Question 1

If Susan has a positive rate of time preference, she will

Accepted Answer

A) value the receipt of $10,000 twenty years from now just as much as she would value receipt of the $10,000 now. 
B) value the receipt of $10,000 twenty years from now more than she would value receipt of the $10,000 now. 
C) value the receipt of $10,000 twenty years from now less than she would value receipt of the $10,000 now. 
D) prefer to receive any amount of money now to the $10,000 twenty years from now. 
A) value the receipt of $10,000 twenty years from now just as much as she would value receipt of the $10,000 now. 
B) value the receipt of $10,000 twenty years from now more than she would value receipt of the $10,000 now. 
C) value the receipt of $10,000 twenty years from now less than she would value receipt of the $10,000 now. 
D) prefer to receive any amount of money now to the $10,000 twenty years from now. C

Question 2

Which of the following will most directly determine the market price of a business or physical asset?

Accepted Answer

A) cost of the asset 
B) expected future net earnings derived from the asset 
C) book value (original purchase price minus depreciation) of the asset 
D) age of the asset 
A) cost of the asset 
B) expected future net earnings derived from the asset 
C) book value (original purchase price minus depreciation) of the asset 
D) age of the asset B

Question 3

Compared to investing in physical capital, human capital investments are more likely to be influenced by

Accepted Answer

A) nonmonetary considerations. 
B) depreciation rates. 
C) the rate of return. 
D) opportunity costs. 
A) nonmonetary considerations. 
B) depreciation rates. 
C) the rate of return. 
D) opportunity costs. A

Question 4

The net present value of $1,000 received in the future would

Accepted Answer

A) decline if the $1,000 were received sooner. 
B) increase if the delivery date for the $1,000 were set farther into the future. 
C) decrease if the interest rate fell. 
D) decrease if the interest rate rose. 
A) decline if the $1,000 were received sooner. 
B) increase if the delivery date for the $1,000 were set farther into the future. 
C) decrease if the interest rate fell. 
D) decrease if the interest rate rose.

Question 5

(I) Discounting procedures apply to decisions to invest in physical capital but are not relevant to human capital investment decisions. (II) Nonmonetary considerations are usually more important in human capital investment decisions than in nonhuman capital investment decisions.

Accepted Answer

A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false. 
A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false.

Question 6

(I) Countries with high rates of investment also tend to have high rates of growth. (II) A country with a high rate of investment but a poorly functioning capital market will tend to have a lower rate of growth than a country with a comparable rate of investment but a capital market that functions well.

Accepted Answer

A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false. 
A) I is true; II is false. 
B) I is false; II is true. 
C) Both I and II are true. 
D) Both I and II are false.

Question 7

Arnold is considering purchasing a business for $100,000. It will pay him an annual return of $8,000. If the interest rate is 10 percent, should he buy the business? What if the interest rate was 6 percent?

Accepted Answer

Given only the above information, we sho

Question 8

At a discount rate of 6 percent, what is the net present value of an investment project expected to yield $1,000 per year (to be received at year end) for the next three years?

Accepted Answer

A) $3,000 
B) $2,829 
C) $2,673 
D) There is insufficient information to determine whether the project should be undertaken. 
A) $3,000 
B) $2,829 
C) $2,673 
D) There is insufficient information to determine whether the project should be undertaken.

Question 9

If an individual or family began at age 25 paying funds into a tax-free investment account or pension earning a 7 percent real return, how much would they have to save annually in order for the funds to be worth a million dollars (measured in the purchasing power of today's dollar) when they reach age 65?

Accepted Answer

A) approximately $5,000 annually 
B) approximately $10,000 annually 
C) approximately $20,000 annually 
D) approximately $50,000 annually 
A) approximately $5,000 annually 
B) approximately $10,000 annually 
C) approximately $20,000 annually 
D) approximately $50,000 annually

Question 10

If we want to produce more capital goods during the present time period, we must

Accepted Answer

A) increase current consumption. 
B) lower future consumption. 
C) reduce current consumption. 
D) reduce our savings rate. 
A) increase current consumption. 
B) lower future consumption. 
C) reduce current consumption. 
D) reduce our savings rate.

Question 11

In a barter economy that had no form of currency, how could interest exist?

Accepted Answer

Goods would be loaned, and when the loan

Question 12

If profit-seeking major oil companies began to use current profits from the oil business to buy department stores and hotel chains, economic analysis suggests that

Accepted Answer

A) oil company profits were high relative to other possible investment opportunities. 
B) oil company executives thought profits from investment outside the oil industry would be lower than oil-industry investments. 
C) oil company executives must believe these other investments will be more profitable than investments in the oil industry. 
D) the government would be justified in subsidizing oil companies on grounds of economic efficiency. 
A) oil company profits were high relative to other possible investment opportunities. 
B) oil company executives thought profits from investment outside the oil industry would be lower than oil-industry investments. 
C) oil company executives must believe these other investments will be more profitable than investments in the oil industry. 
D) the government would be justified in subsidizing oil companies on grounds of economic efficiency.

Question 13

If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for each of the next three years, a profit-maximizing entrepreneur would

Accepted Answer

A) definitely undertake the project. 
B) never undertake the project. 
C) undertake the project if the interest rate exceeded 12 percent. 
D) undertake the project if the interest rate was 5 percent or less. 
A) definitely undertake the project. 
B) never undertake the project. 
C) undertake the project if the interest rate exceeded 12 percent. 
D) undertake the project if the interest rate was 5 percent or less.

Question 14

Which of the following statements is correct?

Accepted Answer

A) If the inflation rate is steady at 5 percent, for example, the real and nominal interest rates will be equal. 
B) An increase in the demand for goods now compared with goods in the future would cause the real interest rate to rise. 
C) A "positive rate of time preference" means that an individual would rather save than consume. 
D) During an extended inflationary period, the money (or nominal) interest rate will usually be lower than the real rate of interest. 
A) If the inflation rate is steady at 5 percent, for example, the real and nominal interest rates will be equal. 
B) An increase in the demand for goods now compared with goods in the future would cause the real interest rate to rise. 
C) A "positive rate of time preference" means that an individual would rather save than consume. 
D) During an extended inflationary period, the money (or nominal) interest rate will usually be lower than the real rate of interest.

Question 15

Investment in capital goods only makes sense when

Accepted Answer

A) the capital goods can be used to increase the future output of consumption goods. 
B) the savings rate of a country is low. 
C) the interest rate is high and people have a positive rate of time preference. 
D) economies are organized along capitalist lines. 
A) the capital goods can be used to increase the future output of consumption goods. 
B) the savings rate of a country is low. 
C) the interest rate is high and people have a positive rate of time preference. 
D) economies are organized along capitalist lines.

Question 16

Physical and human capital investments are

Accepted Answer

A) different in that the opportunity for economic profit is present for physical capital but not human capital decisions. 
B) different in that human capital decisions do not involve future income considerations while physical capital investments do. 
C) similar in that non-pecuniary considerations do not influence the choices of utility-maximizing decision makers in either case. 
D) similar in that both involve forgoing current income (and consumption) with the objective of increasing one's future income (and consumption). 
A) different in that the opportunity for economic profit is present for physical capital but not human capital decisions. 
B) different in that human capital decisions do not involve future income considerations while physical capital investments do. 
C) similar in that non-pecuniary considerations do not influence the choices of utility-maximizing decision makers in either case. 
D) similar in that both involve forgoing current income (and consumption) with the objective of increasing one's future income (and consumption).

Question 17

Which one of the following economists is best known for his view that innovation by entrepreneurs is the major source of economic growth?

Accepted Answer

A) Joseph Schumpeter 
B) Karl Marx 
C) Joan Robinson 
D) Alfred Marshall 
E) David Ricardo 
A) Joseph Schumpeter 
B) Karl Marx 
C) Joan Robinson 
D) Alfred Marshall 
E) David Ricardo

Question 18

In a market economy, persons undertaking an investment project must

Accepted Answer

A) obtain approval from political authorities before the project can be undertaken. 
B) either personally supply the required funds or convince other investors and financiers to do so. 
C) finance the project entirely with equity capital. 
D) arrange for bank financing before the project can be undertaken. 
A) obtain approval from political authorities before the project can be undertaken. 
B) either personally supply the required funds or convince other investors and financiers to do so. 
C) finance the project entirely with equity capital. 
D) arrange for bank financing before the project can be undertaken.

Question 19

Most of the income of Americans comes from

Accepted Answer

A) transfer payments. 
B) the ownership of bonds and physical assets. 
C) the ownership of bonds and corporate stocks. 
D) the ownership of human capital. 
A) transfer payments. 
B) the ownership of bonds and physical assets. 
C) the ownership of bonds and corporate stocks. 
D) the ownership of human capital.

Question 20

If the interest rate is 8 percent and an investment undertaken and paid for today is expected to yield $3,000 per year (to be received at year end) for each of the next three years, a profit-maximizing decision maker would undertake the investment only as long as the cost remained less than approximately

Accepted Answer

A) $5,350. 
B) $7,731. 
C) $8,109. 
D) $9,000. 
A) $5,350. 
B) $7,731. 
C) $8,109. 
D) $9,000.

Exam 14: Investment, the Capital Market, and the Wealth of Nations

If Susan has a positive rate of time preference, she will

Which of the following will most directly determine the market price of a business or physical asset?

Compared to investing in physical capital, human capital investments are more likely to be influenced by

The net present value of $1,000 received in the future would

(I) Discounting procedures apply to decisions to invest in physical capital but are not relevant to human capital investment decisions. (II) Nonmonetary considerations are usually more important in human capital investment decisions than in nonhuman capital investment decisions.

Arnold is considering purchasing a business for $100,000. It will pay him an annual return of $8,000. If the interest rate is 10 percent, should he buy the business? What if the interest rate was 6 percent?

At a discount rate of 6 percent, what is the net present value of an investment project expected to yield $1,000 per year (to be received at year end) for the next three years?

If we want to produce more capital goods during the present time period, we must

In a barter economy that had no form of currency, how could interest exist?

If profit-seeking major oil companies began to use current profits from the oil business to buy department stores and hotel chains, economic analysis suggests that

If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for each of the next three years, a profit-maximizing entrepreneur would

Which of the following statements is correct?

Investment in capital goods only makes sense when

Physical and human capital investments are

Which one of the following economists is best known for his view that innovation by entrepreneurs is the major source of economic growth?

In a market economy, persons undertaking an investment project must

Most of the income of Americans comes from

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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