Exam 15: Interest Rates and the Capital Market

The Canadian government introduced the Tax-Free Savings Account (TFSA)in 2009,which allows Canadians to earn tax-free investment returns on a limited amount of savings each year.In theory,and all else remaining equal,what do we expect the effect of such a policy to be on the market for financial capital?

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at that time (principal plus interest).Over the intervening year,however,the average price of goods in the economy falls by 4%.The real rate of return that you will earn on your loan to me is therefore equal to

If the annual interest rate is 10%,the present value of $100 to be received two years from now is

Consider the market for commercial ovens as a factor of production in the commercial bread industry.Assume that all commercial ovens are identical,they have a lifespan of 10 years,and the purchase price is $12 000.The present value of the stream of MRPs from the last oven purchased by each commercial bakery is $16 000.We can expect that

Economists use the concept of present value to determine

In recent decades the economy has experienced dramatic technological improvement in many types of capital equipment.All else remaining equal,this change has the effect of shifting the investment demand curve to the ________ and causing an excess ________ capital,and thus a ________ in the equilibrium interest rate.

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

A decrease in market interest rates will

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.The downward slope of the firm's investment demand curve can be explained by

To determine an individual profit-maximizing firm's maximum purchase price for a unit of capital it is necessary to

Carol can borrow $13 000 to buy a used car from the bank at 8% for five years,or from her friend Eric,who is willing to lend her the money at 7% for five years.If Carol accepts Eric's offer,he can expect a lump-sum repayment in five years of approximately

The table below shows the payments at the end of each year from three different physical assets. TABLE 15-1 -Refer to Table 15-1.A,B,and C represent possible purchases of physical capital,each offering a stream of payments as indicated in the table.There are no payments beyond Year 3.The interest rates in each year are also specified in the table.What is the present value (at the beginning of Year 1)of asset B?

Consider the economy's downward-sloping demand for investment curve.An increase in the interest rate causes

For the economy as a whole,the equilibrium interest rate is determined by

We can think about the interest rate as the "price" of capital because

The Canadian government introduced the Tax-Free Savings Account (TFSA)in 2009,which allows Canadians to earn tax-free investment returns on a limited amount of savings each year.What is the underlying goal of such a government policy?

Consider a manufacturing firm that contemplates buying a lathe with an annual MRP of $1000 (beginning one year from now).Suppose the interest rate is 5% per year.If the lathe is obsolete after the fourth MRP is generated,the maximum the firm is prepared to pay now for the lathe is

The amount of physical capital is a ________ variable;________.

If the annual interest rate is 5%,the present value of $100 to be received two years from now is

The textbook presentation of present value involves an important simplification of reality in order to analyze the concept.That simplification is in assuming that