Question 1

A fall in the real interest rate leads to

Accepted Answer

A fall in the real interest rate makes borrowing cheaper, leading to more investment in capital goods like machines. This increase in the supply of capital goods leads to a decrease in their rental rate. Therefore, a fall in the real interest rate would lead to a decrease in the rental rate on a machine.

Question 2

A firm that wished to calculate the present value of its future nominal profits should use the ____ to do so.

Accepted Answer

To calculate the present value of future nominal profits, a firm should use the nominal interest rate. This is because the nominal interest rate reflects the current market interest rate without adjusting for inflation, which aligns with the nominal nature of the profits being discounted.

Question 3

The present value of $1 payable in the future decreases

Accepted Answer

The present value of future money decreases with a higher interest rate (r) because the opportunity cost of not having the money now is greater. Additionally, the further in the future the payment is, the less its present value, as money has the potential to earn interest over time.

Question 4

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The horizontal (C1)intercept is

Accepted Answer

The horizontal intercept (C1) represents the total resources available in period 1 if all income from period 2 is brought forward to period 1, discounted by the interest rate, $r$. This is given by $Y_1 + \frac{Y_2}{1+r}$, indicating how much can be consumed in period 1 if the consumer decides to borrow against future income, Y2, adjusting for the interest rate.

Question 5

In a perfectly competitive market a firm's rental rate for a machine (v)will be given by: v = P(r + d)where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

Accepted Answer

In the formula, P represents the present market price of the machine, which is used to determine the rental rate for the machine. The initial purchase price of the machine may not necessarily be the same as its present market price. The price of the firm's product and the depreciated value of the machine are not factors in determining the rental rate for the machine.

Question 6

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Accepted Answer

The difference is simply the value of the $1 received today, which is not discounted, hence $1.

Question 7

Accelerated depreciation laws may increase firms' investment in equipment because

Accepted Answer

Accelerated depreciation laws allow firms to deduct a larger portion of the cost of equipment in the earlier years of its life, thus reducing the apparent cost of capital. This in turn lowers the effective rental rate on capital and makes investment in equipment more attractive.

Question 8

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C₁ and C₂).Any funds not spent in period 1 will earn interest (at the rate r),which will increase purchasing power in period 2.Consider four possible reactions to an increase in r: Which of these is consistent with the hypothesis that both C₁ and C₂ are normal goods? I.C₁ increases. II.C₁ decreases. III.C₂ increases. IV.C₂ decreases.

Accepted Answer

The answer of Suppose an individual has a fixed amount...

Question 9

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The vertical (C2)intercept is

Accepted Answer

The answer of Draw a two period budget line where...

Question 10

The present value of $1 payable in two years is

Accepted Answer

The formula for present value is PV = FV/(1+r)^n where PV is present value, FV is future value, r is the interest rate, and n is the number of periods. In this case, FV is $1, r is the interest rate, and n is 2. Plugging these values into the formula, we get PV = $1/(1+r)^2. Therefore, the correct answer is D.

Question 11

The annual rental rate for a machine is

Accepted Answer

The annual rental rate for a machine typically includes all costs associated with owning the machine, such as depreciation (the decrease in value over time), maintenance (costs for upkeep), and interest (if the machine was purchased with a loan). This makes option D the correct answer, as it encompasses all these aspects.

Question 12

If real extraction costs do not change,the relative price of a finite resource would be expected to

Accepted Answer

The relative price of a finite resource is expected to rise at a rate given by the real rate of interest if real extraction costs do not change. This is because as the resource becomes scarcer, its value increases, and the real rate of interest reflects the time value of money in real terms, accounting for inflation.

Question 13

The rental rate approach to investment choices by firms and the present value approach

Accepted Answer

The rental rate approach and the present value approach to investment choices by firms always agree because both methods are based on the principle of maximizing the present value of future cash flows or returns from the investment.

Question 14

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

Accepted Answer

The yield on a bond is the interest rate at which the present value of all future cash flows (interest and principal payments) from the bond equals the bond's current market price.

Question 15

A rise in the real interest rate r

Accepted Answer

The answer of A rise in the real interest rate...

Question 16

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁and Y₂.The slope is

Accepted Answer

The slope of the two-period budget line is determined by the rate at which the consumer can trade off consumption between the two periods, taking into account the interest rate. This slope is given by -(1 + r), where r is the interest rate. This reflects the fact that to consume one more unit in the first period, the consumer must give up 1 + r units of consumption in the second period, due to the opportunity cost of not investing the consumption.

Question 17

A monopolist who owned the entire supply of a scarce resource would set a price

Accepted Answer

The answer of A monopolist who owned the entire supply...

Question 18

For a given interest rate,r,which of the following expressions is smallest?

Accepted Answer

The expression 1 + r is the smallest because it does not involve compounding, while the other expressions involve compounding interest at different intervals, which results in a slightly higher effective interest rate.

Question 19

In the two-period utility maximization model the opportunity cost of one unit of C1 is

Accepted Answer

The opportunity cost of one unit of C1 is the amount of C0 that needs to be forgone to produce that additional unit of C1. In a two-period model, the cost of consuming one more unit of C1 in period 1 is giving up one unit of C0 that could have been consumed in that period. However, that one unit of C0 could also have been saved and consumed in period 2 with interest earned at the rate of r. Therefore, the opportunity cost of one unit of C1 is 1/(1 + r) units of C0.

Question 20

An increase in the corporate profits tax will most likely lead to

Accepted Answer

The answer of An increase in the corporate profits tax...

Quiz 14: Capital and Time

A fall in the real interest rate leads to

A firm that wished to calculate the present value of its future nominal profits should use the ____ to do so.

The present value of $1 payable in the future decreases

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The horizontal (C1) intercept is

In a perfectly competitive market a firm's rental rate for a machine (v) will be given by: v = P(r + d) where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Accelerated depreciation laws may increase firms' investment in equipment because

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The vertical (C2) intercept is

The present value of $1 payable in two years is

The annual rental rate for a machine is

If real extraction costs do not change,the relative price of a finite resource would be expected to

The rental rate approach to investment choices by firms and the present value approach

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

A rise in the real interest rate r

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁and Y₂.The slope is

A monopolist who owned the entire supply of a scarce resource would set a price

For a given interest rate,r,which of the following expressions is smallest?

In the two-period utility maximization model the opportunity cost of one unit of C1 is

An increase in the corporate profits tax will most likely lead to

Quiz 14: Capital and Time

A fall in the real interest rate leads to

A firm that wished to calculate the present value of its future nominal profits should use the ____ to do so.

The present value of $1 payable in the future decreases

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The horizontal (C1) intercept is

In a perfectly competitive market a firm's rental rate for a machine (v) will be given by: v = P(r + d) where r is the prevailing rate of interest and d is the depreciation rate.In this formula P represents

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is

Accelerated depreciation laws may increase firms' investment in equipment because

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The vertical (C2) intercept is

The present value of $1 payable in two years is

The annual rental rate for a machine is

If real extraction costs do not change,the relative price of a finite resource would be expected to

The rental rate approach to investment choices by firms and the present value approach

The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are

A rise in the real interest rate r

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The slope is

A monopolist who owned the entire supply of a scarce resource would set a price

For a given interest rate,r,which of the following expressions is smallest?

In the two-period utility maximization model the opportunity cost of one unit of C1 is

An increase in the corporate profits tax will most likely lead to

Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C₁ and C₂ given their anticipated income on two periods,Y₁and Y₂.The slope is