# Quiz 16: Interest Rates, Investments, and Capital Markets

Business

Q 1Q 1

Suppose a person has a discount rate of zero. This implies she
A)places no value on the future.
B)places no value on the present.
C)values the present and the future equally.
D)would not lend money at any positive interest rate.

Free

Multiple Choice

C

Q 2Q 2

If an individual wins a multimillion dollar lottery and chooses to receive annual payments equaling the total prize, this person has a
A)relatively low discount rate.
B)relatively high discount rate.
C)discount rate of zero.
D)It is impossible to tell.

Free

Multiple Choice

C

Q 3Q 3

Suppose two people with the same level of income and wealth have different discount rates. Joe has a very high discount rate and Jim has a very low discount rate. Which one of the following is TRUE?
A)Joe is more likely to borrow than Jim.
B)Joe is less likely to borrow than Jim.
C)Joe and Jim will borrow the same amount.
D)Neither Joe nor Jim would be borrowers.

Free

Multiple Choice

A

Q 4Q 4

If inflation is 10% and the nominal interest rate equals 16.6% the real interest rate is equal to
A)6.6%.
B)6%.
C)-6.6%.
D)zero.

Free

Multiple Choice

Q 5Q 5

Interest rates are positive mainly because
A)of inflation.
B)people tend to prefer the present to the future.
C)people tend to prefer the future to the present.
D)bankers are greedy.

Free

Multiple Choice

Q 6Q 6

If you place $100 in a bank account that pays 6% at the end of each year, and you leave your $100 and all your interest in the bank, how much will you have in the bank at the end of 7 years with annual compounding?
A)(106)

^{7}B)7 ∗ (106) C)100 ∗ (1.60)^{7}D)100 ∗ (1.06)^{7}Free

Multiple Choice

Q 7Q 7

If you invest $500 today, and the value one year from today is $1000, then the annual interest rate must be
A)10%.
B)50%.
C)100%.
D)200%.

Free

Multiple Choice

Q 8Q 8

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

Free

Multiple Choice

Q 9Q 9

If the interest rate is 10%, then $1 received one year from now is worth how much today?
A)$1.10
B)$1.00
C)$0.91
D)$0.90

Free

Multiple Choice

Q 10Q 10

If the interest rate is 10%, then $1 today is worth how much one year from now?
A)$1.10
B)$1.00
C)$0.91
D)$0.90

Free

Multiple Choice

Q 11Q 11

You place $100 in a bank account that pays 8%. If you remove the interest you receive each year you can turn your stock into a flow of
A)$108 per year.
B)$100 per year.
C)$80 per year.
D)$8 per year.

Free

Multiple Choice

Q 12Q 12

You can put your $100 in Bank A that pays 8% at the end of the year. You can also put your $100 in Bank B that pays 4% at the end of six months and then 4% again at the end of the year. You will keep your $100 and all interest in the bank. At the end of the year
A)the total will be the same at both banks.
B)the total at Bank A will be greater.
C)the total at Bank B will be greater.
D)the total could be larger at either bank.

Free

Multiple Choice

Q 13Q 13

You invest an amount today for four years that pays 6% annually. The bank compounds annually. At the end of the four years you will have $150. What amount must you invest today?
A)$148.81
B)$138.81
C)$128.81
D)$118.81

Free

Multiple Choice

Q 14Q 14

If savers require a 2% return and inflation is expected to be 3%, what approximate rate will banks offer savers?
A)1%
B)3.2%
C)5%
D)6%

Free

Multiple Choice

Q 15Q 15

If your bank pays you 6% interest on a savings account and inflation is 2%, your approximate real rate of interest is
A)2%.
B)4%.
C)8%.
D)12%.

Free

Multiple Choice

Q 16Q 16

If inflation turns out to be higher than was anticipated,
A)debtors are helped.
B)debtors are hurt.
C)debtors are neither helped nor hurt.
D)The effect on debtors cannot be predicted.

Free

Multiple Choice

Q 17Q 17

Four banks are offering the same interest rate of 4%. Where do you invest?
A)Bank A compounds interest on a yearly basis.
B)Bank B compounds interest on a monthly basis.
C)Bank C compounds interest on a daily basis.
D)I am indifferent between banks.

Free

Multiple Choice

Q 18Q 18

If inflation turns out to be higher than was anticipated, debtors are helped because
A)the real present value of their payments increases.
B)the real present value of their payments decreases.
C)the nominal present value of their payments increases.
D)the nominal present value of their payments decreases.

Free

Multiple Choice

Q 19Q 19

If you agree to a long-term loan at a specified nominal rate of interest and inflation turns out to be higher than was anticipated,
A)the nominal rate of interest falls.
B)the nominal rate of interest rises.
C)the real rate of interest falls.
D)the real rate of interest rises.

Free

Multiple Choice

Q 20Q 20

As the interest rate rises, the present value of a given perpetual stream of income
A)increases.
B)decreases.
C)does not change.
D)approaches infinity.

Free

Multiple Choice

Q 21Q 21

As the interest rate increases, the present value of a future payment
A)increases.
B)decreases.
C)does not change.
D)approaches infinity.

Free

Multiple Choice

Q 22Q 22

If an asset has a future value of $120, a present value of $30, and an interest rate of 4%, how many periods of compounding are there?
A)45 periods
B)35 periods
C)28 periods
D)100 periods

Free

Multiple Choice

Q 23Q 23

If an asset has a present value of $50 and appreciates at an interest rate of 4%, what is the asset's future value in 47 compounding periods?
A)Approximately $400
B)Approximately $316
C)Approximately $137
D)Approximately $1143

Free

Multiple Choice

Q 24Q 24

Individuals who lease a new car
A)have a higher discount rate than those who buy.
B)have a lower discount rate than those who buy.
C)have the same discount rate as those who buy.
D)behave irrationally and are taken advantage of by car companies.

Free

Multiple Choice

Q 25Q 25

You won the "$1,000 per year forever" lottery. You decided to convert such prize into a lump sum payment. The interest rate is 2% per year. How much is this lump sum payment ?
A)$25,000
B)$1,000
C)$50,000
D)$365,000

Free

Multiple Choice

Q 26Q 26

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

Free

Multiple Choice

Q 27Q 27

A firm has to choose between projects X and Y. Project X's internal rate of return is positive. If the cash flow of project Y is discounted at project X's internal rate of return, this firm will
A)choose project X if the net present value of project Y is positive.
B)choose project X if the net present value of project Y is negative.
C)choose project Y if the net present value of project Y is positive.
D)choose project X regardless of the net present value of project Y.

Free

Multiple Choice

Q 28Q 28

Suppose there is no inflation, and the current interest rate is 5% per year. Sarah plans to open a savings account and deposit $100 annually for the next 14 years. At the end of the period, the balance of her savings account will be
A)100(1.05

^{14}- 1). B)2000(1.05^{14}- 1). C)2000(1.05^{12 }- 1). D)20(1.05^{12 }- 1).Free

Multiple Choice

Q 29Q 29

Suppose there is no inflation, and the current interest rate is 4% per year. Erin plans to open a savings account and deposit $100 annually for the next 5 years. She plans to leave this money untouched for 10 more years. At the end of the period, the balance of her savings account will be
A)2500(1.04

^{5}- 1). B)2000(1.04^{15}-1). C)2000(1.04^{5}- 1)(1.04)^{10}. D)2500(1.04^{5}- 1)(1.04)^{10}.Free

Multiple Choice

Q 30Q 30

Suppose $100 is deposited in a bank account paying 5% compounded annually. If the interest earned is X after 5 years, then the interest earned will be 2X after 10 years.

Free

True False

Q 31Q 31

If the interest rate is positive, the future value of an interest bearing investment is always larger than the present value.

Free

True False

Q 32Q 32

Interest rates are positive because inflation makes purchases more expensive in the future than today.

Free

True False

Q 33Q 33

Jerry wishes to retire in 5 years with $1 million in his bank account. If the account pays 4% and his current balance is $500,000, how much must he deposit at the beginning of each of the next five years for his wish to come true? The amount must be the same each year.

Free

Essay

Free

Essay

Q 35Q 35

A state lottery has a Million Dollar Lottery game that pays $1,000 a week for life. Assuming a 6% nominal rate of interest and generously assuming an infinite lifetime, can this game be called a "Million Dollar Lottery"?

Free

Essay

Q 36Q 36

A major corporation hires high school students on a part-time basis. It offers a reward of $5,000 to any of its high school seniors who graduate college in four years. What is the present value of that reward to a student who just finished her junior year of high school, assuming a nominal rate of interest of 8%?

Free

Essay

Q 37Q 37

You sign a contract to pay $1000 next year for the refrigerator you bought today. The rate of inflation is 10% and the real interest rate is 7%. Alternatively, you could pay $875 today. What should you do to save the most money?

Free

Essay

Q 38Q 38

A firm should make an investment if the expected return is greater than
A)the marginal cost of the investment.
B)the fixed cost of the investment.
C)the opportunity cost of the investment.
D)the expected rate of inflation.

Free

Multiple Choice

Q 39Q 39

The Net Present Value approach to investment results in an investment being undertaken only if
A)its net present value is positive.
B)its net present value is zero.
C)it has positive cash flow.
D)its internal rate of return equals the rate of interest.

Free

Multiple Choice

Q 40Q 40

Suppose a new cost-saving device will generate $1,000 net savings per year to a firm. The device costs $10,000. Should the firm purchase the device?
A)definitely
B)absolutely not
C)The firm is indifferent between buying the device and not.
D)More information is required to answer.

Free

Multiple Choice

Q 41Q 41

Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm. The device costs $10,000. Using the Internal Rate of Return approach, will the firm make the investment?
A)definitely
B)definitely not
C)if the interest rate exceeds 10%
D)if the interest rate is less than 10%

Free

Multiple Choice

Q 42Q 42

In using the Internal Rate of Return approach, one must first calculate the discount rate on the investment that makes
A)the net present value equal zero.
B)the interest rate equal zero.
C)the interest rate equal the discount rate.
D)the first year's return positive.

Free

Multiple Choice

Q 43Q 43

Using the Internal Rate of Return approach to investment, one would undertake an investment if the internal rate of return
A)equals zero.
B)equals the interest rate.
C)exceeds the interest rate.
D)is less than the interest rate.

Free

Multiple Choice

Q 44Q 44

To calculate the internal rate of return on a factory that would yield a perpetual future stream of income, one would divide
A)the annual future payment by the cost of the factory.
B)the sum of the future payments by the cost of the factory.
C)the cost of the factory by the rate of interest.
D)the cost of the factory by the annual future payment.

Free

Multiple Choice

Q 45Q 45

A bond issuer agrees to pay a stated nominal amount each year. An increase in the nominal interest rate will cause
A)the price of the bond to fall.
B)the price of the bond to rise.
C)the nominal value of the bond's coupon to rise.
D)the nominal value of the bond's coupon to fall.

Free

Multiple Choice

Q 46Q 46

If a bond's coupon adjusts to pay a constant real rate of return, then an increase in inflation would cause
A)the nominal coupon payment to rise.
B)the nominal coupon payment to fall.
C)the nominal coupon payment to remain unchanged.
D)the bond's price to fluctuate wildly.

Free

Multiple Choice

Q 47Q 47

If a firm needs one machine to produce a product, and must replace the machine when it wears out, then the firm should pick a durability level of the machine that
A)minimizes the expense today.
B)minimizes the present discounted cost of having the machine forever.
C)maximizes the future value of the machine.
D)minimizes the future value of the machine.

Free

Multiple Choice

Q 48Q 48

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
A)10,000 × .
B)20,000 × .
C)30,000 × .
D)40,000 × .

Free

Multiple Choice

Q 49Q 49

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 benefit of a degree would be
A)10,000 × .
B)10,000 × .
C)10,000/r.
D)10,000 × .

Free

Multiple Choice

Q 50Q 50

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. If these are real amounts (adjusted for inflation), then the discount rate to be used should be
A)the nominal rate of interest.
B)the real rate of interest.
C)the rate of inflation.
D)zero.

Free

Multiple Choice

Q 51Q 51

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. From an investment standpoint, Joe will go back full-time if
A)10,000 × = 40,000 ×
.
B)10,000/r > 10,000 × .
C)10,000 × > 40,000 ×
.
D)10,000 × > 40,000 ×
.

Free

Multiple Choice

Q 52Q 52

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 more likely that Joe will decide to go back to college full-time?
A)The rate of interest increases.
B)The rate of interest decreases.
C)The government enacts mandatory retirement at age 60.
D)Tuition increases.

Free

Multiple Choice

Q 53Q 53

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?
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.

Free

Multiple Choice

Q 54Q 54

Today John says: "I will start working out tomorrow." Yet, as tomorrow arrives he doesn't. This is an example of
A)time inconsistent preferences.
B)time consistent preferences.
C)exponential discounting.
D)future-biased preferences.

Free

Multiple Choice

Q 55Q 55

With respect to events like global warming some economists suggest using falling discount rates because
A)exponential discounting virtually gives no weight to (large)costs incurred far into the future.
B)exponential discounting weights (large)costs incurred far into the future heavily.
C)events far in the future do not affect us.
D)we should not care about costs far in the future.

Free

Multiple Choice

Q 56Q 56

Assume a baseball player's development in the minor leagues yields -$250,000 per year for four years. If the player were to have a single big league season and be paid $350,000, how much revenue would the player need to generate to be considered a positive net present value project from the point of view of the team owner if the interest rate was 4%?
A)$1.45 million
B)$2.5 million
C)$350,000
D)$250,000

Free

Multiple Choice

Q 57Q 57

The question "What are you going to do with that major?" implicitly questions
A)how much you learn in that major.
B)whether the major should be offered on campus.
C)how much the market values the human capital developed in the major.
D)western bias.

Free

Multiple Choice

Q 58Q 58

An individual who wants to stop smoking but chooses not to
A)reflects future bias.
B)reflects present bias.
C)reflects irrationality.
D)reflects uncontrollable addiction.

Free

Multiple Choice

Q 59Q 59

Billy is considering the purchase of a rental house. The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000. What is the internal rate of return of this investment?
A)5%
B)7.5%
C)3.75%
D)24%

Free

Multiple Choice

Q 60Q 60

Billy is considering the purchase of a rental house. The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000. Nevertheless, Billy will need to borrow $240,000 at an interest rate of 7% per year in case he decides to make this investment. Should Billy purchase this house?
A)No, he will lose money.
B)Yes, his profits will be zero.
C)No, his profits will be positive but close to zero.
D)Yes, he will profit from this investment.

Free

Multiple Choice

Q 61Q 61

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?
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.

Free

Multiple Choice

Q 62Q 62

Assel grows mulberry trees. The lumber yard purchases cut trees from you. The trees grow 1 foot per year. Assuming a constant real price per foot for mulberry, at what interest rate would Assel be willing to sell a 10-foot tree today?
A)3%
B)5%
C)8%
D)12%

Free

Multiple Choice

Q 63Q 63

A firm has two projects. Project A has an internal rate of return of 6%. Project B's internal rate of return is 11%. If the firm's discount rate is 9.57%,
A)both projects have a negative net present value.
B)only project A has a positive net present value.
C)only project B has a positive net present value.
D)both projects have a positive net present value.

Free

Multiple Choice

Q 64Q 64

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

Free

True False

Q 65Q 65

An investment is profitable as long as its internal rate of return is equal to the rate of interest.

Free

True False

Q 66Q 66

Explain why a firm may rationally make an investment when its cash flow from the investment is not positive each year.

Free

Essay

Q 67Q 67

Suppose that your college offers you two payment plans. You may either pay tuition of $10,000 per year at the beginning of each of the next four years, or pay just $38,000 before the start of freshman year. If the interest rate is 10%, what would you do? If the interest rate were 2%, what would you do? Intuitively explain the difference in your answer.

Free

Essay

Q 68Q 68

Suppose that your college offers you two payment plans for your last two years of college. You may either pay tuition of $20,000 per year at the beginning of each of the next two years, or pay just $38,000 before the start of freshman year. What would the interest rate have to be for you to be indifferent between these two deals? Explain.

Free

Essay

Q 69Q 69

A financial services company offers to pay you $1,000 a year for life in exchange for $20,000 today. What factors affect your decision to take this offer?

Free

Essay

Q 70Q 70

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?

Free

Essay

Q 71Q 71

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?

Free

Essay

Q 72Q 72

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

Free

Multiple Choice

Q 73Q 73

If an exhaustible resource is priced at marginal cost that remains constant over time, then
A)all owners of that resource earn rent.
B)the price will stay constant over time.
C)the percent price increase each year equals the rate of interest.
D)the good is relatively scarce.

Free

Multiple Choice

Q 74Q 74

An exhaustible resource with a very large known reserve will most likely exhibit
A)a highly variable price in the near future.
B)a decreasing price in the near future.
C)an increasing price in the near future.
D)a constant price in the near future.

Free

Multiple Choice

Q 75Q 75

If a non-renewable resource is scarce, has constant marginal cost of production and is sold in a competitive market,
A)its price will increase over time.
B)its price will exceed marginal cost.
C)its price will increase by the rate of interest.
D)All of the above.

Free

Multiple Choice

Q 76Q 76

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

Free

Multiple Choice

Q 77Q 77

Suppose an exhaustible resource can be sold only this period or next period. The resource owner is considering selling 100 tons of the resource this period. The future value of the resource when 100 tons are sold this period is less than the present value of the 100 tons sold this period multiplied by one plus the interest rate. What should the resource owner do?
A)She should sell more than 100 tons this period.
B)She should sell only 100 tons this period.
C)She should sell less than 100 tons this period.
D)She should not sell any of the resource in either period.

Free

Multiple Choice

Q 78Q 78

Technological improvements in coal mining will
A)increase the price of coal.
B)decrease the price of coal.
C)increase the interest rate.
D)decrease the interest rate.

Free

Multiple Choice

Q 79Q 79

The growth over time in the spread between price and marginal cost of an exhaustible resource is equal to
A)zero.
B)one.
C)the interest rate.
D)the present value of the reserves.

Free

Multiple Choice

Q 80Q 80

The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that
A)resource owners earn a profit.
B)resource owners are willing to sell some of the resource in the future.
C)the price of the resource remains constant in real terms.
D)the marginal cost of extracting the resource declines.

Free

Multiple Choice

Q 81Q 81

Consider a wine maker who has put her wine in bottles. The question is whether to store the wine for a marginal cost of $1 per year or to sell the wine today at a price of $10. If the interest rate is 6%, how much must the price of the wine increase in the next year to justify storing it?
A)$1.66
B)$1.27
C)$0.72
D)$0.45

Free

Multiple Choice

Q 82Q 82

In the later part of the twentieth century, the price of crude oil began to increase after decades of relatively steady prices, which of the following could explain this phenomenon?
A)Worldwide reserves have been increasing.
B)Worldwide demand has been increasing.
C)Global warming
D)Extraction technology has been degrading.

Free

Multiple Choice

Q 83Q 83

If extraction technology continues to improve over time,
A)the price of crude oil can continue to fall or stay steady.
B)the price of crude oil will increase despite any attempts to stem demand.
C)the price of crude oil will only fall if sufficient government taxation is implemented.
D)the price of crude oil will only fall if sufficient demand declines are arranged.

Free

Multiple Choice

Q 84Q 84

Suppose we know that 10 Spanish Galleons sunk in the Atlantic Ocean carrying approximately 50 tons of gold, but the exact location of these shipwrecks is unknown. Would this gold add to the world reserve?
A)Yes, we know it exists.
B)No, we know it exists but we can't extract the gold.
C)Yes, it's only a matter of time before the shipwrecks are discovered.
D)No, there are no established property rights over the shipwreck so they cannot add to world reserves.

Free

Multiple Choice

Q 85Q 85

Suppose an astronomer discovers gold on the moon. Would this gold add to the world reserves?
A)Yes, we know it exists and we could recover it.
B)No, we know it exists but we can't extract the gold.
C)No, there are no established property rights over the moon so they cannot add to world reserves.
D)Yes, but only if the astronomer is the resident of a developed country with well-established property rights.

Free

Multiple Choice

Q 86Q 86

Alchemy was the attempt to discover a process by which base metals, such as lead, could be turned into gold. If an alchemist had been successful,
A)all the lead in the world would have been added to the world's gold supply.
B)all the lead in the world would have replaced the world's gold supply.
C)all the lead in the world would only have been added to the world's gold supply when it was converted to gold.
D)the alchemist would likely have been killed by the owners of real gold.

Free

Multiple Choice

Q 87Q 87

Which of the following is an example of an exhaustible resource?
A)silver
B)soybeans
C)pork belly
D)pound cake

Free

Multiple Choice

Q 88Q 88

Suppose an exhaustible resource can be sold only this period or in the next period. The marginal cost of extraction is constant and equal to $2. The current and next year prices of the resource are $12 and $13, respectively. At what interest rate the owner of the resource will be indifferent between selling it today or in the next period?
A)5%
B)7.5%
C)10%
D)12.5%

Free

Multiple Choice

Q 89Q 89

Suppose an exhaustible resource can be sold only this period or in the next period. The marginal cost of extraction is constant and equal to $10. The next year price of the resource is $115, respectively. The interest rate is 5%. What is the minimum current price required to make the sale of the resource profitable in the current period?
A)$95
B)$100
C)$110
D)$125

Free

Multiple Choice

Q 90Q 90

Suppose an exhaustible resource can be sold only this period or in the next period. The marginal cost of extraction is constant and equal to $5. The current year price of the resource is $55, respectively. The interest rate is 10%. What is the minimum next year price required to make the sale of the resource profitable next year?
A)$55
B)$60
C)$65
D)$75

Free

Multiple Choice

Q 91Q 91

As in all other competitive markets price equals marginal cost in a market for a scarce, non-renewable resource that is traded in a competitive market.

Free

True False

Q 92Q 92

Why is the price of a scarce exhaustible resource in a competitive market above the marginal cost of providing a unit of the resource?

Free

Essay

Q 93Q 93

Explain how continuing technical progress may cause the price of scarce, exhaustible resources to fall over time.

Free

Essay

Q 94Q 94

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?

Free

Essay

Q 95Q 95

Investment demand is downward sloping because
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.

Free

Multiple Choice

Q 96Q 96

Investment demand is downward sloping because as the interest rate decreases,
A)each project's internal rate of return decreases.
B)each project's internal rate of return increases.
C)more projects will have an internal rate of return that exceeds the interest rate.
D)more projects will have an internal rate of return that is less than the interest rate.

Free

Multiple Choice

Q 97Q 97

Government policies that encourage savings
A)reduce interest rates.
B)increase interest rates.
C)have no effect on interest rates.
D)lower the net present value of all investments.

Free

Multiple Choice

Q 98Q 98

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

Free

Multiple Choice

Q 99Q 99

Which of the following is most likely to cause the savings supply curve in the market for loanable funds to shift leftward?
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.

Free

Multiple Choice

Q 100Q 100

Which of the following is most likely to cause the demand curve in the capital market to shift leftward?
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.

Free

Multiple Choice

Q 101Q 101

Government borrowing may crowd out borrowing by private interests because
A)funds are not available at any interest rate.
B)the equilibrium interest rate increases.
C)the supply curve shifts to the left.
D)None of the above.

Free

Multiple Choice

Q 102Q 102

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

Free

Multiple Choice

Q 103Q 103

A government policy that lets individuals put away money for retirement tax-free will
A)shift the demand curve for loanable funds rightward.
B)crowd out private investment.
C)shift the supply curve of loanable funds to the right.
D)induce people to save less at any interest rate.

Free

Multiple Choice

Q 104Q 104

As the baby boomer generation retires and takes money out of their retirement accounts, what is expected to happen to the interest rate, ceteris paribus?
A)It will increase.
B)It will not change.
C)It will decrease.
D)It will decrease because of demand-side shocks.

Free

Multiple Choice

Q 105Q 105

If a recession were to reduce the demand for loans, ceteris paribus,
A)the interest rate will increase.
B)the interest rate will not change.
C)the interest rate will decrease.
D)the number of loans will increase.

Free

Multiple Choice

Q 106Q 106

During the Iraq War, the U.S. government continued to borrow funds and yet the interest rate was steady or slightly declined. What could explain this?
A)The U.S. crowded out private saving.
B)The U.S. crowded out private borrowing.
C)The supply of loanable funds increased by a greater proportion than demand increased.
D)The supply of loanable funds increased by a smaller proportion than demand increased.

Free

Multiple Choice

Q 107Q 107

What is one reason for the high interest rates for home loans offered to those with low credit ratings?
A)Predatory lending practices
B)Those with lower credit ratings faced a restricted supply of loans, ceteris paribus.
C)Those with lower credit ratings typically demand greater loans, ceteris paribus.
D)Government regulation

Free

Multiple Choice

Q 108Q 108

If the interest rate received in Mexico is greater than that obtained in the United States,
A)the demand for loans will increase in Mexico.
B)the supply of loans will decrease in the United States.
C)the supply of loans will decrease in Mexico.
D)the demand for loans will decrease in the United States.

Free

Multiple Choice

Q 109Q 109

If the interest rate received in Mexico is greater than that obtained in the United States,
A)the interest rate will decrease in the United States in the future.
B)the interest rate will increase in the United States in the future.
C)the interest rate will increase in Mexico in the future.
D)the interest rate will not change in either country.

Free

Multiple Choice

Q 110Q 110

In developed industries, the interest rate tends to be lower than in newer industries. What could explain this?
A)greater demand for loans in the developed industry
B)greater supply for loans in the new industry
C)greater demand for loans in the new industry
D)lower supply for loans in the developed industry

Free

Multiple Choice

Q 111Q 111

A capital gains tax acts to
A)reduce the interest rate received by loan demanders.
B)increase the interest rate received by loan demanders.
C)increase the interest rate received by loan suppliers.
D)reduce the interest rate received by loan suppliers.

Free

Multiple Choice

Q 112Q 112

How does a decrease in government budget deficits affect the equilibrium interest rate in the loanable funds model?
A)Interest rate increases.
B)Interest rate decreases.
C)Interest rate stays the same.
D)Interest rate first increases and then decreases back to the original level.

Free

Multiple Choice

Q 113Q 113

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
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.

Free

Multiple Choice

Q 114Q 114

The nominal interest rate is 7% and the real interest rate is 2.75%. What is the inflation rate?
A)3.75%
B)4.55%
C)4.25%
D)9.75%

Free

Multiple Choice

Q 115Q 115

How does a n increase in the contribution limits of Individual Retirement Accounts (IRA)is represented in the loanable funds model?
A)The supply of funds curve shifts to the left.
B)The supply of funds curve shifts to the right.
C)The demand for funds curve shifts to the left.
D)The demand for funds curve shifts to the right.

Free

Multiple Choice

Q 116Q 116

Suppose government does not allow households to deduct their mortgage interest expenses from their income tax anymore. How this change is represented in the loanable funds model?
A)The supply of funds curve shifts to the left.
B)The supply of funds curve shifts to the right.
C)The demand for funds curve shifts to the left.
D)The demand for funds curve shifts to the right.

Free

Multiple Choice

Q 117Q 117

Suppose life becomes more unpredictable and households decide to increase their precautionary savings. In this case, the loanable funds model predicts that
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.

Free

Multiple Choice

Free

True False

Q 119Q 119

A government policy that makes investments prior to retirement tax exempt until retirement increases the amount saved at any given interest rate.

Free

True False

Free

Essay