phoenix college > departments > Liberal Arts > economics > ECN111> Ch.10 Study Questions

 

Dr. Bromley
ECN111
(Macroeconomics):

Additional
Multiple Choice
Questions

Chapter 10

10-1 Capital is
A. money invested in a business or productive enterprise.
B. any productive resource which can be used for a long time without being used up.
C. the same as labor.
D. ownership of a business or productive enterprise.
E. the same as education.

10-2 All of the following are capital except
A. workers hired to pour cement.
B. a cement-mixing machine.
C. the trowels and other tools used to smooth cement.
D. the warehouse used to store the bags of cement.
E. the truck used to transport the cement and cement mixer.

10-3 Which of the following is not capital?
A. the time of workers.
B. machinery
C. vehicles
D. buildings
E. tools and utensils

10-4 "Capital" is the term used by economists to describe
A. money lent by banks to a business.
B. funds obtained by the selling of stocks and bonds.
C. resources that last a long time.
D. saving done by the owners of a firm.
E. all of the financial assets of a business.

10-5 The interest rate
A. is generally positive because consumers prefer to consume in the future rather than in the present.
B. is set by governmental authorities.
C. does not include a premium for risk.
D. is determined under the assumption that prices do not change over time.
E. reflects the additional amount that a person is willing to pay to obtain a good now rather than later.

10-6 The real rate of interest
A. is the same as the inflation rate.
B. is the rate a which a low-risk borrower can obtain a loan.
C. is generally less than the money interest rate when there is inflation.
D. is generally more than the money interest rate when there is inflation.
E. is the money rate of interest minus the risk premium.

10-7 The real rate of interest is
A. the money rate of interest minus the risk premium.
B. the risk premium minus the expected rate of inflation.
C. the risk premium minus the money interest rate.
D. the money interest rate minus the expected rate of inflation.
E. the expected inflation rate minus the risk premium.

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10-8 The money or nominal rate of interest is equal to
A. the real rate of interest.
B. the inflationary premium.
C. the risk premium.
D. the real rate of interest minus the inflationary premium.]
E. the real rate of interest plus the inflationary premium.

10-9 If the nominal interest rate is 8% and the inflation rate is expected to be about 3%, what is the approximate real interest rate?
A. 24%

B. 2.4%

C. 5%
D. 2.67%

E. 3.75%

10-10 If the nominal interest rate is 8% and the inflation rate is expected to be about 5%, what is the approximate real interest rate?
A. 40%

B. 4%

C. 1.6%
D. 6.25%

E. 3%

10-11 Inflation will
A. lead to lower prices, eventually.
B. cause the nominal interest rate to increase.
C. cause the real interest rate to increase.
D. cause the real interest rate to fall.
E. cause the nominal interest rate to fall.

10-12 If your uncle wins the $40 million lottery prize, and will get paid $2 million dollars per year for the next 20 years, is he $40 million richer than he was before the lottery?
A. Yes, since twenty times $2 million is $40 million, he is $40 million richer.
B. No, the taxes due on the $40 million must be considered.
C. No, since the present value of the payments is less than $40 million, he is not $40 million richer.
D. No, since the taxes due on the money and the lower present value of the future payments must be considered, he is not $40 million richer.
E. Yes, since the interest he could earn on the first few payments will pay the taxes and yield an interest income sufficient to balance the lower present value of the later payments, he will be $40 million richer immediately after winning.

10-13 Reducing the value of future payments so that they can be compared to present ones is called
A. presenting B. discounting C. renting
D. investing E. futuring

10-14 Recently, several once-famous movie and television personalities have been selling retirement supplement plans on T.V. Which of the following retirement plan payoffs would be worth the most to you today, at an interest rate of 10%?
A. $10,000 twenty years from now.
B. $11,000 twenty-one years from now.
C. $12,100 twenty-two years from now.
D. $1,000 every year, beginning twenty-one years from now and continuing forever.
E. All of the above have the same present value.

10-15 Suppose that after doing a present value calculation all of last night, you decided to accept a payment from your boss of $100 today instead of $114 two years from now. Then, you awake to discover you used the wrong interest rate, and the one you used was too high. How does this affect what you will tell your boss when he asks for your decision?
A. I would instead take the $114 two years from now, because that now looks better.
B. I would still take the $100 now, because that option looks even better.
C. I can't tell you what I would do without more information.
D. I will quit because I make such Homer mistakes.
E. I will stop watching Jay Leno because he throws my math off.

10-16 Suppose that after doing a present value calculation all of last night, you decided to accept a payment from your boss of $100 today instead of $114 two years from now. Then, you awake to discover you used the wrong interest rate, and the one you used was too low. How does this affect what you will tell your boss when he asks for your decision?
A. I would instead take the $114 two years from now, because that now looks better.
B. I would still take the $100 now, because that option looks even better.
C. I can't tell you what I would do without more information.
D. I will quit because I make such Homer mistakes.
E. I will stop watching Jay Leno because he throws my math off.

10-17 If the interest rate is 8%, the present value of $1000 payable two years from now is
A. $925.93

B. $862.07

C. $857.34
D. $462.96

E. $1080.00

10-18 If the interest rate is 8%, the present value of $1000 payable three years from now is
A. $925.93

B. $862.07

C. $857.34
D. $793.83

E. $806.45

10-19 If the interest rate is 8%, the present value of $500 payable one year from now and $500 payable two years from now is
A. $925.93

B. $892.86

C. $857.34
D. $891.63

E. $806.45

10-20 If the interest rate is 8%, the present value of $500 payable two years from now and $500 payable three years from now is
A. $925.93

B. $892.86

C. $857.34
D. $891.63

E. $825.59

10-21 If the interest rate is 8%, the present value of $10,000 payable every year in perpetuity is
A. $10,000

B. $100,000

C. $125,000
D. $108,000

E. $92,593

10-22 The present value of $10,000 payable now is
A. $10,000

B. $100,000

C. $1,000,000
D. $10,000,000

E. We cannot tell without more information.

10-23 If the interest rate is 6%, the present value of $1000 payable two years from now is
A. $943.40

B. $890.00

C. $892.86
D. $471.70

E. $1123.60

10-24 If the interest rate is 6%, the present value of $1000 payable three years from now is
A. $847.46

B. $314.47

C. $839.62
D. $999.78

E. $822.37

 

10-25 If the interest rate is 6%, the present value of $500 payable one year from now and $500 payable two years from now is
A. $890.00

B. $943.40

C. $916.70
D. $917.43

E. $918.13

10-26 If the interest rate is 6%, the present value of $500 payable two years from now and $500 payable three years from now is
A. $864.81

B. $870.16

C. $847.46
D. $839.62

E. $890.00

10-27 If the interest rate is 6%, the present value of $10,000 payable every year in perpetuity is
A. $10,000

B. $100,000

C. $166,667
D. $106,000

E. $60,000

10-28 You borrow $300 from a relative who tells you the interest rate on the loan is10%. You pay $180 back one year from now and $180 two years from now. Is the interest rate on the loan really 10%?
A. Yes, the present value of the two payments is the same as the $300 I am borrowing.
B. No, I am paying back the money at an interest rate lower than 10%.
C. No, I am paying more than 10% interest.
D. I cannot tell without more information.
E. If she or he says I am paying 10%, I must be.

10-29 You borrow $1000 from a friend who tells you she is lending you the money at an interest rate of 10%. The friend says that you can pay her two payments of $633.81. The first is due two years from now and the second payment is due three years from now. Is the interest rate that your friend is charging you really 10%?
A. Yes, the present value of the two payments is the same as the $1000 I am borrowing.
B. No, I am paying back the money at an interest rate lower than 10%.
C. No, I am paying more than 10% interest.
D. I cannot tell without more information.
E. Since all my friends are trustworthy and never make mistakes, I shouldn't even bother to figure it out.

10-30 You borrow $1000 from a friend who tells you she is lending you the money at an interest rate of 10%. The friend says that you can pay her back by giving her three payments of $366.67 (one payment each year for the next three years, beginning one year from today). She really charging you 10% interest?
A. Yes, the present value of the three payments is the same as the $1000 I am borrowing.
B. No, I am paying back the money at an interest rate lower than 10%.
C. No, I am paying more than 10% interest.
D. I cannot tell without more information.
E. Since all my friends are trustworthy and never make mistakes, I shouldn't even bother to figure it out.

10-31 The reason for calculating present values is
A. to avoid the complex calculations involved in estimating the Internal Rate of Return.
B. to make a dollar received today worth less than one received in the future.
C. that predicting future values is subject to risk and uncertainty.
D. to make profits received in different time periods comparable.
E. to fill class time.

10-32 Pat estimates that her car could be sold today for $6000. If the car is kept for one year, it will be worth $4000. What is the cost to Pat of keeping the car for one year if the interest rate is 10%?
A. $2000

B. $2600

C. $600
D. $200

E. $4000

10-33 It is now the beginning of a small business's fiscal year and the business owner must decide now whether to switch to a new bookkeeping computer program. The owner estimates that the new program will save her $1500 worth of time at the end of the first fiscal year she uses it, $1000 at the end of the second fiscal year, and $500 at the end of the third fiscal year. After the third year, the program will be no better than alternative methods of keeping books. The program costs $1500 to buy and the owner estimates that the cost of learning the program, which she must do immediately , will be about $1000 in lost income. If the interest rate at which the owner can borrow (or invest) funds is 12%
A. the owner will find it profitable to use the new program, since it will save more money ($3000) than it costs to buy and learn ($2500).
B. the owner will find it profitable to use the new program, since it will save more money (in present value) than it costs to buy and learn.
C. the owner will not find it profitable to use the new program, since it will save less money (in present value) than it costs to buy and learn.
D. the owner will not find it profitable to use the new program, even though it will save more money (in present value) than it costs to buy and learn.
E. none of the above.

10-34 It is now the beginning of a small business

s fiscal year and the business owner must decide now whether to switch to a new bookkeeping computer program. The owner estimates that the new program will save her $1500 worth of time at the end of the first fiscal year she uses it, $1000 at the end of the second fiscal year, and $500 at the end of the third fiscal year. After the third year, the program will be no better than alternative methods of keeping books. The program costs $1500 to buy and the owner estimates that the cost of learning the program, which she must do immediately , will be about $1000 in lost income. If the interest rate at which the owner can borrow (or invest) funds is 10%
A. the owner will find it profitable to use the new program, since it will save more money ($3000) than it costs to buy and learn ($2500).
B. the owner will find it profitable to use the new program, since it will save more money (in present value) than it costs to buy and learn.
C. the owner will not find it profitable to use the new program, since it will save less money (in present value) than it costs to buy and learn.
D. the owner will not find it profitable to use the new program, even though it will save more money (in present value) than it costs to buy and learn.
E. none of the above.

10-35 Which has the lowest present value, at an interest rate of 10%?
A. $700 in one year.

B. $780 in two years.
C. $870 in three years.

D. $350 in one year and $390 in two years.
E. $390 in two years and $435 in three years.

10-36 Which has the lowest present value, at an interest rate of 12%?
A. $700 in one year.
B. $780 in two years.
C. $870 in three years.
D. $350 in one year and $390 in two years.
E. $390 in two years and $435 in three years.

10-37 A Fluffinator can be rented out to fluff makers for $10,000 a year. A new Fluffinator would last three years, at which time it would have a scrap value of $5,000. Assume that the rent on a Fluffinator is paid at the beginning of each year, and the three-year old Fluffinator is scrapped at the end of the third year. If the interest rate on the best alternative investment is 8%, which of the following is the highest price at which a new Fluffinator can sell and still be a worthwhile investment?
A. $35,000

B. $27,784

C. $29,689
D. $31,800

E. $29,740

10-38 A Ruminator can be rented out to college libraries for $8,000 a year. A new Ruminator would last three years, at which time it would have a scrap value of $10,000. Assume that the rent on a Ruminator is paid at the beginning of each year, and the three-year old Ruminator is scrapped at the end of the third year. If the interest rate on the best alternative investment is 7%, which of the following is the highest price at which a new Ruminator can sell and still be a worthwhile investment?
A. $30,627

B. $34,000

C. $27,754
D. $30,343

E. $29,125

10-39 A greepwanger can be used to generate $1,000 worth of income per year for three years, beginning one year from today. If the price of a greepwanger purchased today is $2,500, what does the interest rate on equally risky investments have to be in order for the greepwanger purchase to look good in comparison?
A. The greepwanger purchase will be a poor investment no matter what the interest rate is.
B. The greepwanger purchase will be a good investment no matter what the interest rate is.
C. The greepwanger purchase looks good if the interest rate is 9% or less.
D. The greepwanger purchase only looks good if the interest rate is more than 10%.
E. The greepwanger purchase only looks good if the interest rate is less than 4%.

10-40 A ferfdoffer can be used to generate $2,000 worth of income per year for three years, beginning one year from today. If the price of a ferfdoffer purchased today is $5550, what does the interest rate on equally risky investments have to be in order for the ferfdoffer purchase to look good in comparison?
A. The ferfdoffer purchase will be a poor investment no matter what the interest rate is.
B. The ferfdoffer purchase will be a good investment no matter what the interest rate is.
C. The ferfdoffer purchase looks good if the interest rate is 9% or less.
D. The ferfdoffer purchase only looks good if the interest rate is more than 10%.
E. The ferfdoffer purchase only looks good if the interest rate is less than 4%.

10-41 A motslobber can be used to generate $1,000 worth of income per year for four years, beginning one year from today. If the price of a motslobber purchased today is $4,000, what does the interest rate on equally risky investments have to be in order for the motslobber purchase to look good in comparison?
A. The motslobber purchase will be a poor investment no matter what the interest rate is.
B. The motslobber purchase will be a good investment no matter what the interest rate is.
C. The motslobber purchase looks good if the interest rate is 9% or less.
D. The motslobber purchase only looks good if the interest rate is more than 10%.
E. The motslobber purchase only looks good if the interest rate is less than 4%.

10-42 The present value of a future set of payments will be higher if
A. the future payments are lower.
B. the interest rate on other investments is higher.
C. the interest rate on other investments is lower.
D. the amount of time that must pass before the payments occur is longer.
E. the square of the interest rate is higher.

 

10-43 You must decide which of two cars to buy, based on the assumption that you will keep the car for four years. The two cars are identical except for price and fuel efficiency, so that you choose the one with the lower present value of expenditure. The Boston Xenon is priced at $16,000 and will have fuel costs of $500 per year. The Venus Wildcat, on the other hand, has a lower price of $15,000 but its fuel cost would be $800 per year. Both cars should be worth about $8,000 at the end of four years. For simplicity, assume that the annual fuel costs are paid at the end of each year, starting one year from now. The interest rate is 8%. What can you conclude?
A. The Boston Xenon must be the better buy, since saving fuel is always economical.
B. The Boston Xenon is the better buy, since the present value of its fuel cost is lower.
C. The Boston Xenon is not the better buy, since the present value of its fuel savings is not enough to compensate for its larger purchase price.
D. The Boston Xenon is the better buy, since the present value of its fuel savings is enough to compensate for its larger purchase price.
E. We need more information to determine which vehicle is the better buy.

10-44 You must decide which of two cars to buy, based on the assumption that you will keep the car for four years. The two cars are identical except for price and fuel efficiency, so that you choose the one with the lower present value of expenditure. The Boston Xenon is priced at $16,000 and will have fuel costs of $500 per year. The Venus Wildcat, on the other hand, has a lower price of $15,000 but its fuel cost would be $800 per year. Both cars should be worth about $8,000 at the end of four years. For simplicity, assume that the annual fuel costs are paid at the end of each year, starting one year from now. The interest rate is 6%. What can you conclude?
A. The Boston Xenon must be the better buy, since saving fuel is always economical.
B. The Boston Xenon is the better buy, since the present value of its fuel cost is lower.
C. The Boston Xenon is not the better buy, since the present value of its fuel savings is not enough to compensate for its larger purchase price.
D. The Boston Xenon is the better buy, since the present value of its fuel savings is enough to compensate for its larger purchase price.
E. We need more information to determine which vehicle is the better buy.

10-45 Other things being equal, what will happen to interest rates if the government sells a large amount of bonds?
A. Interest rates will fall, since bond prices will rise.
B. Interest rates will stay the same, since bond prices have no effect on interest rates.
C. Interest rates will rise.
D. Interest rates will fall, since bond prices will fall.
E. We cannot tell what will happen to interest rates.

10-46 The interest rate is
A. set by the government.
B. determined by the demand for loaned funds and the supply of saving.
C. the price of bonds.
D. the price of stocks.
E. inversely related to the inflation rate.

10-47 The interest rate is most likely to fall if
A. people have less confidence in Social Security and so save more for their old age.
B. the rate of time preference increases.
C. the rate of inflation increases.
D. the desire to purchase capital for productive uses increases.
E. the price of bonds falls.

 

10-48 Which of the following is most likely to raise interest rates?
A. Lower expected future inflation rates.
B. Worse investment opportunities in the stock market.
C. The U.S. Treasury sells fewer bonds than usual.
D. Tax law changes make it less attractive to save for retirement.
E. Lower incomes overseas make business expansion less attractive.

10-49 The interest rate is determined by
A. the ratio of consumption to saving in the economy.
B. the supply of resources in the economy.
C. the supply of and demand for loans.
D. the ratio of consumers to producers in the economy.
E. the ratio of savers to lenders in the economy.

10-50 When funds are borrowed and repaid,
A. only borrowers benefit.
B. only lenders benefit.
C. lenders and borrowers both benefit, if the loan is made at zero interest.
D. lenders and borrowers both benefit, even though the borrowers pay interest.
E. lenders only benefit if the inflation rate is not included in the nominal interest rate.

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Chapter 10 Questions