Question 1

In general,a profit- maximizing firm will purchase a piece of capital equipment if the

Accepted Answer

A profit-maximizing firm will purchase a piece of capital equipment if the present value of the stream of future MRPs exceeds the purchase price. This is because the firm wants to ensure that the investment will generate more revenue over time than the initial cost of the equipment. Therefore, the present value of future MRPs must be greater than the purchase price in order for the investment to be profitable.

Question 2

The economy's supply curve for saving (financial capital)shows

Accepted Answer

The supply curve for saving shows how the economy's desired flow of saving varies with changes in the interest rate. As interest rates rise, the quantity of saving supplied by households and businesses typically increases, as they are incentivized to save more in order to earn higher returns on their financial investments. Similarly, as interest rates fall, the quantity of saving supplied decreases as the opportunity cost of saving (foregoing consumption or investment) becomes lower. Therefore, the supply curve for saving slopes upward, indicating a positive relationship between the interest rate and the quantity of saving supplied.

Question 3

FIGURE 15- 2 
-Refer to Figure 15- 2.The market for financial capital is initially in equilibrium at point E1.If the marginal product of capital increases,all other things being equal,the

Accepted Answer

When the marginal product of capital increases, the investment demand curve shifts to the right (I2) as firms are willing to invest more at each interest rate, leading to a new equilibrium at E4.

Question 4

Ongoing technological improvement over the past four decades in Canada has led to continual increases in investment demand,and an increase in the flow of investment,but no clear trend in the interest rate.The reason that we have not seen continual increases in the interest rate over this time period is that

Accepted Answer

Technological change has led to rising productivity and incomes, which increases the supply of savings, offsetting the increased demand for investment and stabilizing interest rates.

Question 5

If the annual rate of interest is 6%,the present value of $100 to be paid every year for three years (beginning one year from now)is

Accepted Answer

The answer of If the annual rate of interest is...

Question 6

Suppose a roofing contractor is considering the purchase of an additional truck at a price of $35 00.He expects the discounted MRP of the truck in Year 1 to be $7000,in Year 2 to be $6000,in Year 3 to be $5000,after which he can sell the truck at a present value of $14 000.This contractor should

Accepted Answer

The answer of Suppose a roofing contractor is considering the...

Question 7

The present value of a given future payment is higher the _ _ the rate of interest and the distant the payment date.

Accepted Answer

The answer of The present value of a given future...

Question 8

FIGURE 15- 2 
-Refer to Figure 15- 2.Suppose the economy begins at point E1.If technology changes in a way that increases the marginal product of capital,which movement best depicts the change in equilibrium in the market for financial capital?

Accepted Answer

The answer of FIGURE 15- 2 
-Refer to Figure 15-...

Question 9

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing. $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Number of } \
\text { Sewing Machines }
\end{array} & \text { Annual MRP } \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}$$ TABLE 15- 2
-Refer to Table 15- 2.If the interest rate is 4%,and the purchase price of a sewing machine is $3000,what is the optimal capital stock (number of sewing machines)for this firm?

Accepted Answer

The answer of The firm in the table below produces...

Question 10

Financial intermediaries are often the "middlemen" between households and firms and,as such,

Accepted Answer

Financial intermediaries specialize in assessing the risk of various borrowers and matching them with appropriate lenders, helping to facilitate the flow of funds between households and firms. While they are not the fundamental determinant of the supply or demand for capital, they play an important role in efficiently allocating capital within an economy. They do charge fees for their services, but these fees are generally considered reasonable in exchange for the benefits they provide to both borrowers and lenders.

Question 11

The present value of $100 to be received one year from now,with an annual interest rate of 6%,is

Accepted Answer

Using the present value formula $PV = \dfrac{FV}{(1+r)^n}$ with $FV=100$, $r=0.06$, and $n=1$, we get $PV = \dfrac{100}{(1+0.06)^1} \approx 94.34$. Therefore, the answer is B.

Question 12

The diagram below shows a firm's demand for its units of capital-coin- operated coffee machines.The firm places its machines in universities and colleges across Canada.
  FIGURE 15- 1
-Refer to Figure 15- 1.One possible explanation for a shift of the firm's investment demand curve from I0 to I2 is

Accepted Answer

The answer of The diagram below shows a firm's demand...

Question 13

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing. $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Number of } \
\text { Sewing Machines }
\end{array} & \text { Annual MRP } \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}$$ TABLE 15- 2
-Refer to Table 15- 2.If the interest rate is 4% and the purchase price of a sewing machine is $2000,what is the optimal capital stock (number of sewing machines)for this firm?

Accepted Answer

The answer of The firm in the table below produces...

Question 14

The term "present value" refers to the

Accepted Answer

Present value refers to the value today of a payment or receipt that will occur in the future, taking into account the time value of money and potential interest earned or charged.

Question 15

When we consider any future stream of benefits,and we seek to determine its value today,we that steam of benefits using the market interest rate.

Accepted Answer

The process of determining the value of future benefits today is known as discounting, which involves using the market interest rate to calculate the present value of those benefits. Therefore, the correct choice is (B) discount.

Question 16

Suppose the nominal interest rate is 10%.The rate of inflation has been 4% and is expected to continue at 4% in the future.The real interest rate,which determines the firm's decision to purchase capital,is therefore

Accepted Answer

The real interest rate is calculated as nominal interest rate - inflation rate. So, the real interest rate in this case is 10% - 4% = 6%. This is the rate that will determine the firm's decision to purchase capital, as it represents the true cost of borrowing after accounting for inflation.

Question 17

The concepts of stock and flow are involved in firms' demand for labour and for capital.Which of the following statements is correct?

Accepted Answer

A firm hires a flow of labour services, as labour is typically measured over a period of time (e.g., hours worked per week), and purchases a stock of physical capital, which provides a flow of services over time.

Question 18

Choose the best reason for a rightward shift in the economy's investment demand curve.

Accepted Answer

Changes in technology that improve the productivity of capital would lead to an increase in the return on investment, which would increase the demand for investment and shift the investment demand curve to the right. Options A and D relate to changes in interest rates, which affect the cost of borrowing and would not directly shift the investment demand curve. Option B relates to the concept of diminishing marginal returns, which would decrease the demand for investment and shift the curve to the left.

Question 19

If the annual interest rate is 7%,the present value of $100 to be received at the end of two years is

Accepted Answer

The present value of $100 to be received at the end of two years at an annual interest rate of 7% is $93.46. This can be calculated using the formula:PV = FV / (1 + r)^nwhere:PV is the present valueFV is the future valuer is the annual interest raten is the number of yearsIn this case, FV = $100, r = 7%, and n = 2. Plugging these values into the formula, we get:PV = $100 / (1 + 0.07)^2PV = $100 / 1.1449PV = $93.46

Question 20

Consider the flow of investment and saving in a small economy.Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion.Now suppose,all else remaining equal,that there is an increase in per capita income.What will be the effect in the capital market?

Accepted Answer

An increase in per capita income will lead to an increase in both saving and investment. As both saving and investment increase, there is an ambiguous effect on the interest rate because the effect on the demand for and supply of loanable funds is uncertain. Therefore, the equilibrium interest rate may remain the same, rise, or fall. However, the equilibrium level of saving and investment will increase.

Quiz 15: Interest Rates and the Capital Market

In general,a profit- maximizing firm will purchase a piece of capital equipment if the

The economy's supply curve for saving (financial capital) shows

FIGURE 15- 2 -Refer to Figure 15- 2.The market for financial capital is initially in equilibrium at point E1.If the marginal product of capital increases,all other things being equal,the

If the annual rate of interest is 6%,the present value of $100 to be paid every year for three years (beginning one year from now) is