978-1259723223 Test Bank TBChap018 Part 6

18–97

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

14

26

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

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

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

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

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

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

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

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.

18-107

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

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

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.

18-110

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.