it is contractually obligated to retain a portion of its earnings E)it typically uses the profits to buy back its own stock from the underwriter

Once ABC Corp.sells shares of stock to the public, the stock's price tends to A)fluctuate inversely with the profit prospects of ABC Corp. B)fluctuate inversely with the dividend payout of ABC Corp. C)fluctuate directly with the dividend payout of ABC Corp. D)fluctuate directly with the profit prospects of ABC Corp. E)remain constant

If I own a share of stock in IBM, I own A)only the right to vote in elections of corporate directors B)a claim to a share of IBM's assets and earnings as well as the right to demand annual dividend payments C)the right to demand annual dividend payments as well as the right to vote in elections of corporate directors D)only the right to demand annual dividend payments E)a claim to a share of IBM's assets and earnings as well as the right to vote in elections of corporate directors

One reason investors may prefer bonds over stocks is A)potential profits are larger B)bond prices never vary C)bondholders get paid before stockholders D)owning bonds implies owning a part of the company E)interest rates do not affect the value of bonds

An IOU reflecting the corporation's promise to pay the holder a fixed sum of money at a designated maturity date plus an annual interest payment until maturity is A)a bond B)a stock certificate C)a prospectus D)a golden parachute E)an underwriting note

The federal agency that regulates the New York Stock Exchange is the A)Securities and Exchange Commission B)Department of Justice C)Department of Commerce D)Federal Reserve Board E)Department of the Treasury

The market value of a bond is __________ related to the rate of interest. A)directly B)inversely C)exactly D)sometimes E)never

Other things constant, the more profitable a corporation is, A)the lower the value of its shares on the stock market and the lower the interest rate that would have to be paid on new bond issues B)the higher the value of its shares on the stock market and the higher the interest rate it would have to pay on new bond issues C)the higher the value of its shares on the stock market and the lower the interest rate that would have to be paid on new bond issues D)the lower the value of its shares on the stock market and the higher the interest rate that would have to be paid on new bond issues E)the lower the interest rate that would have to be paid on new bond issues; the value of its shares on the stock market does not vary

The market value of ABC Corp., whose securities are publicly traded, can be found by A)multiplying the price of its stock by the number of shares outstanding B)dividing the number of shares outstanding by the price of the stock C)adding the total value of its outstanding stock to the total value of its outstanding bonds D)subtracting the total value of its outstanding bonds from the total value of its outstanding stock E)subtracting the total value of its outstanding stock from the total value of its outstanding bonds

The largest securities exchange in the United States is the A)American Stock Exchange B)Chicago Board of Trade C)Securities and Exchange Commission D)New York Stock Exchange E)Federal Trade Commission

Most securities traded in the United States are A)secondhand securities bought by individuals B)secondhand securities bought by institutional investors C)new securities bought by institutional investors D)new securities bought by banks and insurance companies E)new securities bought by individuals

The exchange of secondhand securities A)takes place in an oligopolistic market B)does not provide funds to the firm that issued those securities C)includes the initial sale when securities are issued by a firm D)involves very few institutional investors E)lowers the liquidity of the securities

A self-employed editor and writer is thinking about purchasing a new computer to use for work.In making this investment decision, the person should take time into account.

Sharing music files is not a(n) A)victimless crime B)example of decisions about the use of capital C)issue regarding intellectual property D)current problem E)important issue for the Recording Industry of America

Economic development around the globe will be affected by how society nurtures incentives to create new A)ideas B)inventions C)only ideas and inventions D)only ideas and artistic creations E)ideas, inventions, and artistic creations

Laura Kaid owns a business and is willing to invest in capital until, at the margin, her investment yields a cash stream with a present value less than the marginal cost of the investment.

Compared to the present value of a high school education, the present value of at least a college education is A)100 times as great B)nearly double C)the same D)about half E)Present value cannot be used to analyze education

As large-scale production became more profitable during the Industrial Revolution, the easiest way to finance the required factories and heavy machinery was A)sole proprietorships B)limited liability partnerships C)letting government take over D)the corporate structure E)family businesses

When a start-up company meets with success and the entrepreneur needs to achieve economies of scale, it would not make economic sense to consider an IPO.

Which of the following is the best description of the risks of corporate bonds? A)the firm declines to pay dividends B)both bankruptcy and higher market interest rates C)only bankruptcy D)lower market interest rates E)both the firm declines to pay dividends and higher market interest rates

Securities exchanges pay no attention to hedge funds.

Exhibit 13-9 In the market for loanable funds depicted in Exhibit 13-9, what is the equilibrium interest rate? A)50% B)40% C)30% D)20% E)10%

Exhibit 13-9 In the market for loanable funds depicted in Exhibit 13-9, what is the equilibrium amount of loanable funds exchanged? A)$4 million B)$5 million C)$6 million D)$7 million E)$8 million

Exhibit 13-10 Consider Exhibit 13-10.Which of the lines represents the pattern of the expected rate of return on investment for most firms? A)a B)b C)c D)d E)none of the lines

Exhibit 13-10 Consider Exhibit 13-10.Which of the lines represents the opportunity of funds available for investment? A)a B)b C)c D)d E)none of the lines