Deck 13: Interest Rates and the Markets for Capital and Natural Resources

Question 1

Someone who has to make a choice involving whether to receive a certain amount of money now or in the future, will probably choose _______ , since there is a(n) ________ in waiting to use money.

A) the future; benefit
B) now; opportunity cost
C) the future; opportunity cost
D) now; benefit

Answer 1

now; opportunity cost

Question 2

An individual's wealth:

A) is the income made during a specific time period.
B) is always considered before taxes are paid.
C) is the sum of all assets minus liabilities.
D) is described by all of the above.

Answer 2

is the sum of all assets minus liabilities.

Question 3

The present value of a future payment increases if the:

A) period between the present and the future increases.
B) future payment decreases.
C) interest rate decreases.
D) stock market falls.

Answer 3

interest rate decreases.

Question 4

Assets are:

A) obligations to make future payments.
B) anything of value.
C) a payment made to people who postpone the use of wealth.
D) described by none of the above.

Question 5

An obligation to make future payments is:

A) an asset.
B) a liability.
C) wealth.
D) interest.

Question 6

Payments that are distributed over time are linked to one another by:

A) the use of prices.
B) monetary units.
C) interest rates.
D) computers.

Question 7

An amount that would equal a particular future value if deposited today at a specific interest rate is the:

A) present value.
B) inflation rate.
C) discount premium.
D) market index.

Question 8

The amount paid to postpone the use of wealth divided by the amount of wealth whose use is postponed is a(n):

A) interest rate.
B) price-earnings ratio.
C) insurance premium.
D) discount factor.

Question 9

The dollar amount of a future payment is ________ its present value.

A) exactly the same as
B) approximately the same as
C) less than
D) greater than

Question 10

The interest rate is:

A) the total payment made to those who postpone the use of their wealth.
B) is the payment made for postponing the use of wealth, expressed as a percentage of the amount of wealth whose use is postponed.
C) is the amount paid to someone for the use of their liabilities.
D) is not described by any of the above.

Question 11

Using slightly different notation from that used in the text, the present value (PV) of a payment one year in the future (FV), given interest rate (r), is given by the equation:

A) PV = 1 ÷ FV.
B) PV = FV ÷ 1.
C) PV = FV ÷ (1 + r).
D) PV = FV × (1 + r).

Question 12

Anything that is of value is:

A) an asset.
B) a liability.
C) wealth.
D) interest.

Question 13

All other things unchanged, people who choose to have a certain amount of money now instead of at a future date:

A) are making a mistake.
B) will benefit because they can use the money during the intervening time period.
C) would benefit if prices go up unexpectedly during the time period.
D) B and C are true.

Question 14

Using slightly different notation than in the text, we could say that the present value (PV) of a payment n years in the future (FV), given interest rate (r), is given by the equation:

A) PV = FVⁿ.
B) PV = 1 ÷ FVⁿ.
C) PV = FV ÷ (1 + r).
D) PV = FV ÷ (1 + r)ⁿ.

Question 15

If you are paid $10,500 in one year on a $10,000 loan made today, then your interest rate is:

A) 0%.
B) 5%.
C) $500.
D) $10,000.

Question 16

Liabilities are:

A) the sum of all your assets.
B) anything of value.
C) obligations to make future payments.
D) a payment made to people who postpone the use of their wealth.

Question 17

The _______ the payment made for waiting, the _______ the interest rate.

A) lower; higher
B) greater; higher
C) greater; lower
D) all of the above are false statements.

Question 18

The present value of a future payment is _______ its future dollar amount.

A) exactly the same as
B) approximately the same as
C) less than
D) greater than

Question 19

The total of assets less liabilities is:

A) wealth.
B) profit.
C) insurance.
D) depreciation.

Question 20

A payment made to people who agree to postpone their use of wealth is:

A) rent.
B) interest.
C) profit.
D) a wage.

Question 21

Capital goods are:

A) financial assets.
B) natural resources.
C) goods used to produce other goods or services.
D) described by none of the above.

Question 22

If Mega Corp.borrows $9,000 in 2010 and agrees to pay the lender $10,000 in 2011, the interest rate on the loan is approximately:

A) 9.0 percent.
B) 10.0 percent.
C) 11.1 percent.
D) Not enough information to determine.

Question 23

The Case in Point on terminal illness and life insurance makes the point that:

A) people who are terminally ill are taken advantage of by financial investors who purchase their life insurance policies.
B) most states outlaw the viatical industry because the companies that purchase the life insurance policies of terminally ill patients don't have the funds to pay the premiums.
C) viatical firms and financial investors share a win-win situation with terminally ill patients with whom they do business.
D) a financial investor who pays more than 80 percent of the face value of an insurance policy is probably dealing with a patient that has a good chance of recovering from his or her illness.

Question 24

The present value of a future payment decreases if the:

A) period between the present and the future increases.
B) future payment increases.
C) interest rate decreases.
D) stock market rises.

Question 25

According to the Case in Point on terminal illness and life insurance, in the viatical industry, one of the greatest risks faced by a financial investor is that a person from whom they purchased an insurance policy:

A) will not have sufficient funds to pay off the purchase price.
B) will die too early.
C) will not die soon enough.
D) cannot get life insurance.

Question 26

Which of the following is (are) true?

A) People generally prefer to receive money later rather than sooner.
B) Interest is a payment made by lenders to borrowers.
C) The present value of a future payment will be smaller the smaller the payment, the later it is due, and the higher the interest rate.
D) All of the above are true.

Question 27

The present value (PV) of a $110 payment one year in the future (FV), given a 10 percent interest rate, is:

A) $10.
B) $11.
C) $100.
D) $110.

Question 28

The Case in Point on terminal illness and life insurance discusses an industry which has been called the:

A) viatical industry, which provides terminally ill people with access to quick cash while they are still alive.
B) viatical industry, which sells life insurance to sick people.
C) computer industry, which traces the genealogy of sick people.
D) life partners industry, which helps people with AIDS find long-term health-care providers.

Question 29

The present value of future payments depends on:

A) the size of the payment.
B) the length of the time period.
C) the interest rate.
D) all of the above.

Question 30

In the short run, capital is generally treated as a(n) ________ factor of production.

A) variable
B) fixed
C) irrelevant
D) B and C are true.

Question 31

The present value (P₀) of any payment to be received n periods from now is:

A) P₀(1+r) = P₁
B) P₀ = Pn/(1+r)ⁿ
C) P₀ = P₁/(1+r)
D) none of the above are correct

Question 32

The Case in Point on terminal illness and life insurance suggests that a patient with a terminal illness can expect to sell his or her life insurance policy for a ________ amount if his or her life expectancy is ________.

A) higher; short
B) higher; long
C) lower; short
D) lower; not less than 3 months

Question 33

Which of the following is (are) true?

A) Interest rates can be used to compare values of payments that will occur at different times.
B) Choices concerning capital and natural resources do not involve the use of interest rates.
C) The concept of present value cannot be applied to a series of future payments.
D) A and B are true.

Question 34

Which of the following equations shows how to determine the future value (P₁) at the end of one year of a payment or deposit (P₀) made today?

A) P₀ = P₁/1+r
B) P₀ (1+r) = P₁
C) P₀ = Pn/(1+r)ⁿ
D) none of the above are correct

Question 35

Which of the following equations shows how we can compute the value today (P₀) of an amount (P₁) that will be paid a year hence?

A) P₀(1+r) = P₁
B) P₀ = P₁/ (1+r)
C) P₀ = Pn/(1+r)ⁿ⁻¹
D) none of the above are correct.

Question 36

Your friend wants to borrow $2,000, pay it back in 1 year, and is someone who keeps his or her word.The friend agrees to repay you $2,080 in 1 year.The bank interest rate is 5 percent.Which of the following statements is(are) true?

A) You will be financially worse off if you make the loan rather than deposit $2,000 in the bank.
B) You will be financially better off if you make the loan rather than deposit $2,000 in the bank.
C) The present value of $2,080 payable in one year with an interest rate of 5 percent is $1,904.76, which is less than the value of the $2,000 you have been asked to loan.
D) A and C are true.

Question 37

The ________ the future payment, the ________ its present value.

A) smaller; the more uncertain is
B) bigger; smaller
C) bigger; greater
D) smaller; greater

Question 38

The ________ the time period, the ________ is the present value of a given future payment, all other things held constant.

A) longer; lower
B) shorter; lower
C) longer; higher
D) shorter; the more uncertain

Question 39

Given an interest rate of 3 percent, the present value of a future payment of $2,080 to be paid in one year is:

A) $1,904.76
B) $2,000.00
C) $2,019.42
D) $2,080.00

Question 40

If Mega Corp.borrows for $9,000 in 2012 and agrees to pay the lender $10,500 in one year, the interest rate on this loan is approximately:

A) 8.6 percent.
B) 14.3 percent.
C) 16.7 percent.
D) not enough information to determine.

Question 41

A profit-maximizing firm uses additional units of a factor of production until ________ equals _______ .

A) MR; MC
B) MRP; MP
C) MP; MR
D) MRP; MFC

Question 42

An addition to the capital stock is:

A) net present value.
B) dissaving.
C) saving.
D) investment.

Question 43

The big differences between capital and labor include:

A) contending with the fact that the revenues of holding capital are distributed over time.
B) contending with the fact that the costs of holding capital are distributed over time.
C) realizing capital is not directly consumed, but is used up in the production of other goods and services.
D) all of the above.

Question 44

Given the special characteristics of capital:

A) it is not a factor of production.
B) it is still a factor of production.
C) the concepts of MRP and MFC cannot be used in regard to capital.
D) none of the above are true.

Question 45

Which of the following is (are) true?

A) To assess a firm's demand for capital we must determine the present value of marginal revenue products and marginal factor costs of capital.
B) A firm maximizes profit in the hiring of capital when the MRP of capital is greater than the MFC of capital.
C) A firm should hire less capital if the MRP of capital is greater than the MFC of capital.
D) A and B are true.

Question 46

Investment:

A) is an addition to the capital stock.
B) refers to the acquisition of new capital goods.
C) results in a change in the ability of the economy to produce goods and services.
D) is represented by all of the above.

Question 47

The quantity of capital firms intend to hold at each interest rate is the:

A) demand for capital.
B) net present value of capital.
C) net investment of capital.
D) saving demand.

Question 48

Which of the following is (are) true?

A) The firm's desire to acquire and hold capital depends only on the price of the capital.
B) The NPV of capital depends on the interest rate.
C) The higher the interest rate, the greater the amount of capital that firms will want to acquire and hold.
D) All of the above are true.

Question 49

Which of the following is (are) true?

A) The returns to capital are spread over the period in which capital is used.
B) The returns to capital are certain.
C) The choice to acquire capital is a choice to forego future consumption.
D) All of the above are true.

Question 50

A firm can profitably purchase an asset if the asset's net present value is:

A) less than zero.
B) negative.
C) positive.
D) less than zero but greater than minus one.

Question 51

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) In the movement from A to B, a fall in the interest rate of _______ percentage points, resulted in an increase in the _______ for capital of _______ billion.

A) 4; demand; about $2.67
B) 4; quantity demanded; about $2.67
C) 6; demand; about $3.5
D) 2.5; quantity demanded; $4

Question 52

If a firm considering the purchase of an asset determines that the asset's NPV > 0, ________ the asset will ________ profits.

A) refusing to buy; increase
B) purchase of; increase
C) purchase of; decrease
D) sale of; increase

Question 53

A firm should use less of a factor of production if:

A) MRP > MFC.
B) MRP = MFC
C) (MR × MP) < MFC
D) MRP < (MP × MR)

Question 54

Which of the following is (are) true?

A) The NPV of an investment project is equal to the present value of its expected revenues minus the present value of its expected costs.
B) The demand curve for capital shows that firms demand a greater quantity of capital at higher interest rates.
C) Changes in technology cause movements along the demand for capital curve.
D) A and B are true.

Question 55

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) A movement from C to B may have been a result of:

A) a decrease in the demand for capital, because expectations regarding the profitability of capital had fallen.
B) a decrease in the interest rate.
C) an increase in the interest rate.
D) Both A and C are correct.

Question 56

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) At point _______ at an interest rate of ________ , ________ of capital is demanded.

A) A; 10; $4 billion
B) B; 6; about $7.67 billion
C) C; 8; $4 billion
D) all of the above are true.

Question 57

The net present value (NPV) of an activity or project is:

A) equal to the future value of all the revenues minus the present value of all the costs associated with it.
B) equal to the present value of all the revenues minus the present values of all the costs associated with it.
C) equal to the present value of all the revenues minus the future values of all the costs associated with it.
D) equal to the future values of all the revenues minus the future values of all the costs associated with it.

Question 58

All of the following will cause a shift in the demand curve for capital EXCEPT:

A) a change in sales expectations.
B) the interest rate.
C) technological change.
D) changes in relative factor prices.

Question 59

The present value of all revenues minus the present value of all costs associated with an asset is:

A) market value.
B) net present value.
C) gross domestic value.
D) the interest rate.

Question 60

The production of capital goods:

A) generally requires that consumption goods be sacrificed in that period.
B) means less employment for labor now and in the future.
C) decrease a nation's ability to produce goods and services in the future.
D) are described by all of the above.

Question 61

Which of the following is (are) true about the loanable funds market?

A) Lenders demand funds in the loanable funds market.
B) In general, high interest rates make lending less attractive.
C) Less funding is demanded at higher interest rates.
D) A and B are true.

Question 62

The demand for loanable funds is _______ sloping, and the _______ the interest rate the ________ the quantity of capital firms will demand.

A) upward; higher; lower
B) downward; lower; greater
C) downward; higher; greater
D) upward; lower; lower

Question 63

The market in which borrowers and lenders meet is called the:

A) loanable funds market.
B) money market.
C) stock market.
D) product market.

Question 64

The interest rate:

A) is important regardless of the method of financing the purchase and/or holding of capital.
B) is not important if a firm uses it own funds.
C) is essentially set by the supplier of the funds.
D) is essentially set by the demander of the funds.

Question 65

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) The demand curve for capital would shift to the left if the:

A) interest rate rises.
B) price of capital rises.
C) price of labor falls.
D) supply of capital increased.

Question 66

If the vertical axis of a demand curve for capital is represented by the price of capital goods (rather than the interest rate), then a rise in the interest rate would:

A) shift the newly defined demand curve for capital to the right.
B) shift the newly defined demand curve for capital to the left.
C) not change the newly defined demand curve for capital.
D) do none of the above.

Question 67

Income not spent on consumption is:

A) disposable income.
B) personal income.
C) per capita income.
D) saving.

Question 68

The demand curve for capital (with interest rate on vertical axis):

A) shows the quantities of capital that will bought at various prices of capital goods.
B) indicates the quantity of capital firms intend to hold at each price of capital goods.
C) is downward sloping.
D) is represented by A and C.

Question 69

When a firm decides to expand its capital stock, it can generally:

A) use its own funds.
B) borrow the funds from a bank.
C) sell bonds.
D) do all of the above.

Question 70

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) The demand curve for capital would shift to the ________ if technological change ________ the marginal product of capital.

A) right; decreased
B) left; increased
C) right; increased
D) none of the above are correct

Question 71

Interest rates that firms face depend on:

A) the riskiness of the loan.
B) the duration of the loan.
C) the costs of administering the loan.
D) all of the above.

Question 72

Use the following to answer question(s): The Demand Curve for Capital

(Exhibit: The Demand Curve for Capital) The demand curve for capital would shift to the right if:

A) the labor force increased.
B) the price of labor rises.
C) the marginal product of capital falls.
D) All of the above are true.

Question 73

The desire for more capital:

A) means a desire for more loanable funds.
B) means a desire for less loanable funds.
C) is not relevant to the demand for loanable funds.
D) none of the above is true, since capital and loanable funds are the same thing.

Question 74

Interest rates on mortgages are usually ________ the interest rates on credit cards.

A) higher than
B) lower than
C) about the same as
D) the same as

Question 75

Which of the following is (are) true?

A) The interest rate is a market-determined price.
B) The interest rate is determined by the forces of demand and supply.
C) The market in which the borrowers and lenders meet is the market for loanable funds
D) All of the above are true.

Question 76

Lenders are consumers or firms that are _______ to _______ some _______ use of their funds to have _______ funds available in the future.

A) willing; forgo; current; more
B) unwilling; forgo; future; less
C) willing; borrow; current; more
D) unwilling; forgo; current; more

Question 77

The model of the market for capital assumes:

A) the interest rate is determined in the market for loanable funds.
B) that given the demand curve for capital, the interest rate then determines the quantity of capital firms demand.
C) the supply curve of loanable funds is likely to be upward sloping.
D) all of the above.

Question 78

At ________ interest rates there will be ________ loanable funds demanded.

A) higher; less
B) lower; less
C) higher; more
D) lower; no change in

Question 79

A bond is:

A) essentially the same thing as a stock.
B) a promise to pay back a certain amount at a certain time.
C) considered to be an asset by the seller, since the buyer of the bond accepts a liability in receiving the funds for the sale of the bond.
D) B and C are both correct.

Question 80

A promise to pay back a certain amount of money at a certain time is:

A) a bond.
B) future value.
C) face value.
D) a maturity date.