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18-97
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Blooms: Understand
Difficu 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
222.
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. A usury law that sets the
interest rate 4 percent below the market rate of interest will result in a shortage of loanable
funds of
A. $10 billion.
223. Economists claim that a farmer who owns her land, provides all her own labor, and
calculates her profits from the farm by subtracting explicit costs from total revenues will
18-98
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. overstate her economic profits.
D. understate her economic profits.
224. Entrepreneurs normally do all of the following except
A. taking the initiative in combining other resources to produce goods or services.
225. Economic profits are not payments received for
A. taking uninsurable risks in a firm.
226. The minimum rate of return or payment necessary to keep an entrepreneur in some
specific enterprise is referred to as
A. the pure rate of interest.
227. Economic profits
A. are identical to accounting profits.
228. Which would usually not be an entrepreneurial function?
A. introducing a new product in a business
18-100
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficu lty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with
losses, allocate resources among alternative uses.
Test Bank: II
Topic: Economic Profit
229. Entrepreneurs can generate economic profits by all of the following, except
A. developing popular new products.
230. Which of the following is a source of insurable business risk?
A. changes in consumer tastes
231. Which of the following statements about economic profits is not correct?
A. Economic profits act as a signal to producers who make decisions about how to allocate
scarce resources.
18-101
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written consent of McGraw-Hill Education.
D. Economic profits are an explicit cost of production.
232. Entrepreneurs mostly focus on a single number: profits. As a result, which of the
following statements tends to be true about their firms?
A. The firms tend to do well in some aspects of their operations, but other aspects are
neglected.
233. "Proprietor's income" refers to income received by
A. corporate executives.
234. Since 1900, the relative share of "wages & salaries, plus proprietors' income" in the total
income earned by Americans in a typical year has been about
A. 20 percent.
235. The share of total income for "capitalists" in America (in the form of rent, interest, and
profits) has been about
D. 75 percent.
236. Interest rates are the payments needed to entice individuals to
A. accept insurable risk.
18-103
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of
production.
Test Bank: II
Topic: Income Shares
237. Economists who have studied the composition of "proprietor's income" have found that
this income item is made up of
D. wages and interest, mostly wages.
238. Which type of income contributes the smallest share to total income in the U.S.?
A. wages
True / False Questions
239. Economic rent is the payment made to a resource that has a perfectly inelastic demand
curve.
18-104
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
FALSE
240. Reducing the payment of rent to landowners will decrease the quantity of land supplied.
241. As viewed by society, economic rent is not a cost but rather a surplus payment.
242. The demand side, not supply, is the major factor determining how high land's rent will be.
18-105
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Economic Rent
243. Money is an economic resource referred to as capital.
244. Interest represents a cost to the borrower, but an income to the lender.
245. The demand curve for loanable funds illustrates the behavior of lenders or savers.
246. The quantity of loanable funds supplied is inversely related to the interest rate.
18-106
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
247. A decrease in the supply of loanable funds would tend to lower the interest rate.
248. If people became thriftier and saved more, the loanable funds theory predicts that the
equilibrium interest rate would decrease.
249. If the expected rates of return on investments increased, the loanable funds theory predicts
that the equilibrium interest rate would decrease.
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Loanable Funds Theory of Interest Rates
250. An increase in the expected rates of return on investments would most likely increase the
supply of loanable funds.
251. Other things equal, short-term loans usually have lower rates of interest than do long-term
loans.
252. For a given future value, the higher the interest rate is, the higher the present value will be.
253. In time-value of money calculations, discounting is the reverse of compounding.
18-108
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu 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
254. For a given future value and interest rate, the discounted present value will become larger
as the time period gets longer.
255. A firm will undertake investments as long as the expected rate of return is less than the
interest rate.
256. Investment and R&D decisions by firms are based on nominal interest rates, not real
interest.
18-109
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
257. When the inflation rate is 4 percent and the nominal interest rate on long-term government
bonds is 8 percent, the real interest rate is 12 percent.
258. If the nominal rate of interest is 8 percent and the real rate of interest is 3 percent, the
inflation rate must be 11 percent.
259. Usury laws are a special case of "price floors" applied to the loanable funds market.
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written consent of McGraw-Hill Education.
Topic: Role of Interest Rates
260. Usury laws will result in a shortage of loanable funds and nonmarket rationing in credit
markets.
261. Normal profit is considered an economic cost.
262. The payment earned for taking uninsurable risks in owning and running a business is
called profit.
263. The risk that the firm's employees might get hurt while working is an example of the
uninsurable risks faced by an entrepreneur.
264. Labor's share of income earned by Americans is smaller than the share of capital.
265. Profits account for a smaller share of total U.S. income than interest income.
