Deck 15: Government Taxation and Expenditure

Question 1

Capital consist of:

A)those durable produced items that are in turn used as productive inputs for further production.
B)those durable produced items that are sold to consumers.
C)only those goods that are output.
D)goods sold at Walmart.
E)none of the above.

Answer 1

those durable produced items that are in turn used as productive inputs for further production.

Question 2

When you buy a bond or put money in your savings account, the financial yield on this investment is called:

A)rate of return on investment.
B)interest rate.
C)lending rate.
D)bond rate.
E)none of the above.

Answer 2

interest rate.

Question 3

Capital differs from other resources in that it:

A)is not used in socialist economies.
B)is not subject to diminishing returns.
C)cannot be augmented or exhausted.
D)is not a physical good.
E)is both an input and an output of the economy.

Answer 3

is both an input and an output of the economy.

Question 4

The rate of return on investment is:

A)the annual net return per dollar of invested capital.
B)the number of investments we do not accept.
C)the annual payment on money borrowed.
D)the monthly total return per dollar of invested capital.
E)none of the above.

Question 5

If the interest rate is 10% and you will receive $2000 next year and $3000 in three years, what is the present value?

A)$5000.
B)$6000.
C)$5500.
D)$4075.
E)none of the above.

Question 6

Why would asset prices tend to move inversely with interest rates?

A)their present value decreases as interest rates increase.
B)their present value increases as interest rates increase.
C)their past value decreases as interest rates increase.
D)prices tend to move the same as interest rates.
E)none of the above.

Question 7

An individual who holds marketable government securities now is likely to sell them and hold money instead if he believes that:

A)interest rates will fall far below present levels.
B)interest rates will fall below present levels for 3 months and then will rise above present levels.
C)interest rates will soon rise far above present levels.
D)interest rates will not change from present levels.
E)a substantial price deflation is coming.

Question 8

Real interest rate is:

A)the nominal interest rate minus inflation.
B)the interest rate including inflation.
C)not the interest rate.
D)return on investments in terms of real goods.
E)none of the above.

Question 9

The present value of a farm is $10,000.It pays $2000 per year in net income.The interest rate per year must be:

A)0 percent.
B)5 percent.
C)10 percent.
D)15 percent.
E)20 percent.

Question 10

If net investment is positive, then:

A)the rate of interest (and the capital market)could still be in long-run equilibrium.
B)it is impossible to say whether the capital stock is growing, unless gross investment is also known.
C)the capital stock is increasing, which might cause the interest rate to fall in the long run if the greater capital is applied to fixed amounts of other factors.
D)the capital stock is increasing, causing the demand curve for capital to shift downward in the long run and the interest rate to fall.
E)this could be a long-run equilibrium position, provided net saving is zero.

Question 11

If the rate of interest increases from 8 percent to 10 percent, the holder of a perpetuity which yields $100 a year forever receives a capital:

A)loss of $40.
B)loss of $50.
C)gain of $50.
D)loss of $250.
E)gain of $250.

Question 12

A person who can save at 8 percent interest decided to subscribe to a magazine.A 1-year subscription costs $12, a 2-year subscription $22.What is the cost to her of the second year?

A)$10.
B)$10.80.
C)$9.60.
D)$11.
E)$11.40.

Question 13

Nominal interest rate is:

A)the interest rate on money in terms of money.
B)the interest corrected for inflation.
C)not the interest rate.
D)return on investments in terms of real goods.
E)none of the above.

Question 14

Which of the following would be considered intangible capital?

A)software.
B)patents.
C)brand name.
D)all of the above.
E)none of the above.

Question 15

The reward to an entrepreneur, as such, is called by economists:

A)windfall gain.
B)rent.
C)unearned increment.
D)monopoly profit.
E)profit.

Question 16

From society's viewpoint, a particular new investment project is always worthwhile if:

A)the cost of borrowing is very low.
B)the new project is more roundabout than the present method of production.
C)it will increase real GDP.
D)it will increase real NDP.
E)its rate of return is greater than the market rate of interest.

Question 17

Which of the following is not associated with the concept of profit?

A)Rewards for risk-taking.
B)Rewards for innovation.
C)Monopoly returns.
D)Implicit returns to factors supplied by owners.
E)All of the above are related to the concept of profit.

Question 18

For an economist normal business profits are:

A)a cost, because they represent payments necessary to keep the resources owned by the entrepreneur in the enterprise.
B)not a cost, because they cannot be accurately calculated.
C)not a cost, because they accrue to the entrepreneur.
D)not an economic cost, because they are not necessary to acquire and retain entrepreneurial ability.
E)none of the above.

Question 19

What is the dollar value today of a stream of income over time?

A)future value.
B)past value.
C)present value.
D)interest payment.
E)none of the above.

Question 20

If capital has a computable rate of return, then we say that:

A)it is the yardstick against which most consumer loan applications are measured.
B)it is the time interval between future consumption goods and sacrificed present consumption goods.
C)it is the technological factor which equates investment opportunities with people's impatience to consume now.
D)employers should substitute capital for labor in current production processes.
E)none of the above are correct.

Question 21

In allocating scarce resources, the market may sometimes reward entrepreneurs with a less than normal return.A market economy may therefore be described as a system of:

A)profit.
B)socially necessary profit.
C)normal returns.
D)profit or loss.
E)monopoly profit.

Question 22

Who was the economist that introduced the "time discounting" and "marginal rate of return over cost" pillars?

A)Irving Fisher.
B)Adam Smith.
C)Joseph Schumpeter.
D)Milton Friedman.
E)Ben Bernanke.

Question 23

In a small corporation, the economic cost most likely to be overlooked in the measurement of profit arises from the failure to:

A)keep ownership and control separate.
B)consider corporate profits taxes as a cost.
C)amortize capital expenditures properly.
D)distinguish between long-term and short-term expenditures.
E)acknowledge the normal return to ownership capital.

Question 24

A firm's profits equal:

A)sales minus wages.
B)net worth minus depreciation and factor costs.
C)income minus liabilities corrected for inflation.
D)total revenue minus total cost.
E)total revenue minus total labor cost only.

Question 25

Some portion of profit may sometimes be considered a component of costs because it:

A)represents a price-determined cost of production.
B)is a pure economic surplus.
C)results from business usually undertaken by corporations.
D)constitutes a premium for risk taking.
E)none of the above.

Question 26

If capital has a positive rate of return, then by devoting effort toward the production of capital goods, future total production will:

A)increase, but not necessarily sufficiently to pay back replacement costs.
B)increase sufficiently to pay back replacement costs, no more, no less.
C)increase sufficiently to pay back replacement costs and yield a return in the form of a percentage interest per annum.
D)increase sufficiently to pay back replacement costs, yield a return in the form of a percentage interest per annum, and also compensate those who originally abstained from consumption.
E)do none of the above.

Question 27

If inflation and depreciation are equal to zero, a pinball machine which costs $2000 and produces an annual revenue of $200 has a rate of return of:

A)10% per year.
B)$200 per year.
C)20% per year.
D)0% per year.
E)-10% per year.

Question 28

Positive profit premiums in excess of normal profits that must be paid to attract people to risky activities reflect payment to compensate for:

A)risk aversion.
B)temporary excess losses to innovators.
C)constant marginal utility of income.
D)contrived scarcities.
E)a lack of perfect competition.

Question 29

An entrepreneur who collects profits in the short run for a new invention is collecting:

A)the competitive rate of return on capital.
B)temporary monopoly profit.
C)rent on his or her effort.
D)a Ramsey surplus.
E)an illegal monopoly profit.

Question 30

If an investment returns $600 a year forever and the annual rate of interest is 10%, then its present value is:

A)$6,000.
B)$3,000.
C)$1,000.
D)$600.
E)some positive number that cannot be determined from the information provided.

Question 31

The real interest rate is 2 percent per year.If, at the same time, the interest rate on money is 12 percent per year, then:

A)deflation is affecting this economy.
B)the inflation rate is 6 percent per year.
C)the inflation rate is 10 percent per year.
D)the inflation rate is 2 percent per year.
E)the inflation rate is 12 percent per year.

Question 32

"Normal profits" may properly be included in economic costs because:

A)it is normal for business people to want to make a profit.
B)only monopolies are not normal.
C)they include opportunity and implicit costs.
D)costs always include profit markups.
E)this makes private costs equal social overhead costs.

Question 33

Investment in capital goods involves:

A)increasing present consumption.
B)forgoing present consumption to increase future consumption.
C)consuming at the same rate.
D)consuming today and not worrying about tomorrow.
E)none of the above.

Question 34

The demand and supply of capital is strongly affected by:

A)consumer tastes.
B)the supply of natural resources.
C)interest rates.
D)the level of real income and output.
E)the supply of labor.

Question 35

In order to make worthwhile the construction of a bridge with a life of 200 years and an estimated rate of return equal to 10 percent per year the market rate of interest must be:

A)not over 2 percent.
B)not over 20 percent.
C)10 percent or less.
D)10 percent or more.
E)not sufficient information given to answer this question.

Question 36

Why is capital not considered a primary factor of production?

A)It is produced by the economic system itself.
B)It is not a physical good.
C)It is in fixed supply.
D)It does not exist in all economies.
E)None of the above.

Question 37

Real rates of return on capital have not been generally falling in this century because:

A)legal restrictions on interest have been removed.
B)technological progress has shifted the derived demand for capital out.
C)inflation has risen steadily.
D)capital is not subject to diminishing returns.
E)government policy has been to maintain high interest rates.

Question 38

In a perfectly competitive market, any larger than normal returns to transferable capital are reduced when:

A)the government repeals an excess-profits tax.
B)businesses are able to pay other factors of production less.
C)new firms enter the industry, increasing the supply of the product and lowering product price.
D)old firms leave the industry, decreasing the supply of the product and lowering product price.
E)other factors of production agree to a smaller reward for their contribution to production.

Question 39

The present discounted value of $100 payable 1 year from now, assuming a market rate of interest of 10 percent, is:

A)$100.
B)$10.
C)$90.
D)slightly less than $90.
E)slightly more than $90.

Question 40

In an ideal capital market:

A)competitive market forces set the riskless rate of interest.
B)there is no spread of interest rates for ventures of different riskiness.
C)the rate of interest is zero.
D)the net productivity of capital is constant.
E)competitive market forces set the rent of land.

Question 41

The rate of return to new capital is that market rate of interest at which it would just pay to invest.

Question 42

Capital is bought and sold in consumer markets.

Question 43

Capital consists of both tangible and intangible assets.

Question 44

An increase in land (or labor)will tend to increase the marginal productivity of capital and thus the rate of interest in at least the short run.

Question 45

When interest rates rise, many asset prices fall.

Question 46

According to the law of diminishing returns, the lower the capital stock, the higher the rate of return to capital.

Question 47

There is only one kind of interest rate.

Question 48

The demand for capital is derived ultimately from the value of the extra consumption of goods that additional capital makes possible.

Question 49

If I purchase a 1-year subscription for $30 when the interest rate is 10 percent, rather than a 2-year subscription for $58, I have made a wise investment.

Question 50

The nominal interest rate plus the percentage price rise equals the real interest rate.

Question 51

If technical change ceased, then the rate of interest would continue to encourage people to increase their saving.

Question 52

The rule for making correct decisions about how to use a capital asset over its life is: for the same cost, choose that use which will yield the longest life for the asset in question.

Question 53

Long-run equilibrium in the market for capital is reached at the point where net investment ceases.

Question 54

The rate of return that an investment project can earn determines its place in the line for projects to be done.

Question 55

Profit statistics ordinarily include dividends paid out as well as undistributed corporate earnings.

Question 56

The present value is the dollar value today of a stream of income over time.

Question 57

A more roundabout method of production is not necessarily preferable to a less roundabout method of production.

Question 58

If a firm earning monopoly profits were sold, then the buyers would view those profits as, in effect, interest.

Question 59

The real interest yield on capital allows for price changes but not for depreciation.

Question 60

The competitive rate of return on capital can be equal to the interest rate only if you eliminate:

A)monopolies and unions.
B)risk, inflation, and imperfect competition.
C)government intervention.
D)imperfect competition and externalities.
E)externalities.

Question 61

Much of what is ordinarily called profit is really nothing but interest, rents, and wages under a different name.

Question 62

Just as the derived demand for labor is obtained from its marginal product curve, so the demand for capital goods is derived from its marginal product curve.

Question 63

The long-run equilibrium rate of interest in the capital market can be described as either the one at which the stock of capital stops increasing or the one at which there is no net saving.

Question 64

The theory of capital and interest explains how the supply and demand for capital determines returns such as real interest rates and profits.

Question 65

In a competitive system, profits from innovation represent a transitory income that will later tend to be competed away.

Question 66

The real interest rate is corrected for inflation and is calculated as the nominal interest rate minus the rate of inflation.

Question 67

A capital project has a positive rate of return if the present value of total future receipts resulting from its use exceeds its original cost.

Question 68

U.S.Treasury bonds are generally considered a riskless investment.

Question 69

In risky but competitive industries, long-run costs of production do not include a positive profit premium to compensate for risk aversion.

Question 70

Society should consider any investment projects whose rate of return is greater than the rate of interest.

Question 71

The nominal interest rate is the interest rate on money in terms of money.