Question 1

The further in the future a payment is received, the more it is worth today.

Accepted Answer

The further in the future a payment is received, the less it is worth today due to the time value of money, which accounts for the preference of receiving money now rather than later.

Question 2

You are asked to lend a friend $20,000 for a year. At the end of the year your friend agrees to pay you $21,000. The interest rate on this loan is

Accepted Answer

The interest rate is calculated as (Interest / Principal) * 100. Here, the interest is $1,000 ($21,000 - $20,000), and the principal is $20,000. So, the interest rate is ($1,000 / $20,000) * 100 = 5%.

Question 3

The stock market, banks, and savings and loans are three examples of institutions that economists would classify as belonging to the financial

Accepted Answer

The stock market, banks, and savings and loans are all part of the capital market, where investors buy and sell financial securities, and institutions provide financing for businesses and individuals.

Question 4

A risk premium is the added return an investor needs to compensate for the risks of future payments.

Accepted Answer

A risk premium is indeed the additional return an investor requires to compensate for the risk associated with an investment, particularly the risk that the investment's returns could be lower than expected or that future payments might not be made.

Question 5

You will agree to lend your sister's grandma's daughter $2,000 for a year, if at the end of the year she pays you $2,200. The interest rate you are charging her is

Accepted Answer

The interest rate is calculated as the interest amount divided by the principal amount. Here, the interest amount is $200 ($2,200 - $2,000), and the principal amount is $2,000. So, the interest rate is $200 / $2,000 = 0.1 or 10%.

Question 6

You use $45,000 of your own money to start an espresso stand. During the first year you earn a 10% return on that investment. If the current interest rate is 8%, you earn an economic profit of

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, the explicit cost is $0 since the question doesn't mention any. The implicit cost is the opportunity cost of not investing the $45,000 at the current interest rate of 8%, which would be $45,000 * 0.08 = $3,600. The actual return on the investment is 10% of $45,000, which is $45,000 * 0.10 = $4,500. Therefore, the economic profit is $4,500 (actual return) - $3,600 (opportunity cost) = $900.

Question 7

One of the most important forms of capital income is

Accepted Answer

Interest is a payment made by a borrower to a lender for the use of money. It is a form of capital income because it is a return on investment.

Question 8

You use $50,000 of your own money to start a catering business. During the first year you earn a 5% return on that investment. If the current interest rate is 8%, you earn an economic profit of

Accepted Answer

The answer of You use $50,000 of your own money...

Question 9

You are asked to lend a friend $10,000 for a year. At the end of the year your friend agrees to pay you $10,500. The interest rate on this loan is

Accepted Answer

The interest rate is calculated as the interest paid divided by the principal amount, which in this case is ($10,500 - $10,000) / $10,000 = $500 / $10,000 = 0.05 or 5%.

Question 10

You use $5,000 of your own money to start a dog-walking business. During the first year you earn a 6% return on your investment. If the current interest rate is 8%, you earn an economic profit of

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, the explicit profit is $5,000 * 6% = $300. However, the implicit cost, or opportunity cost, of not investing the $5,000 in an alternative with an 8% return is $5,000 * 8% = $400. Therefore, the economic profit is $300 (explicit profit) - $400 (implicit cost) = -$100.

Question 11

You agree to lend a friend $15,000 for a year at an annual interest rate of 20%. At the end of the year your friend must pay you ________ in interest.

Accepted Answer

The interest is calculated as Principal x Rate x Time = $15,000 x 0.20 x 1 = $3,000.

Question 12

You use $2,000 of your own money to start a dog-sitting service. During the first year you earn a 10% return on your investment. If the current interest rate is 7%, you earn an economic profit of

Accepted Answer

Economic profit is calculated as the actual return minus the opportunity cost. The actual return is 10% of $2,000, which is $200. The opportunity cost, based on the 7% interest rate, is 7% of $2,000, which is $140. Therefore, the economic profit is $200 - $140 = $60.

Question 13

Households' ________ limit(s) firms' ability to invest in capital.

Accepted Answer

Households' savings decisions directly impact firms' ability to invest in capital because savings are a primary source of the funds that banks lend to firms for investment purposes. When households save more, banks have more funds to lend, which can increase investment in capital. Conversely, when households save less, there is less capital available for firms to borrow and invest.

Question 14

As a holder of a share of common stock, you are

Accepted Answer

Holders of common stock are entitled to a portion of the firm's profits, typically paid out as dividends, rather than a portion of revenues or a guaranteed return. They are not personally responsible for the corporation's liabilities; their financial risk is limited to the amount they have invested in the stock.

Question 15

The market in which households supply their savings to firms that demand funds in order to buy capital goods is the ________ market.

Accepted Answer

The capital market is where households supply their savings to firms that demand funds to buy capital goods.

Question 16

As economists use the word, investment refers only to an increase in capital.

Accepted Answer

Economists define investment as spending on capital goods by firms and governments, which leads to an increase in their capacity to produce goods and services.

Question 17

When a household lends money directly to a firm, the firm gives the household a

Accepted Answer

When a household lends money directly to a firm, the firm typically issues a bond to the household. A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).

Question 18

You agree to lend a friend $20,000 for a year at an annual interest rate of 45%. At the end of the year your friend must pay you ________ in interest.

Accepted Answer

The interest can be calculated as $20,000 * 45% = $9,000.

Question 19

You agree to lend ________ to a friend for a year at an annual interest rate of 10%. At the end of the year your friend pays you $500 in interest.

Accepted Answer

The interest paid is calculated using the formula Interest = Principal × Rate × Time. Given the interest is $500 at a rate of 10% for 1 year, the principal amount (the amount lent) is found by rearranging the formula to Principal = Interest / (Rate × Time) = $500 / (0.10 × 1) = $5,000.

Question 20

In economics, "investment" refers only to the creation of new capital.

Accepted Answer

The answer of In economics, "investment" refers only to the...

Quiz 11: Input Demand: the Capital Market and the Investment Decision