Deck 11: Interest,rent,and Profit

Question 1

Under tight monetary policy,large amounts of government borrowing will

A) shift the demand curve for loanable funds to the left.
B) produce balance of payments surpluses.
C) contribute to further increases in interest rates.
D) lead to an increase in government bond prices.
Shift to the left, causing the interest rate to fall.

Answer 1

C

Question 2

Small loans carry higher interest rates than large loans because they are

A) less risky.
B) pure loans.
C) more productive.
D) more expensive to administer.
E) very liquid.

Answer 2

D

Question 3

If the permanent annual rate of return on an asset that costs $20,000 is 8 percent,then each year the owner of the asset will earn

A) $20,000.
B) $16,000.
C) $4,000.
D) $1,600.
E) $800.

Answer 3

D

Question 4

To shift the supply of loanable funds to the right,a society must be willing to

A) eliminate risk.
B) cease saving.
C) postpone present consumption.
D) pursue tight money policies.
E) jail money lenders.

Question 5

The pure rate of interest is the

A) rate of interest charged for large, as compared to small, loans.
B) interest rate minus any administrative costs, such as bookkeeping and collection.
C) difference between the interest rate charged on a loan with no risk and one with a measurable degree of risk.
D) prime rate of interest.
E) interest rate on a riskless loan.

Question 6

The distinction between the pure rate of interest and the actual interest rate is primarily a reflection of

A) surplus value.
B) rent.
C) innovation.
D) riskiness.
E) intensity.

Question 7

If the desire for present consumption by individuals and households increases,the supply of loanable funds will

A) shift to the right, causing the interest rate to rise.
B) shift to the right, causing the interest rate to fall.
C) shift to the left, causing the interest rate to fall.
D) shift to the left, causing the interest rate to rise.
E) be unaffected, but the demand for loanable funds will fall.

Question 8

The primary function of interest rates is to

A) determine the demand for labor.
B) allocate the supply of loanable funds.
C) compute the rate of profit.
D) serve as a price for fixed inputs such as land.
E) serve as a reward for uncompensated risk.

Question 9

If a surge of new inventions results in many profitable investment opportunities,the demand for loanable funds will

A) shift to the left, causing the interest rate to fall.
B) shift to the left, causing the interest rate to rise.
C) shift to the right, causing the interest rate to rise.
D) shift to the right, causing the interest rate to fall.
E) be unaffected, but the supply of loanable funds will rise.

Question 10

The equilibrium rate of interest is

A) determined by the demand and supply of loanable funds.
B) equivalent to the profit rate.
C) fixed by law in the United States.
D) the rate that ensures that households and businesses can borrow all they need.
E) equal to the value of a bond or a stock.

Question 11

The rate of return on an asset that costs $6,000 and yields a permanent return of $540 per year is ________ percent.

A) 11
B) 9
C) 6
D) 5.4
E) 0.6

Question 12

The demand curve for loanable funds slopes downward to the right because

A) there are more projects that are profitable at low than at high rates of interest.
B) firms borrow money only when interest rates are low.
C) an increase in the supply of loanable funds generally raises interest rates.
D) the lower the asset's rate of return, the higher the interest rate.
E) money is not as profitable when its price is high.

Question 13

As the degree of risk connected with a loan increases,the difference between the actual rate of interest on the loan and the pure rate of interest

A) increases.
B) decreases.
C) remains unchanged.
D) becomes zero.
E) is negative.

Question 14

Interest rates

A) help ensure that only those projects with the greatest expected productivity will be undertaken.
B) are not really needed in a modern planned economy.
C) arise solely because investment projects entail risk.
D) vary directly with the capitalized value of an asset.
E) are synonymous with the concept of expected rates of return.

Question 15

The amount of money one must pay for the use of $1 for one year is called

A) wage.
B) rent.
C) interest.
D) profit.
E) a loanable fund.

Question 16

Two important determinants of the rate of interest charged to borrowers are the riskiness of the loan and the

A) capital budget.
B) liquidity index.
C) cost of bookkeeping and collection.
D) level of roundaboutness.
E) profit share.

Question 17

If the Federal Reserve pursues a policy of easy money,the supply of loanable funds will

A) shift to the right, causing the interest rate to fall.
B) shift to the right, causing the interest rate to rise.
C)be unaffected, but the demand for loanable funds will shift to the right.
D) shift to the left, causing the interest rate to rise.
E) shift to the left, causing the interest rate to fall.

Question 18

Money is demanded in the form of loanable funds because it

A) possesses intrinsic value.
B) can provide command over resources.
C) is not as liquid as other forms of capital.
D) grows in value as it is held over time.
E) has no opportunity costs associated with holding it.

Question 19

Rent,interest,and profit are forms of ________ income.

A) bookkeeping
B) property
C) nonproductive
D) surplus
E) fixed

Question 20

The interest rate earned on an investment in an asset is called

A) the capital output ratio.
B) depreciation.
C) the risk quotient.
D) capitalization.
E) the rate of return.

Question 21

Suppose I am to receive $24,000 two years from now.I need the money immediately and wish to sell the rights to the $24,000.If the interest rate is 12 percent,I can expect to receive

A) $23,659.
B) $21,428.
C) $20,000.
D) $19,133.
E) $18,230.

Question 22

Land is defined by economists as an input whose ________ is fixed.

A) price
B) value
C) tax rate
D) quantity
E) revenue

Question 23

The value of an asset such as a bond will rise when

A) interest rates rise.
B) interest rates fall.
C) the price of bonds falls.
D) the supply of loanable funds decreases.
E) the demand for loanable funds increases.

Question 24

Capitalization is

A) the process of accumulating capital.
B) a measure of the degree of roundabout production.
C) the process of computing the present value of the future income stream produced by an asset.
D) a form of labor's surplus value kept by business.
E) a way of measuring the value of capital worn out in a year.

Question 25

If the interest rate is 7.5 percent,a dollar received a year from now has a present value of

A) $1.075.
B) $0.93.
C) $0.875.
D) $0.82.
E) $0.75.

Question 26

A firm typically undertakes a project when the

A) firm has enough money to spend on the project.
B) interest rate exceeds the profit rate.
C) interest rates are rising.
D) rate of return exceeds the interest rate at which it can borrow.
E) project's rate of return is greater than zero.

Question 27

An increase in interest rates will cause

A) present values to rise.
B) a dollar received today to be worth less than a dollar received a year from today.
C) no changes in the capitalized worth of an asset.
D) firms to undertake more projects whose rates of return are below the interest rate.
E) bond prices to fall.

Question 28

If variations in the price of an input do not lead to changes in the amounts of the input available to the economy,the payment received by the input is referred to as

A) profit.
B) interest.
C) capital.
D) compensation.
E) rent.

Question 29

The basic difference between rent and other payments for productive inputs is that

A) a reduction in rent will not influence the availability of the input; reductions in other input payments will reduce their availability.
B) rent is earned income to the input owner; other input payments are unearned.
C) rent is payment for use of an input; other input payments are made to obtain input services.
D) rent is payment for an input that has alternative uses; other input payments are for unique inputs.
E) There are no basic differences among these payments.

Question 30

If the pure rate of interest is 5 percent per year,a riskless asset that guarantees to pay the owner $2,000 per year forever is worth

A) $10,000.
B) $20,000.
C) $30,000.
D) $40,000.
E) an infinite amount.

Question 31

If the interest rate remains constant,the present value of a dollar

A) declines as the length of time increases before the dollar is received.
B) is unaffected by the length of time before the dollar is received.
C) rises as the length of time increases before the dollar is received.
D) is calculated by dividing the interest rate by one, raised to the power of the number of years in the future the money will be received.
E) is calculated by multiplying the interest rate per dollar by the number of dollars to be received.

Question 32

The rate of return for an asset that costs $200,000 and promises to pay $40,000 net per year forever to its owner is ________ percent.

A) 10
B) 15
C) 20
D) 25
E) 100

Question 33

If a $1 million project can be financed at 12 percent per year and will have a 15 percent rate of return per year,its annual profit will be

A) $30,000.
B) $120,000.
C) $150,000.
D) $240,000.
E) $850,000.

Question 34

An asset that earns a fixed sum of money each year for its owner will

A) provide the same rate of return regardless of its cost.
B) provide its owner with a capitalized value equal to its annual payment.
C) have its present value capitalized each time the annual payment is received.
D) yield a lower rate of return when its price declines.
E) decline in price when the market rate of interest rises.

Question 35

The process of computing an asset's worth is called

A) computing an asset's rate of return.
B) appropriation.
C) calibration.
D) investment.
E) capitalization.

Question 36

If $1,000 received a year from today is equivalent to $926 received today,the rate of interest is ________ percent.

A) 10
B) 9.3
C) 8
D) 7.4
E) 6

Question 37

The following questions are based on the following schedule:

If the interest rate is 12 percent,the firm will invest ________ million.

A) $8
B) $9
C) $20
D) $22
E) $28

Question 38

The following questions are based on the following rates of return for five independent investment projects:

If the rate of interest is 12 percent,the number of projects that would be undertaken is

A) 1.
B) 2.
C) 3.
D) 4.
E) 5.

Question 39

The following questions are based on the following schedule:

A 3-percentage-point increase in the rate of interest prior to making the investment decision would reduce the amount invested by ________ million.

A) $8
B) $9
C) $20
D) $22
E) $28

Question 40

The following questions are based on the following rates of return for five independent investment projects:

A 2 percent increase in the interest rate might result in canceling the decision to undertake project

A) A.
B) B.
C) C.
D) D.
E) E.

Question 41

One who accepts the risks inherent in introducing and commercializing a new product or manufacturing process is called a(n)

A) socialist.
B) innovator.
C) banker.
D) rentier.
E) economist.

Question 42

If the government imposes a tax on rents

A) government revenues will decline.
B) accounting profits will more closely approximate economic profits.
C) there will be no effect on the supply of resources to the economy.
D) land will be less productive.
E) the demand for land will fall.

Question 43

Assume that the economy is in equilibrium with the pure rate of interest at 7 percent per year and an investment of funds in a particular project would return 11 percent per year.Frank Knight would argue that most of the 4 percent differential is

A) a reward for innovation in this area.
B) a premium for the risk inherent in this project.
C) the result of monopoly profits due to contrived scarcity in this area.
D) an indication that society should allocate more resources to this area.
E) the result of exploitation of labor in this area.

Question 44

Henry George is best known for his view that

A) profits arise as a result of labor exploitation.
B) capital budgeting is an important activity for a corporation.
C) the rate of interest is determined by the liquidity preference theory.
D) all economic profit is the result of uncertainty.
E) land rent is unearned income that should be taxed away.

Question 45

The single tax movement of Henry George would have

A) lumped together the piecemeal taxes of government into one tax on income.
B) placed taxes on economic profits but not on accounting profits.
C) taxed away economic rents.
D) taxed only consumption so as not to discourage investment and innovative activity.
E) placed a heavy tax on all consumption above the minimum requirements for food, clothing, and shelter.

Question 46

An increase in the price of some rural acreage resulting from the construction of a nearby interstate highway is an example of

A) capital formation.
B) consumer surplus.
C) parity.
D) risk.
E) rent.

Question 47

The following questions are based on the following diagram, representing the supply and demand curves for an input:

The price of this input is called

A) wage.
B) the pure interest rate.
C) profit.
D) rent.
E) a risk premium.

Question 48

Economic rent is a

A) payment above the minimum necessary to make an input available to the economy.
B) price of an apartment or other leased building.
C) tax imposed by the government on property.
D) payment for free resources such as air and water.
E) payment for an input that has many close substitutes readily available.

Question 49

Among the factors giving rise to profits are

A) innovation, uncertainty, and monopoly power.
B) perfect competition and perfect knowledge of the future.
C) the absence of risk and uncertainty.
D) the need to reward labor in excess of its contribution to production.
E) business efforts to avoid forms of income that can be taxed fully.

Question 50

Schumpeter argued that

A) rents should be taxed away.
B) profits result from exploitation of labor.
C) interest is the reward for bearing risk.
D) profits are derived from innovation.
E) interest is best explained by the liquidity preference theory.

Question 51

Approximately what percent of the gross domestic product is before-tax corporation profits?

A) 2 to 3 percent
B) 5 to 10 percent
C) 15 to 25 percent
D) 33 to 50 percent
E) over 50 percent

Question 52

If the supply of an input is fixed,its supply curve is a(n)

A) upward-sloping line.
B) vertical line.
C) downward-sloping line.
D) horizontal line.
E) single point.

Question 53

If the demand curve is D₀,a tax on the income received by the supplier of this input

A) increases the demand to D₁.
B) reduces the quantity sold of the input.
C) raises the quantity sold of the input.
D) raises the equilibrium price of the input.
E) has no effect on the equilibrium price and quantity of the input.

Question 54

Profits

A) are the largest component of GDP.
B) are a reward for the productivity of land.
C) have no useful function in a capitalistic economy.
D) primarily result from the exploitation of labor.
E) vary greatly from year to year and behave more erratically than wages.

Question 55

The view that the only tax governments should impose is a tax on rent is most closely associated with

A) Adam Smith.
B) J. M. Keynes.
C) Henry George.
D) Joseph Schumpeter.
E) Frank Knight.

Question 56

The price of an input,fixed in supply,its limits established by nature,is called

A) land.
B) profit.
C) interest.
D) entitlements.
E) rent.

Question 57

Which of the above diagrams,illustrating changes in demand,best demonstrates the concept of economic rent?

A) A
B) B
C) C
D) D
E) E

Question 58

Star athletes often receive incomes significantly above what they would be willing to accept to continue playing.In the context of economic analysis,it would be reasonable to consider this additional income a form of

A) wage.
B) profit.
C) rent.
D) interest.
E) merit pay.

Question 59

Profits as a reward to innovation is a concept most associated with

A) Karl Marx.
B) Henry George.
C) Frank Knight.
D) Thomas Malthus.
E) Joseph Schumpeter.

Question 60

Accounting profits differ from the economist's concept of profits because accounting profits

A) fall less rapidly during recessions.
B) are excluded from calculations of the national income.
C) are corrected for differences in the quality of management provided by owners.
D) are measured in a way that does not fully reflect the opportunity costs of firms' resources.
E) vary among industries, whereas economic profits are the same among all industries.

Question 61

According to Schumpeter,the large profits often realized from innovation tend to be transitory because

A) interest rates rise, causing the value of the innovator's assets to fall.
B) the state taxes away most of these excess earnings.
C) innovators sell their businesses by going public, and stock prices are very unpredictable and unstable.
D) rival firms are induced to copy the innovations, and thus entry of new firms drives down profits.
E) they result from contrived scarcities resulting from the use of monopoly power.

Question 62

That profits are a consequence of the exploitation of labor and the appropriation of labor's surplus value is a theory closely associated with

A) Karl Marx.
B) Henry George.
C) Frank Knight.
D) Thomas Malthus.
E) Joseph Schumpeter.

Question 63

Which of the following reasons for the existence of profits is LEAST socially justifiable?

A) Profits serve as an incentive for risk taking.
B) Profits serve to signal entry and exit of resources in an economic system.
C) Profits reward economically efficient producers.
D) Profits appear where there are contrived scarcities in product or resource markets.
E) Profits accrue to successful innovators.

Question 64

Usury laws stemmed from the idea that

A) interest represents labor surplus appropriated by business.
B) interest rates are not prices and therefore are not subject to the laws of supply and demand.
C) money is a medium of exchange and not a store of value.
D) money is an asset that is fixed in supply.
E) charging someone for the use of money is sinful.

Question 65

To Marx,profits were

A) a reward for risk bearing.
B) a measure of capital's productive activity.
C) a social dividend arising from the capitalist's efficiency.
D) a measure of the surplus value created by capital.
E) that part of labor's productivity the capitalist retains.

Question 66

Marx called that part of labor's productivity appropriated by employers

A) surplus value.
B) capital.
C) interest.
D) the value of the marginal product.
E) excess capacity.

Question 67

Profits as a reward to risk and uncertainty is a theory closely associated with

A) Karl Marx.
B) Henry George.
C) Frank Knight.
D) Thomas Malthus.
E) Joseph Schumpeter.

Question 68

Profits from innovation represent greater than normal returns to capital,because in the case of innovation

A) it is extremely difficult to calculate an expected rate of return.
B) borrowers are often taken advantage of by lenders.
C) no one wants to lend innovators any money to finance their businesses.
D) it leads to the formation of a natural monopoly.
E) the rate of return generally exceeds the interest rate.

Question 69

In a capitalistic system,the signal for entry into and exit from an industry is provided by

A) wages and salaries.
B) rent and interest.
C) spending and saving.
D) liquidity and rigidity.
E) profits and losses.

Question 70

In the 1990s,thousands of new companies were formed to take advantage of the

A) pure rate of interest.
B) single-tax movement.
C) Internet.
D) investment tax credit program.
E) anti-usury laws.