Deck 29: Interest Rent and Profit

Question 1

A person with a high positive rate of time preference greatly prefers current consumption over future consumption.

Answer 1

True

Question 2

Is there a difference between the terms interest and interest rate?

A)No.Interest is simply a shorthand version of interest rate.
B)Yes.Interest refers to the return that capital earns, whereas interest rate is the payment to someone who lends money to someone else.
C)Yes.Interest is what one earns by placing funds in a savings account, whereas interest rate is the rate that the U.S.Treasury pays for borrowed funds when the government incurs a deficit.
D)Yes.Interest is a dollar payment for the use of funds, whereas interest rate is the ratio of that dollar amount to the total amount of funds borrowed.

Answer 2

Yes.Interest is a dollar payment for the use of funds, whereas interest rate is the ratio of that dollar amount to the total amount of funds borrowed.

Question 3

People such as Henry Ford and Thomas Edison most likely earned profit as a result of "innovative genius."

Answer 3

True

Question 4

The administrative costs per dollar are lower for a large loan than for a small loan.

Question 5

The only resource that cannot earn economic rent is labor.

Question 6

Firms demand credit so that they can invest in capital goods and finance roundabout methods of production.

Question 7

The terms interest and interest rate are synonyms.

Question 8

Prices of goods and services are high in cities such as Tokyo and New York City as a result of high land rents in those cities.

Question 9

As interest rates decrease, present values decrease and firms will purchase more capital goods.

Question 10

Pure economic rent can exist only when a factor has a demand curve that is perfectly inelastic.

Question 11

Without savers, there would be no supply of loanable funds.

Question 12

Economist David Ricardo argued that land rent was high because grain prices were high.

Question 13

The nominal interest rate is determined

A)by the Federal Reserve system.
B)in the loanable funds market.
C)by the U.S.Treasury.
D)by the average rate of change in the price of capital goods.

Question 14

Interest can be regarded as the

A)payment to entrepreneurs for incurring risk in the production of new goods.
B)rate that a lender receives for the use of the lender's loanable funds.
C)return earned by capital as an input in the production process.
D)dollar amount of loanable funds that a person borrows to invest in a capital good.

Question 15

The nominal interest rate is determined in the loanable funds market.

Question 16

The two ways in which the word "interest" is used in economics are as the price for

A)loanable funds and the return earned by entrepreneurship.
B)loanable funds and the return earned by capital as an input in the production process.
C)money and the return for risk taking.
D)loanable funds and the return for risk taking.

Question 17

Suppose you borrow $1,000 today with the promise to pay back $1,070 one year from today. Based upon this information, the interest rate is __________, and the interest is __________.

A)$70; 7 percent
B)7 percent; $1,070
C)7 percent; $70
D)$100; 10 percent
E)10 percent; $100

Question 18

According to Henry George, in his book Progress and Poverty, all land rents are pure economic rents and should therefore be heavily taxed.

Question 19

An artificial rent is an economic rent that would not exist without government.

Question 20

The quantity demanded of loanable funds is inversely related to the rate of interest.

Question 21

If you have a low rate of time preference, then you

A)buy goods right now because "you just can't wait."
B)are willing to save a larger percentage of your income than a person who has a high rate of time preference.
C)find it difficult to save much of your income because money "just sitting around" is worthless to you.
D)are willing to borrow money to buy goods now.
E)a, c, and d

Question 22

Roundabout methods of production are said to be productive. What does this mean?

A)Goods are best produced by many people working together-as in a circle.
B)If you go round and round thinking about something, you will usually come up with the right way to do it-so you minimize on mistakes.
C)If you take the most direct route to producing a good, you will save time, and time is something that producers want to save since "time is money."
D)If you take time out to produce a capital good, with that capital good you can produce more than you could produce without it.

Question 23

Which of the following statements is true?

A)All persons have a high rate of time preference.
B)People with a high rate of time preference are more likely to be borrowers than people with a low rate of time preference.
C)People with a high rate of time preference are more likely to be lenders than people with a low rate of time preference.
D)A high interest rate is the cause of a high rate of time preference.
E)none of the above

Question 24

The supply of loanable funds depends most directly on

A)investment expenditures.
B)people's saving and newly created money.
C)bond and stock activity.
D)the profits of firms.

Question 25

Loanable funds are

A)another term for capital.
B)a particular type of investment fund that companies such as Merrill Lynch offer to consumers.
C)funds that someone borrows with a promise to pay interest for the use of the funds.
D)funds that someone lends with the requirement that interest be paid for the use of the funds.
E)c and d

Question 26

Which of the following statements is false?

A)The quantity supplied of loanable funds and the interest rate are inversely related.
B)The supply curve of loanable funds is upward sloping.
C)One of the reasons the federal government demands loanable funds is that it needs to finance budget deficits.
D)Savers are people who consume less than their current income.

Question 27

If the interest rate increases, then

A)households will decrease their level of saving.
B)the supply of loanable funds will fall because it now costs more to borrow funds and people who were supplying the funds will realize that fewer people will be willing to borrow their funds.
C)households will consume less and save more.
D)government will consume more because it now costs more to borrow funds to buy goods.
E)a, b, and d

Question 28

The people most likely to save are those with a

A)low rate of time preference since they only slightly prefer present consumption to future consumption.
B)high rate of time preference since they greatly prefer present consumption to future consumption.
C)low rate of time preference since they greatly prefer present consumption to future consumption.
D)efficient rate of time preference since they do not prefer consuming luxury goods to necessities.
E)roundabout rate of time preference since they don't really care about consuming.

Question 29

As the interest rate falls,

A)the quantity demanded of loanable funds rises.
B)the quantity demanded of loanable funds falls.
C)the demand for loanable funds rises.
D)the supply of loanable funds falls.

Question 30

The supply curve of loanable funds is __________ sloping, which implies that as the interest rate __________, the __________ loanable funds will increase.

A)downward; decreases; demand for
B)upward; increases; supply of
C)upward; decreases; supply of
D)downward; decreases; quantity demanded of
E)upward; increases; quantity supplied of

Question 31

As the interest rate (price for loanable funds) decreases, businesses will

A)find it less profitable to invest in capital goods, because the lower interest rate means that they will earn a lower return on their investments.
B)find it less profitable to invest in capital goods, because their costs of production will be higher.
C)increase their borrowings of loanable funds, because the cost of borrowing has declined relative to the benefits of borrowing.
D)decrease their borrowings of loanable funds, because there will now be cheaper ways to produce goods than to employ roundabout methods of production.
E)b and c

Question 32

If the price for loanable funds is less than the return on capital, then firms will

A)borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
B)borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
C)not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
D)not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

Question 33

The term "roundabout methods of production" refers to

A)Firm A purchasing a product from Firm B and reselling it to consumers.
B)firms first producing capital goods and then using those capital goods to produce consumer goods.
C)firms selling unassembled products so that the consumer completes the production process.
D)banks and other financial institutions making loans available to producers so that the producers can make goods available to consumers; thus in a roundabout way the banks are making the goods available to consumers.

Question 34

If you have a high rate of time preference, then you are

A)willing to wait a longer time to consume a good than someone with a low rate of time preference.
B)not willing to wait a long time to consume a good.
C)willing to save your earnings so that you can buy more goods in the future.
D)not acting rationally, because it means that you are willing to delay consumption of goods and services until a later date (but you might not be around to do so).
E)a and c

Question 35

If the return on capital is 12 percent and the price for loanable funds is 9 percent, then

A)firms will not be willing to borrow loanable funds until either the return on capital decreases or the price for loanable funds increases, because the market for loanable funds is not in equilibrium and businesses will be wary of further investment.
B)firms will realize that if they borrow loanable funds and invest in capital goods, it will cause the return on capital to decrease, so they won't want to borrow the funds.
C)savers will realize that they can earn more if they invest their savings in capital, so they will withdraw their savings and supply them to firms at 14 percent.
D)none of the above

Question 36

The demand curve for loanable funds is

A)upward sloping, indicating that lower interest rates are associated with a lower demand for loanable funds.
B)downward sloping, indicating that businesses will increase their demand at lower interest rates, but that consumers will probably decrease the supply of loanable funds at lower interest rates.
C)downward sloping, indicating that both businesses and consumers will increase the quantity demanded of loanable funds as the interest rate decreases.
D)horizontal at the equilibrium interest rate.

Question 37

A person who greatly prefers present consumption to future consumption has a(n) __________ rate of time preference.

A)low
B)high
C)efficient
D)roundabout

Question 38

The term "positive rate of time preference" suggests that

A)people prefer more time to do something than less time.
B)people prefer goods to be available at an earlier time period than at a later time period.
C)some people are irrational because they would rather have something now than wait to consume it later when they can enjoy it more.
D)interest rates tend to increase over time.
E)businesses know that if they invest in capital goods, they will earn profits.

Question 39

If consumers prefer earlier availability of goods to later availability, they are said to have a __________ rate of time preference.

A)positive
B)negative
C)rational
D)roundabout
E)none of the above

Question 40

Abigail has a high rate of time preference while Cynthia has a low rate of time preference. If the interest rate payable on savings accounts increases from 5 percent to 7 percent, then

A)Abigail would find it easier than Cynthia to cut back on consumption and increase her savings.
B)Cynthia would find it easier than Abigail to cut back on consumption and increase her savings.
C)neither Abigail nor Cynthia would decrease her consumption and increase her savings because relative time preferences have little to do with the interest rate.
D)Abigail and Cynthia would probably decrease their consumption and increase their savings by the same amount because the higher interest rate will affect them both to the same degree regardless of their time preferences.

Question 41

Which of the following statements is true?

A)The administrative costs per dollar are greater for a large loan than a small loan.
B)The risk on a long-term loan is likely to be less than on a short-term loan, ceteris paribus.
C)a and b
D)none of the above

Question 42

If the nominal interest rate is 5.2 percent and expected inflation rate is 2 percent, the real interest rate equals

A)7.2 percent.
B)3.2 percent.
C)5.0 percent.
D)10.4 percent.
E)none of the above

Question 43

The present value of $100,000 two years in the future at a 7 percent interest rate is approximately

A)$114,000.
B)$97,087.
C)$8,700.
D)$87,344.

Question 44

Which of the following statements is true?

A)Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus.
B)Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus.
C)Larger loans are likely to be cheaper to process (per dollar) than smaller loans; therefore, larger loans will carry a higher interest rate than smaller loans, ceteris paribus.
D)Larger loans are likely to be more expensive to process (per dollar) than smaller loans; therefore, larger loans will carry a lower interest rate than smaller loans, ceteris paribus.

Question 45

If the nominal interest rate is 8 percent and expected inflation rate is 9 percent, the real interest rate

A)is 1 percent.
B)is -1 percent.
C)is 9 percent.
D)cannot be calculated.
E)none of the above

Question 46

Which of the following statements is true?

A)Ceteris paribus, the longer the term of a loan, the lower the interest rate.
B)The nominal interest rate is the interest rate adjusted for expected inflation.
C)Loans that cost more to process and administer will come with higher interest rates than loans that cost less to process.
D)a and b
E)none of the above

Question 47

If the price for loanable funds is greater than the return on capital, then firms will

A)borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
B)borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
C)not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
D)not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

Question 48

Approximately how much is $25,000 to be received a year from now worth today at an interest rate of 11 percent?

A)$27,750
B)$25,556
C)$22,523
D)$20,385

Question 49

Which of the following statements is true?

A)A major corporation would tend to pay a higher interest rate for a $10,000 loan than a single parent working for a fast food restaurant.
B)The more risky the loan, the higher the interest rate charged, ceteris paribus.
C)The less risky the loan, the higher the interest rate charged, ceteris paribus.
D)The duration (length) of a loan is unrelated to the interest rate charged for the loan.
E)c and d

Question 50

Which of the following statements is false?

A)Firms calculate present values when they make investment decisions because investment decisions yield benefits in the future and firms want some idea of the value of these benefits.
B)The present value of $100 a year from today at a 10 percent interest rate is approximately $91.
C)The present value of $100 two years from today at a 10 percent interest rate is approximately $83.
D)A firm will not undertake an investment if the present value of the future income resulting from the investment is greater than the cost of the investment.

Question 51

If 1 percent inflation rather than zero percent inflation is expected by both the suppliers and demanders of loanable funds, then the nominal interest rate will

A)fall, ceteris paribus.
B)remain constant.
C)rise.
D)rise, ceteris paribus.

Question 52

Jimmy borrowed $50,000 to add a room to his house. He financed the loan over 3 years at 7 percent per year. He expects a 2 percent inflation rate each year for the next 3 years. It follows that he expects to pay an annual real interest rate of

A)8 percent.
B)9 percent.
C)4.5 percent.
D)5 percent.

Question 53

The present value of $10,000 one year in the future at a 6 percent interest rate is approximately

A)$9,585.
B)$9,434.
C)$1,667.
D)$10,060.

Question 54

If the return on capital is 12 percent and the price for loanable funds is 14 percent, then

A)currently businesses will not borrow loanable funds to invest in capital goods.
B)eventually the return on capital will decrease to the point where businesses will find it profitable to borrow loanable funds.
C)the return on capital will fall as the supply of capital decreases over time, and simultaneously, the price for loanable funds will increase as savers make even more savings available.
D)a and b

Question 55

If the nominal interest rate is 4 percent and expected inflation rate is 1.6 percent, the real interest rate equals

A)2.4 percent.
B)5.6 percent.
C)-2.4 percent.
D)8 percent.
E)none of the above

Question 56

The present value of $2,000 one year in the future at a 6.5 percent interest rate is approximately

A)$4,045
B)$1,300.
C)$2,130.
D)$1,878.

Question 57

Which of the following statements is true?

A)The nominal interest rate is always higher than the real interest rate since the nominal interest rate equals the real interest rate plus the expected inflation rate.
B)The nominal interest rate is always lower than the real interest rate since the nominal interest rate equals the real interest rate minus the expected inflation rate.
C)The nominal interest rate can equal the real interest rate, but to do so the expected inflation rate must be zero percent.
D)It is the nominal interest rate-not the real interest rate-that matters to borrowers.

Question 58

Which of the following statements is true?

A)Nominal interest rate = real interest rate - expected inflation rate.
B)Nominal interest rate = real interest rate + expected inflation rate.
C)Real interest rate = nominal interest rate + expected inflation rate.
D)Expected inflation rate = nominal interest rate + real interest rate.

Question 59

Ceteris paribus, the more risk associated with a loan,

A)the lower the interest rate.
B)the higher the interest rate.
C)the more likely the loan will be granted.
D)the bigger the loan.

Question 60

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate) is expected by both suppliers and demanders in the loanable funds market, then

A)the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward.
B)the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward.
C)both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward.
D)both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward.

Question 61

Exhibit 29-1
​

Refer to Exhibit 29-1. Suppose the supply curve is S₁ and the price is A. Pure economic rent equals area

A)ABD.
B)EBA.
C)ODBC.
D)EBD.
E)none of the above

Question 62

What is the approximate present value of a future income stream of three $1,000 payments to be received one, two, and three years from today if the interest rate is 6.75 percent?

A)$2,814
B)$2,636
C)$2,882
D)$3,205

Question 63

If you place $10,000 in a savings account that pays 3 percent interest per year and you leave all the money, principal plus interest earned, in the account for three years, approximately how much money will you have at the end of the three years?

A)$10,090
B)$11,120
C)$10,927
D)$9,152
E)$10,124

Question 64

"Economic rent" is

A)what an individual pays for the use of land or buildings.
B)a payment in excess of the producer's explicit costs of production.
C)a payment in excess of opportunity costs.
D)a payment for capital goods.
E)none of the above

Question 65

What is the approximate present value of $500 four years from now if the interest rate is 2 percent?

A)$462
B)$508
C)$510
D)$541
E)$485

Question 66

As interest rates increase, present values __________, and firms will buy __________ capital goods.

A)increase; fewer
B)decrease; fewer
C)increase; more
D)decrease; more

Question 67

Land can earn economic rent, and so can

A)labor and capital.
B)labor.
C)capital.
D)none of the above

Question 68

Michelle can work at job A earning $50,000 a year, job B earning $83,000 a year, or job C earning $85,000 a year. If Michelle chooses job C, then her economic rent from working at that job rather than job A is

A)$35,000.
B)$2,000.
C)$0.
D)$33,000.

Question 69

Exhibit 29-1
​

Refer to Exhibit 29-1. Suppose the supply curve is S₂ and the price is A. Economic rent equals area

A)EBD.
B)ABD.
C)ODBC.
D)EBA.
E)none of the above

Question 70

The English economist David Ricardo argued that

A)grain prices were high because land rents were high.
B)land rents were high because grain prices were high.
C)grain prices were high because land rents were low.
D)land rents were high because grain prices were low.
E)none of the above

Question 71

Approximately how much money would you need to place in a savings account today to accumulate $5,000 five years from now if the savings account pays an interest rate of 3.5 percent per year?

A)$4,210
B)$4,831
C)$5,937
D)$3,411
E)$3,887

Question 72

Michelle can work at job A earning $50,000 a year, job B earning $83,000 a year, or job C earning $85,000 a year. If Michelle chooses job C, then her economic rent for working at job C rather than job B is

A)$35,000.
B)$2,000.
C)$0.
D)$33,000.

Question 73

Which of the following statements is true?

A)The supply curve for land is upward sloping in the short run, but is perfectly inelastic in the long run.
B)The supply curve for land is upward sloping in the short run, but is perfectly elastic in the long run.
C)The supply curve for land is upward sloping when considering a small portion of the total amount of land, but is perfectly inelastic when considering the total amount.
D)The supply curve for land is upward sloping when considering the total amount of land, but is perfectly inelastic when considering a small portion of the total amount.

Question 74

"Pure economic rent" is a payment

A)in excess of opportunity costs.
B)in excess of opportunity costs when opportunity costs are zero.
C)for the use of land.
D)in excess of opportunity costs when opportunity costs are positive.
E)to a pure monopolist for the monopolist's product.

Question 75

As interest rates decrease, present values __________, and firms will buy __________ capital goods.

A)increase; fewer
B)decrease; fewer
C)increase; more
D)decrease; more

Question 76

Economists generally agree that land rents are

A)price determining, not price determined.
B)price determined, not price determining.
C)too high.
D)too low.
E)Economists generally do not agree on anything.

Question 77

What is the approximate value of a future income stream of three $1,000 payments to be received one, two, and three years from today if the interest rate is 5 percent?

A)$864
B)$1,633
C)$2,723
D)$5,062

Question 78

The difference between artificial rents and real rents is that

A)artificial rents are contrived by government and real rents are not.
B)real rents are usually bigger than artificial rents.
C)artificial rents occur only if the supply curve for the good in question is perfectly inelastic.
D)artificial rents are subject to rent seeking and real rents are not.

Question 79

Pure economic rent can exist only when the factor under consideration

A)is something other than land.
B)has a supply curve that is perfectly elastic.
C)has a demand curve that is perfectly elastic.
D)has a supply curve that is perfectly inelastic.
E)a and d

Question 80

The term "present value" refers to

A)how much something costs today relative to what it could be sold for in the future after it depreciates in value.
B)how much you would be willing to pay for a good today if you are not sure that the good will be available in the future.
C)the current worth of some future dollar amount of income.
D)how much your savings are worth today after having been invested for a certain number of years.
E)the difference between the price you pay for a good and the costs of producing that good.