Deck 15: Interest Rates and the Capital Market

Question 1

The term "present value" refers to the

A) current purchase price of a capital good.
B) value in the future of a payment made today.
C) value that a capital good will have in the future.
D) value today of a payment or receipt to occur in the future.
E) current interest rate.

Answer 1

D

Question 2

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages firms to increase their desired investment,

A) the equilibrium interest rate falls but the amount of investment is unchanged.
B) the flow of investment and saving both increase, and the equilibrium interest rate increases.
C) the equilibrium interest rate falls and the amount of investment increases.
D) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected.
E) the equilibrium interest rate rises and the amount of investment decreases.

Answer 2

B

Question 3

An economy's upward- sloping supply curve of desired saving is usually plotted with on the vertical axis.

A) the general price level
B) technology
C) the price of capital
D) capital stock
E) the market interest rate

Answer 3

E

Question 4

When we consider any future stream of benefits, and we seek to determine its value today, we
That steam of benefits using the market interest rate.

A) collateralize
B) depreciate
C) capitalize
D) appreciate
E) discount

Question 5

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. Suppose the interest rate is 4%, the purchase price of a sewing machine is
$3000, and the firm is holding its optimal capital stock. If the interest rate rises to 7%, how will this firm adjust its capital stock?

A) it will increase its number of machines from 13 to 14
B) it will reduce its number of machines from 12 to 11
C) it will reduce its number of machines from 14 to 13
D) it will not change its capital stock
E) it will increase its number of machines from 11 to 12

Question 6

A firm's demand for physical capital leads to its and a household's supply of saving leads to its .

A) demand for stocks; supply of stocks
B) lending behaviour; borrowing behaviour
C) negative effect on the interest rate; positive effect on the interest rate
D) demand for bonds; supply of bonds
E) demand for financial capital; supply of financial capital

Question 7

In any given period, a firm's flow of investment demand is determined by

A) the change in the firm's optimal capital stock.
B) the rate of change of the firm's investment demand.
C) the change in the firm's optimal flow of investment.
D) the rate of change of the capital stock in the entire economy.
E) any of the above, as they are all the same.

Question 8

The present value of a given future stream of benefits will be lower when the benefits are and the interest rate is .

A) accruing in the first time period only; lower
B) more distant in time; lower
C) more distant in time; higher
D) nearer in time; lower
E) equalized over a ten- year period; zero

Question 9

In general, a profit- maximizing firm will purchase a piece of capital equipment if the

A) present value of the stream of future MRPs exceeds the purchase price.
B) future value of the stream of MRPs exceeds the purchase price.
C) simple sum of the future MRPs exceeds the purchase price.
D) present value of the stream of future MRPs falls below the purchase price.
E) simple sum of the future MRPs falls below the purchase price.

Question 10

Suppose a new piece of capital equipment will deliver a stream of MRPs of $1000 each year for 3 years (beginning one year from today). What is the present value of this stream of benefits, assuming that the annual rate of interest is 5 percent?

A) $952.38
B) $2591.58
C) $863.86
D) $2723.25
E) $1000.00

Question 11

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

A) $3723.24
B) $3019.52
C) $3910.51
D) $3546.40
E) $4000

Question 12

Households' supply of financial capital is derived from

A) firms' demand for physical capital.
B) their supply of saving.
C) their supply of physical capital.
D) their supply of human capital.
E) firms' demand for financial capital

Question 13

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

A) the future stream of MRPs lasts for one period only.
B) the interest rate is constant over time.
C) the future stream of MRPs is constant over time.
D) the future stream of MRPs of a unit of capital is known with certainty.
E) all units of capital generate an identical stream of MRPs.

Question 14

Suppose the nominal interest rate is 10 percent. The rate of inflation has been 4 percent and is expected to continue at 4 percent in the future. The real interest rate, which determines the firm's decision to purchase capital, is therefore

A) 4 percent.
B) 6 percent.
C) 10 percent.
D) 14 percent.
E) indeterminate.

Question 15

Suppose you are working as an intern at a large financial firm with an annual salary of $30 000, but you are guaranteed a salary increase to $85 000 at the end of the internship. In general, we can expect that

A) your current level of saving falls and your supply of financial capital to the economy rises in anticipation of the higher future income.
B) your current level of saving rises in anticipation of the higher future income.
C) your current level of saving rises because there is a positive relationship between household saving and future income.
D) your current level of saving is certain to be positive.
E) your current level of saving falls and your supply of financial capital to the economy decreases in anticipation of the higher future income.

Question 16

In general, a profit- maximizing firm will purchase a unit of capital as long as its purchase price is

A) equal to the present value of the stream of marginal revenue product generated by the capital.
B) no less than the present value of the stream of marginal revenue product generated by the capital.
C) non- negative.
D) less than its present marginal revenue product.
E) no more than the present value of the stream of marginal revenue product generated by the capital.

Question 17

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages individuals to increase their desired saving,

A) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected.
B) the flow of investment and saving both increase, and the equilibrium interest rate increases.
C) the equilibrium interest rate falls and the amount of investment increases.
D) the equilibrium interest rate rises, and the amount of investment decreases.
E) the equilibrium interest rate falls but the amount of investment is unchanged.

Question 18

FIGURE 15- 2
Refer to Figure 15- 2. Suppose the economy begins at point E1. If technology changes in a way that increases the marginal product of capital, which movement best depicts the change in equilibrium in the market for financial capital?

A) E4 to E2
B) E1 to E4
C) E1 to E2
D) E3 to E2
E) E1 to E3

Question 19

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. If the annual interest rate is 4%, what is the present value of the 11th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts 2 years.

A) $3328
B) $3772
C) $3395
D) $3531
E) $3600

Question 20

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

A) compute the rental price of the unit of capital and the interest rate.
B) compute the future value of the stream of benefits produced by the unit of capital.
C) know how the interest rate is related to the cost of capital.
D) compute the present value of the stream of benefits produced by the unit of capital.
E) know what competing firms are prepared to pay.

Question 21

The present value of a piece of capital equipment that generates future MRPs will increase if

A) the productivity of the capital asset falls.
B) the interest rate increases.
C) the purchase price of the capital asset decreases.
D) the MRP values are received farther in the future.
E) the interest rate decreases.

Question 22

The diagram below shows the market for loanable funds for a closed economy. FIGURE 15- 3
Refer to Figure 15- 3. Suppose the current equilibrium in the market for financial capital is at point
A. Which of the following events is likely to move the equilibrium to point B?

A) an increase in the interest rate
B) a decrease in the marginal product of capital
C) a reduction in the interest rate
D) an increase in expected future income
E) an increase in current household income

Question 23

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 percent. The real rate of return that you will earn on your loan to me is therefore equal to

A) 4 percent.
B) 6 percent.
C) 10 percent.
D) 14 percent.
E) greater than 14 percent.

Question 24

The law of diminishing marginal returns tells us that the more capital the firm uses, the

A) higher is capital's purchase price.
B) lower is the firm's interest rate.
C) lower is capital's rental price.
D) lower is the MRP of the firm's capital.
E) higher is the MRP of the firm's capital.

Question 25

Choose the best reason for a rightward shift in the economy's investment demand curve.

A) an increase in the interest rate
B) a decrease in the interest rate
C) diminishing marginal returns to capital
D) changes in technology that improve the productivity of capital.
E) none of the above would shift the investment demand curve

Question 26

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at point E1. A shift of the aggregate saving supply curve from S1 to S2, all other things being equal, would

A) shift the investment demand curve to I2.
B) change the technology of capital use.
C) decrease the equilibrium interest rate.
D) reduce the marginal product of capital.
E) increase the equilibrium interest rate.

Question 27

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.

A) right; demand for; rise
B) left; supply of; fall
C) left; demand for; rise
D) right; demand; fall
E) right; supply of; rise

Question 28

The Canadian federal government can encourage a rightward shift of the investment demand curve with which of the following policies:
1) an increase in corporate income- tax rates;
2) providing interest- rate subsidies on loans to firms;
3) decreasing the interest rate.

A) 3 only
B) 2 and 3
C) 1 only
D) 2 only
E) 1 and 2

Question 29

A firm's downward- sloping investment demand curve is usually plotted with on the vertical axis.

A) the interest rate
B) MRP
C) the price of capital equipment
D) the general price level
E) the capital stock

Question 30

How much would you have to deposit today in a bank account paying 8 percent annual interest to allow you to withdraw $200 one year from now and still have $200 remaining in the bank?

A) $185.19.
B) $216.00.
C) $370.38.
D) $385.19.
E) none of the above.

Question 31

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?

A) to decrease the supply of financial capital to the economy
B) to increase government tax revenues
C) to maintain upward pressure on the equilibrium interest rate
D) to increase desired saving of Canadian households
E) to increase investment demand of Canadian firms

Question 32

The present value of $100 to be received one year from now, with an annual interest rate of 8 percent, is

A) $94.34.
B) $85.73.
C) $92.59.
D) $102.13.
E) $108.00

Question 33

The formula to calculate the present value of a future payment of $X received t years from now when the annual percentage interest rate is i is:

A) PV = $X(1 + i)
B) PV = $X/(1 + i)t
C) PV = $X/(1 + i)
D) PV = $X(1 + i)t
E) PV = $X/i

Question 34

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

A) the downward slope of the demand curve for the firm's product-cups of coffee.
B) the relationship between the MRP of the coffee machine and technology improvements to the coffee machines.
C) the downward slope of the marginal cost of capital curve.
D) the negative relationship between the interest rate and the present value of a future stream of MRPs generated by each coffee machine.
E) the negative relationship between the interest rate and the purchase price of the coffee machines.

Question 35

A lottery winner receives a $100 000 cheque now, and a second one in two years. If the annual interest rate is 9 percent, the present value of his total winnings is

A) $184 168.
B) $200 000.
C) $215 832.
D) $300 000.
E) unable to know from the information provided.

Question 36

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

A) the interest rate determines the MRP of the capital, which determines its price.
B) the interest rate represents the value the firm avoids paying to lenders by purchasing the capital instead.
C) this is the amount the firm earns by purchasing the capital.
D) firms use financial capital to purchase physical capital and the interest rate is the "price" of financial capital.
E) the interest rate determines the equilibrium level of investment demand.

Question 37

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?

A) There will be no effect on the market for financial capital.
B) The investment demand curve shifts right, the equilibrium interest rate rises and investment rises.
C) The supply of savings curve shifts right, the equilibrium interest rate falls and investment increases.
D) The supply of saving curve shifts left, the equilibrium interest rate rises and investment decreases.
E) The investment demand curve shifts left, the equilibrium interest rate falls and investment falls.

Question 38

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 rises by 3 percent. The real rate of return that you will earn on your loan to me is therefore equal to

A) 3 percent.
B) 7 percent.
C) 10 percent.
D) 13 percent.
E) greater than 13 percent.

Question 39

Present value is computed by

A) evaluating a stream of future sums resulting from a piece of capital.
B) summing all future payments.
C) discounting a stream of future payments by today's purchase price.
D) multiplying a stream of future sums by the interest rate.
E) discounting a stream of future sums by the interest rate.

Question 40

Consider the economy's upward- sloping supply of saving curve. An increase in the interest rate causes ; an increase in current income causes _.

A) a shift of the curve to the left; a movement downward along the curve.
B) a movement upward along the curve; a shift of the curve to the right.
C) a movement upward along the curve; a movement downward along the curve.
D) a movement downward along the curve; a shift of the curve to the right.
E) a shift of the curve to the left; a movement upward along the curve.

Question 41

A firm can finance its purchase of new capital equipment (investment) in the following ways:
1) purchasing financial capital;
2) borrowing from a bank;
3) using its retained earnings.

A) 2 only
B) 3 only
C) 1 and 3
D) 1 only
E) 2 and 3

Question 42

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. If the interest rate is 4%, and the purchase price of a sewing machine is $3000, what is the optimal capital stock (number of sewing machines) for this firm?

A) 10
B) fewer than 10
C) more than 12
D) 12
E) 11

Question 43

Suppose a piece of capital equipment will produce an MRP of $100 000 per year for the next three years (beginning one year from now). What is the maximum price a profit- maximizing firm will pay to purchase it if the annual interest rate is 12 percent?

A) $71 178
B) $213 534
C) $240 183
D) $243 460
E) $267 857

Question 44

Consider a firm that places coin- operated coffee machines in university buildings. On January 1, 2007 the firm has 1500 machines in operation, and on January 1, 2008 the firm has 2250 machines in operation. A possible explanation is that
1) there was an increase in productivity of coin- operated coffee machines that reduced the cost per cup of coffee produced;
2) an increase in demand for coffee led to an increase in the price per cup;
3) there was an increase in interest rates.

A) 2 only
B) 3 only
C) 2 or 3
D) 1 only
E) 1 or 2

Question 45

Over the past four decades, Canada's non- residential capital stock has increased at an average annual growth rate of approximately _ percent.

A) 9
B) 12
C) 3
D) 15
E) 6

Question 46

The present value of $100 to be received one year from now, with an annual interest rate of 6 percent, is

A) $94.00.
B) $94.34.
C) $95.27.
D) $102.13.
E) $106.00.

Question 47

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. One possible explanation for a shift of the firm's investment demand curve from I0 to I2 is

A) an increase in the expected MRP of the coffee machines.
B) an increase in the interest rate.
C) a technological improvement that reduces the cost per cup of coffee.
D) a decrease in the interest rate.
E) demographic changes that lead to a reduction in the growth rate of the student population at universities.

Question 48

Carol can borrow $13 000 to buy a new 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

A) $19 097.
B) $17 837.
C) $15 239.
D) $18 233.
E) $13 544.

Question 49

The diagram below shows the market for loanable funds for a closed economy. FIGURE 15- 3
Refer to Figure 15- 3. Suppose the current equilibrium in the market for financial capital is at point
A. Which of the following events is likely to move the equilibrium to point C?

A) population growth and a technological improvement
B) an increase in the interest rate
C) population growth
D) a decrease in the interest rate
E) population growth and a simultaneous reduction in the marginal product of capital

Question 50

The diagram below shows the market for loanable funds for a closed economy. FIGURE 15- 3
Refer to Figure 15- 3. Suppose the current equilibrium in the market for financial capital is at point
A. Which of the following events is likely to move the equilibrium to point D?

A) population growth
B) an increase in the interest rate
C) a decrease in the interest rate
D) a reduction in the marginal product of capital
E) a technological improvement

Question 51

A technological improvement in the physical capital available to the firm has a similar impact on a firm's desired capital stock as

A) a decrease in capital's MRP.
B) a shift to the left of the capital's MRP curve.
C) an increase in the interest rate.
D) a decrease in the price of the firm's product.
E) a reduction in the price of capital goods.

Question 52

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

A) $75.25.
B) $82.64.
C) $90.90.
D) $94.73.
E) $110.00.

Question 53

Financial intermediaries are often the "middlemen" between households and firms and, as such,

A) they are not essential for the workings of an economy.
B) they specialize in assessing the risk of various borrowers.
C) are the fundamental determinant of the demand for capital.
D) are the fundamental determinant of the supply of capital.
E) they reduce the amount of trade by charging high fees for their services.

Question 54

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at point E1. If the marginal product of capital increases, all other things being equal, the

A) the equilibrium will remain at E1.
B) supply of saving curve will shift to S2 and the new equilibrium will be E2.
C) the supply of saving curve will shift to S2 and new equilibrium will be E2.
D) investment demand curve will shift to I2, the supply of saving will shift to S2, and the new equilibrium will be E3.
E) investment demand curve will shift to I2 and the new equilibrium will be E4.

Question 55

The table below shows the payments at the end of each year from three different assets. $\begin{array}{|l|l|l|l|l|} \hline& \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\\hline \text { A } & \$ 1000 & \$ 1000 & \$ 1000 & \text { X } \\\hline \text { B } & \$ 1000 & \$ 0 & \$ 2000 & \$ Y \\\hline \text { C } & \$ 0 & \$ 2000 & \$ 1000 & \$ Z \\\hline \text { Interest Rate } & 5 \% & 6 \% & 5 \% & 7 \% \\\hline\end{array}$
$\text { TABLE 15- } 1$

-Refer to Table 15- 1. A, B, and C are possible investment opportunities that expire at the end of Year 4, each offering a stream of payments as indicated in the table. The interest rates in each year are also specified in the table. Assuming that X, Y, and Z are zero, which investment is the most valuable if an investor contemplates them at the beginning of Year 1?

A) A
B) B
C) C
D) They are equivalent.
E) It cannot be determined with the available data.

Question 56

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. If the interest rate is 4% and the purchase price of a sewing machine is $2000, what is the optimal capital stock (number of sewing machines) for this firm?

A) at least 14
B) exactly 14
C) 11
D) 13
E) 12

Question 57

Suppose a piece of capital equipment offers its last MRP of $40 000 in one year, after which it is valueless. At an annual interest rate of 8 percent, a profit- maximizing firm would be willing to buy this unit of capital if its purchase price is

A) above $37 037.
B) below $37 037.
C) above $40 000, but only at a higher interest rate.
D) below $40 000.
E) above $40 000.

Question 58

Economists use the concept of present value to determine

A) the amount someone would be willing to pay in the future for a discounted value today.
B) the price of a unit of physical capital in the future.
C) the value in the future of a given stock of physical capital.
D) the marginal revenue product of a unit of capital.
E) the amount someone would be willing to pay today to get a payment or stream of payments in the future.

Question 59

If the annual interest rate is 10 percent, the present value of $200 paid 3 years from now is

A) $165.28.
B) $20.00.
C) $56.45.
D) $150.26.
E) $40.00.

Question 60

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. What principle will this firm follow to determine the optimal number of sewing machines to own and operate?

A) the annual MRP on the last unit of capital should be equal to (or greater than) its purchase price
B) the marginal products of each machine should be equal
C) the marginal revenue products of all the machines should be equal
D) the present value of the future MRPs should be increasing over time
E) the present value of the future MRPs on the last unit of capital is equal to (or greater than) its purchase price

Question 61

If the annual interest rate is 6 percent, the present value of $100 paid 3 years from now is

A) $15.15.
B) $40.00.
C) $56.45.
D) $83.96.
E) $94.34.

Question 62

Suppose a piece of capital equipment will produce an MRP of $1000 per year for the next three years (beginning one year from now). What is the maximum price a firm will pay to purchase it today if the annual interest rate is 7 percent?

A) $816.37
B) $2624.32
C) $3210.00
D) $1649.81

Question 63

If the annual interest rate is 7 percent, the present value of $100 to be received at the end of two years is

A) $93.46.
B) $90.70.
C) $107.00.
D) $97.00
E) $87.34.

Question 64

Consider a firm making a decision to purchase a unit of capital - let's say, a forklift . In terms of capital markets, which of the following would we consider to be the opportunity cost of the forklift
?

A) the additional revenue to the firm that the forklift would generate in the future
B) the interest the firm could earn by purchasing a bond instead
C) the purchase price of the forklift
D) the resale value of the forklift after one year
E) the future stream of MRPs from the forklift

Question 65

If the annual interest rate is currently 3.5%, Joan is a $1000 payment in exactly two years.

A) better off accepting $930 right now than
B) indifferent between accepting $935.94 right now and
C) better off accepting $950 right now than
D) indifferent between accepting $932.51 right now and
E) worse off accepting $940 right now than

Question 66

It is useful to think of physical capital in terms of a variable, .

A) stock; because most equipment is solidly built.
B) flow; because its usefulness lasts over a long period of time.
C) flow; because it is usually put in place and maintained over a long period of time.
D) stock; depending on the context.
E) stock; because any flow of investment adds to the current capital stock.

Question 67

In a competitive market for capital equipment, the purchase price of a piece of capital equipment is predicted to be

A) the present value of its stream of MRPs.
B) its current- period MRP.
C) the future value of its stream of MRPs.
D) its current- period MRP divided by the interest rate.
E) its last- period MRP divided by the interest rate.

Question 68

If the annual rate of interest is 6 percent, the present value of $100 to be paid every year for three years (beginning one year from now) is

A) $83.90.
B) $251.88.
C) $267.30.
D) $283.02.
E) $300.00.

Question 69

How much would you have to deposit today in a bank account paying 8 percent annual interest to allow you to withdraw $200 one year from now?

A) $185.19.
B) $216.00.
C) $1600.00.
D) $385.19.
E) $200.00

Question 70

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

A) the difference between nominal and real interest rates.
B) the relationship between the flow of saving and the stock of financial assets.
C) how the economy's flow of saving changes with advances in technology.
D) how the economy's desired flow of saving varies with changes in the interest rate.
E) how the economy's stock of capital varies with the interest rate.

Question 71

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}\begin{array} { | l | l | } \hline \text { Number of } & \text { Annual MRP } \\\text { Sew ing Machines } & \\\hline 10 & \$ 2000 \\\hline 11 & \$ 1800 \\\hline 12 & \$ 1600 \\\hline 13 & \$ 1400 \\\hline 14 & \$ 1200 \\\hline\end{array}\\\text { TABLE 15- } 2\end{array}$$

-Refer to Table 15- 2. If the interest rate is 4%, and the purchase price of a sewing machine is $4000, what is the optimal capital stock (number of sewing machines) for this firm?

A) more than 12
B) fewer than 10
C) 10
D) 11
E) 12

Question 72

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. One objective is to increase the total supply of saving in the economy. Why might a policy such as this not have the desired effect on the economy?

A) The supply of savings in general can increase only by income growth or population growth.
B) The introduction of TFSAs will divert financial capital away from saving and toward investment.
C) The supply of saving will increase only in response to a decrease in the interest rate.
D) The funds deposited to a TFSA could simply be substituted from other saving that would happen anyway.
E) The supply of saving will increase only in response to an increase in the pre- tax interest rate.

Question 73

Ongoing technological improvement over the past four decades in Canada has led to continual increases in investment demand, and an increase in the flow of investment, but no clear trend in the interest rate. The reason that we have not seen continual increases in the interest rate over this time period is that

A) the annual flow of investment is large enough to offset any change in the interest rate.
B) technological change has also led to rising productivity and rising incomes and therefore an increase in the supply of saving.
C) natural forces in the economy cause the investment demand curve to shift left to eliminate the excess demand for capital.
D) the government intervenes in the capital market.
E) the supply of saving curve shifts to the left in response to the increases in investment demand.

Question 74

Under which of the following circumstances will a competitive firm choose to own more capital, assuming that the purchase price of the capital and the interest rate remain unchanged?

A) the price of the product the firm produces declines
B) the stock of capital in the entire economy increases
C) technological improvement has made the capital more productive
D) the lifespan of the capital is reduced
E) other firms are increasing their stock of capital

Question 75

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages individuals to decrease the fraction of their income that they consume,

A) the equilibrium interest rate falls and the amount of investment increases.
B) the flow of investment and saving both increase, and the equilibrium interest rate increases.
C) the equilibrium interest rate falls but the amount of investment is unchanged.
D) the equilibrium interest rate rises and the amount of saving increases .
E) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected.

Question 76

How much would you have to deposit today in a bank account paying 8 percent annual interest to allow you to withdraw $200 each year for the next 2 years, beginning one year from today?

A) $400.00
B) $171.47
C) $185.19
D) $368.00
E) $356.66

Question 77

If the interest rate that you could earn on your saving is 4% per year, then your decision to spend
$1500 on a big screen TV today "costs" you in potential forgone spending one year from now.

A) $120
B) $1500
C) $60
D) $0
E) $1560

Question 78

The diagram below shows the market for loanable funds for a closed economy. FIGURE 15- 3
Refer to Figure 15- 3. Suppose the current equilibrium in the market for financial capital is at point
D. Which of the following events is likely to move the equilibrium to point A?

A) the introduction of a policy that encourages saving
B) a technological improvement
C) growth in average household income
D) an increase in the interest rate
E) a decrease in the interest rate

Question 79

The concepts of stock and flow are involved in firms' demand for labour and for capital. Which of the following statements is correct?

A) A firm hires a flow of labour services; and purchases a stock of physical capital, which provides a flow of services.
B) Labour and capital are both flow variables because their values change over time.
C) Labour and capital are both stock variables because they are providing service at any given moment in time.
D) A firm's demand for both labour and capital is determined by the marginal value each provides to the stock of labour and capital, respectively.
E) A firm hires a stock of labour services; and purchases a stock of physical capital, which provides a flow of services.

Question 80

FIGURE 15- 2
Refer to Figure 15- 2. The market for financial capital is initially in equilibrium at E1. A shift of the aggregate investment demand curve from I1 to I2, all other things constant, would

A) change the technology of capital use.
B) shift the supply of saving curve to S2.
C) increase the equilibrium interest rate.
D) reduce the marginal product of capital.
E) decrease the equilibrium interest rate.