Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
188. As interest rates decrease, the
A. cost of current relative to future consumption increases.
189. The core concept that is central to understanding the time-value of money is
A. GDP growth.
190. Which expression is used to calculate the future value of an amount of money?
D. (1 + interest rate)time/Present Value
18–82
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Topic: Time-Value of Money
191. Which expression is used to calculate the present value of an amount of money?
A. Future Value × (1 + interest rate)time
192. If the interest rate is 15 percent, what is the future of value of $10,000 two years from
now?
D. $7,576
193. If the interest rate is 5 percent, what is the future value of $5,000 three years from now?
A. $4,310
18–83
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Test Bank: II
Topic: Time-Value of Money
194. If the interest rate is 10 percent, what is the present value of $25,000 received two years
from now?
A. $20,000
195. If the interest rate is 5 percent, what is the present value of $10,000 received three years
from now?
D. $11,000
196. A given future value of money would have a smaller present value if
D. there is no compounding of interest.
18–84
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Blooms: Understand
Diff icu lty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: II
Topic: Time-Value of Money
197.
Beginning Period Value
Computation
Total Interest
End Period Value
$2,000 (Year 1)
$2,000 x 1.05
100
$2,100
$2,100 (Year 2)
T
W
X
V
U
Y
Z
The table applies to a loan with an interest rate of 5 percent per period. What value goes in the
cell labeled W?
D. $2,205
198.
Beginning Period Value
Computation
Total Interest
End Period Value
$2,000 (Year 1)
$2,000 x 1.05
100
$2,100
$2,100 (Year 2)
T
W
X
V
U
Y
Z
The table applies to a loan with an interest rate of 5 percent per period. What value goes in the
cell labeled X?
A. $2,200
18–85
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written consent of McGraw-Hill Education.
B. $2,315.25
C. $2,210
D. $2,205
199.
Beginning Period Value
Computation
Total Interest
End Period Value
$2,000 (Year 1)
$2,000 x 1.05
100
$2,100
$2,100 (Year 2)
T
W
X
V
U
Y
Z
The table applies to a loan with an interest rate of 5 percent per period. What value goes in the
cell labeled Z?
A. $2,200
200. Government monetary authorities manipulate the supply of money in the economy
primarily to
A. ensure high profits for commercial banks.
18–86
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AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Diff icu lty: 02 Medium
Learning Objective: 18–05 Explain the role of interest rates in allocating capital, modulating R
and D spending, and helping to determine the economys total output of goods and services.
Test Bank: II
Topic: Role of Interest Rates
201. Profit-maximizing businesses will buy more new machinery only if
A. the interest rate increases.
202. Suppose a firm is considering the purchase of a machine which would increase its total
revenues by $10,000 for the year. The machine costs $8,000 and has a useful life of one year.
The interest rate is 20 percent. This investment should
A. be undertaken because the rate of return is 2 percent greater than the interest rate.
203.
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Expected Rate of Net Return (%)
Amount of Capital Goods Investment (in billions)
21
$320
19
350
17
400
15
460
13
530
11
600
The table gives investment-demand in an economy. If the interest rate is 15 percent,
A. $400 billion of investment will be undertaken.
204.
Expected Rate of Net Return (%)
Amount of Capital Goods Investment (in billions)
21
$320
19
350
17
400
15
460
13
530
11
600
The table gives investment-demand in an economy. An increase in the interest rate from 15
percent to 19 percent would
A. increase investment by $90 billion.
18–88
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written consent of McGraw-Hill Education.
B. decrease investment by $90 billion.
C. decrease investment by $110 billion.
D. decrease investment by $140 billion.
205.
Expected Rate of Net Return (%)
Amount of Capital Goods Investment (in billions)
21
$320
19
350
17
400
15
460
13
530
11
600
The table gives investment-demand in an economy. Assume that investment demand decreased
by $100 billion in the investment-demand schedule. What expected rate of return and interest
rate would create $430 billion of investment?
D. 19 percent
206. It is most likely that a firm would borrow funds to expand its capital facilities when the
A. pure rate of interest is greater than the real rate of interest.
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written consent of McGraw-Hill Education.
B. expected rate of return is greater than the interest rate.
C. demand for money is greater than the supply of money.
D. real rate of interest is greater than the nominal rate of interest.
207. If the desired real rate of interest is 5 percent and the expected rate of inflation is 15
percent, what is the nominal rate of interest?
A. 5 percent
208. If the inflation rate is 10 percent, what is a bank‘s real rate of return on a loan of $100 at
10 percent interest?
A. $100
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Test Bank: II
Topic: Role of Interest Rates
209. If you pay $1,980 annually on an $18,000 loan and the rate of inflation is 3 percent, then
the
D. nominal rate of interest is 14 percent.
210. If you pay $10,625 annually on a $125,000 loan and the rate of inflation is 3 percent, then
the
A. real rate of interest is 4.5 percent.
211. Some countries have negative nominal interest rates. Which of the following statements
about this situation is not true?
A. A saver or lender will get back less than the amount she invested.
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212. A usury law is a law that sets the
A. federal funds rate.
213. For a usury law to be effective, the interest rate must be
A. determined by borrowing and lending.
214. One effect of a usury law is that it will
18–92
A. benefit lenders.
215.
Interest Rate
Quantity of Loanable Funds Demanded
Quantity of Loanable Funds Supplied
6%
$300
$60
8
260
100
10
220
140
12
180
180
14
140
220
16
100
260
Answer the question using the table. Figures are in billions of dollars. The equilibrium interest
rate and quantity of loanable funds demanded and supplied in this market will be
A. 8 percent and $140 billion.
216.
18–93
Interest Rate
Quantity of Loanable Funds Demanded
Quantity of Loanable Funds Supplied
6%
$300
$60
8
260
100
10
220
140
12
180
180
14
140
220
16
100
260
Answer the question using the table. Figures are in billions of dollars. If the government passes
a usury law that sets the interest rate 4 percent below the market equilibrium, the interest rate
will be
A. 6 percent.
217.
Interest Rate
Quantity of Loanable Funds Demanded
Quantity of Loanable Funds Supplied
6%
$300
$60
8
260
100
10
220
140
12
180
180
14
140
220
16
100
260
Answer the question using the table. Figures are in billions of dollars. A usury law that sets the
interest rate 2 percent below the market rate of interest will result in a shortage of funds of
18–94
A. $120 billion.
218.
Refer to the graph of the supply and demand for loanable funds. Assume that the government
sets a 10 percent limit on the interest rate that banks can charge to customers for credit card
loans. In this case, the quantity of loanable funds
A. demanded will exceed the quantity supplied by $150 billion.
18–95
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written consent of McGraw-Hill Education.
and D spending, and helping to determine the economys total output of goods and services.
Test Bank: II
Topic: Role of Interest Rates
219.
Refer to the graph of the supply and demand for loanable funds. A limit of 10 percent on the
interest rate that banks can charge for loans will
A. have an equal effect on borrowers and lenders.
220.
Interest Rate
Quantity Supplied of Loanable Funds
Quantity Demanded of Loanable Funds
6%
$10
$40
8
14
34
10
18
28
18–96
12
22
22
14
26
16
16
30
10
Answer the question using the table. Figures are in billions of dollars. The equilibrium interest
rate and quantity of loanable funds demanded and supplied in this market will be
A. 8 percent and $14 billion.
221.
Interest Rate
Quantity Supplied of Loanable Funds
Quantity Demanded of Loanable Funds
6%
$10
$40
8
14
34
10
18
28
12
22
22
14
26
16
16
30
10
Answer the question using the table. Figures are in billions of dollars. If the government passes
a usury law that sets the interest rate 2 percent below the market equilibrium, the interest rate
will be
A. 6 percent.