Economics Chapter 27—Investment, the Capital Market, and the Wealth of Nations
MULTIPLE CHOICE
1. Which of the following is true of saving and investment?
a.
There is no relationship between saving and investment; people can invest without having
to save.
b.
Saving and investment can never be undertaken together by the same person.
c.
Saving and investment must always be undertaken by the same person.
d.
If investment is going to be undertaken, someone must save.
2. The net present value of $1,000 received in the future would
a.
decline if the $1,000 were received sooner.
b.
increase if the delivery date for the $1,000 were set farther into the future.
c.
decrease if the interest rate fell.
d.
decrease if the interest rate rose.
3. Investment in capital goods only makes sense when
a.
the capital goods can be used to increase the future output of consumption goods.
b.
the savings rate of a country is low.
c.
the interest rate is high and people have a positive rate of time preference.
d.
economies are organized along capitalist lines.
4. The money rate of interest is the
a.
real rate of interest minus the inflationary premium.
b.
real rate of interest plus the inflationary premium.
c.
real rate of interest divided by the inflationary premium.
d.
inflationary premium minus the real interest rate.
5. The pure interest yield
a.
reflects the expectation that the loan will be repaid with dollars of less purchasing power.
b.
is the real price one must pay for earlier availability.
c.
reflects the probability of default.
d.
is the real rate of return one could expect if the funds were invested in the commodities
market.
6. A competitive capital market is important to society because it directs resources toward projects that
a.
can be completed quickly.
b.
create wealth.
c.
have an outcome that is known with certainty.
d.
reduce the value of the resources employed.
7. Economic profit
a.
does not exist in competitive markets.
b.
provides an incentive for investors to undertake risky projects.
c.
motivates entrepreneurial innovation.
d.
does all of the above.
e.
is both b and c.
8. Compared to investing in physical capital, human capital investments are more likely to be influenced
by
a.
nonmonetary considerations.
b.
depreciation rates.
c.
the rate of return.
d.
opportunity costs.
9. You are considering the purchase of a business that is currently earning $25,000 per year in after-tax
profit. If these conditions are expected to continue year after year into the future, and the interest rate is
currently 10 percent, the current market value of this business is
a.
$2,500.
b.
$25,000.
c.
$250,000.
d.
$2,500,000.
10. If the interest rate were 10 percent, the net present value of $100 to be received one year from now
would be
a.
$90.
b.
$90.91.
c.
$100.
d.
$110.
11. Long-lasting resources used to expand the production of goods and services in the future are called
a.
consumables.
b.
capital goods.
c.
consumer durables.
d.
inventories.
12. Additional investments in machines that enhance the ability to produce goods and services imply that
a.
the owners of the investments will necessarily have to borrow funds.
b.
the owners of the investments will necessarily have to reduce their current consumption.
c.
someone will have to reduce current consumption.
d.
future consumption will have to be reduced.
13. Economic efficiency requires that costs associated with the expansion and utilization of capital be
balanced against the
a.
future increases in output derived from improved tools and production methods.
b.
reduction in future employment due to automation.
c.
indirect costs of capital goods.
d.
need to maintain a reserve army of the unemployed.
14. Economists refer to consumers’ desire for goods now rather than in the future as
a.
a positive rate of time preference.
b.
the rational expectations hypothesis.
c.
roundabout methods of production.
d.
the inflationary premium.
15. If Alexander has a positive rate of time preference, he will
a.
prefer to have goods now rather than two years from now.
b.
prefer to have goods two years from now rather than during the current period.
c.
prefer apples to oranges.
d.
be unwilling to pay an interest rate in order to acquire purchasing power now.
16. If Emma has a positive rate of time preference, she will
a.
value the receipt of $10,000 twenty years from now just as much as she would value
receipt of the $10,000 now.
b.
value the receipt of $10,000 twenty years from now more than she would value receipt of
the $10,000 now.
c.
value the receipt of $10,000 twenty years from now less than she would value receipt of
the $10,000 now.
d.
prefer to receive any amount of money now to the $10,000 twenty years from now.
17. The interest rate is determined by the
a.
altruism or greed of bankers.
b.
demand for loanable funds.
c.
supply for loanable funds.
d.
supply and demand for loanable funds.
18. Other things constant, if there is an increase in the demand for goods now compared to goods in the
future, we would expect that the
a.
real interest rate would decline.
b.
capital investment rate would decline.
c.
current rate of saving would increase.
d.
real interest rate would rise.
19. Which of the following statements is correct?
a.
If the inflation rate is steady at 5 percent, for example, the real and nominal interest rates
will be equal.
b.
An increase in the demand for goods now compared with goods in the future would cause
the real interest rate to rise.
c.
A “positive rate of time preference” means that an individual would rather save than
consume.
d.
During an extended inflationary period, the money (or nominal) interest rate will usually
be lower than the real rate of interest.
20. The money rate of interest that lenders pay for borrowed funds minus the real rate of interest equals
the
a.
nominal rate of interest.
b.
present value of an asset.
c.
inflationary premium.
d.
productivity of capital.
21. During an extended inflationary period, the money rate of interest will usually be
a.
lower than the real rate of interest.
b.
equal to the real rate of interest.
c.
greater than the real rate of interest.
d.
inversely related to changes in the inflation rate.
22. The real rate of interest is the
a.
money rate of interest plus the inflationary premium.
b.
money rate of interest minus the inflationary premium.
c.
yield one can expect to receive on loanable funds without taking significant risk.
d.
risk component associated with the ownership of real assets.
23. An increase in the real interest rate will increase the
a.
current market value of assets yielding income in the future.
b.
size of the inflationary premium.
c.
cost of current consumption goods relative to future consumption.
d.
net present value of $100 to be received one year from now.
24. If the money rate of interest is 12 percent and the real rate of interest 7 percent, the inflationary
premium is
a.
5 percent.
b.
7 percent.
c.
12 percent.
d.
19 percent.
25. If the money rate of interest is 9 percent and the real rate of interest 6 percent, the inflationary
premium is
a.
3 percent.
b.
6 percent.
c.
9 percent.
d.
12 percent.
26. Assume that Michael is interested in buying a lawn mower. Right now, interest rates are very high, but
he believes they will soon start to fall. If Michael purchases the lawn mower today, we know that
a.
he was concerned about future inflation.
b.
the current inflation rate was low.
c.
he paid an inflationary premium.
d.
he had a strong, positive rate of time preference.
27. Interest rates in the loanable funds market vary with respect to
a.
your rate of time preference.
b.
risk.
c.
expected inflation.
d.
all of the above.
e.
both b and c above.
28. The procedure used to calculate the present value of future income is called
a.
indirect production.
b.
investment tax shelter planning.
c.
discounting.
d.
amortizing.
29. Discounting is a procedure used to
a.
determine the present value of income or costs expected in the future.
b.
adjust future income for the effects of inflation.
c.
adjust the money interest rates for the effects of inflation.
d.
compare the value of income after taxes with its value prior to taxes.
30. The current worth of future income after it is discounted, to reflect the fact that future dollars are worth
less than current dollars, is called
a.
the net present value of the income.
b.
arbitrage.
c.
the inflationary premium.
d.
the real interest rate.
31. If the interest rate is 9 percent, the net present value of $1,000 to be received one year from now would
be
a.
$943.40.
b.
$917.43.
c.
$1,000.
d.
$1,090.
32. If the interest rate is 7 percent, what is the current value of $80 to be received one year from now?
a.
$47.05
b.
$74.77
c.
$85.60
d.
$136
33. If the interest rate is 10 percent, the net present value of $500 to be received one year from now is
a.
$413.22.
b.
$450.
c.
$454.55.
d.
$500.
34. If the interest rate is 7 percent, what is the present value of $100 received two years from now.
a.
$107
b.
$114.49
c.
$87.34
d.
$93.45
35. If the interest rate is 8 percent, the present value of $750 to be received two years from now is
a.
$750.
b.
$886.10.
c.
$643.
d.
$738.14.
36. If the interest rate is 5 percent, the net present value of $200 to be received two years from now is
a.
$165.29.
b.
$181.41.
c.
$200.
d.
$210.
37. If the interest rate is 10 percent, the net present value of $600 to be received two years from now is
a.
$495.87.
b.
$545.45.
c.
$600.
d.
$660.
38. If the interest rate is 6 percent, the net present value of $100 to be received two years from now is
a.
$79.72.
b.
$86.
c.
$89.
d.
$100.
39. At a discount rate of 6 percent, what is the net present value of an investment project expected to yield
$1,000 per year (to be received at year end) for the next three years?
a.
$3,000
b.
$2,829
c.
$2,673
d.
There is insufficient information to determine whether the project should be undertaken.
40. At a discount rate of 10 percent, what is the net present value of an investment expected to yield
$1,000 per year (to be received at year end) for the next two years?
a.
$1,859.41
b.
$1,801.23
c.
$1,735.54
d.
$1,527.78
41. Isabella is contemplating investing $10,000 in an investment. It is expected to yield $4,000 at the end
of each of the next three years. The interest rate is 5 percent. What is the net present value of the
expected revenues from the investment?
a.
$8,426
b.
$9,947
c.
$10,893
d.
$12,000
42. The net present value of $1,000 received at a time in the future would
a.
decline if the $1,000 were received sooner.
b.
increase if the delivery date for the $1,000 were set farther into the future.
c.
increase if the interest rate rose.
d.
increase if the interest rate fell.
43. The present value of $1 million to be received 10 years from now will
a.
decrease if the interest rate rises.
b.
be greater if the funds were going to be received 15 years from now.
c.
be greater than $1 million.
d.
increase if the interest rate were to rise from 4 percent to 8 percent.
44. Which of the following statements is correct?
a.
Interest would not exist in a nonmonetary economy.
b.
The present value of a future dollar payment is inversely related to both the interest rate
and to how far in the future the payment will be received.
c.
A “positive rate of time preference” means that an individual would rather save than
consume.
d.
During an extended inflationary period, the money (or nominal) interest rate will usually
be lower than the real rate of interest.
45. Which of the following statements is correct?
a.
Interest would not exist in a nonmonetary economy.
b.
The present value of a future dollar payment is directly related to the interest rate.
c.
The present value of a fixed dollar payment to be received in the future will decline as the
length of the time before the payment will be received increases.
d.
During an extended inflationary period, the money (or nominal) interest rate will usually
be lower than the real rate of interest.
46. If the interest rate was 5 percent and an investment project was expected to yield net revenue of $3,000
per year (to be received at year end) for each of the next three years, profit-maximizing decision
makers would undertake the investment only as long as it cost less than
a.
$7,461.
b.
$8,170.
c.
$8,652.
d.
$9,000.
47. If the interest rate is 8 percent and an investment undertaken and paid for today is expected to yield
$3,000 per year (to be received at year end) for each of the next three years, a profit-maximizing
decision maker would undertake the investment only as long as the cost remained less than
approximately
a.
$5,350.
b.
$7,731.
c.
$8,109.
d.
$9,000.
48. If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for
each of the next three years, a profit-maximizing entrepreneur would
a.
definitely undertake the project.
b.
never undertake the project.
c.
undertake the project if the interest rate exceeded 12 percent.
d.
undertake the project if the interest rate was 5 percent or less.
49. At an interest rate of 6 percent, if an investment project was expected to yield $1,000 per year (to be
received at year end) for each of the next three years, profit-maximizing decision makers would
undertake the project only as long as the cost remained less than
a.
$1,000.
b.
$2,577.
c.
$2,673.
d.
$3,000.
50. If an individual or family began at age 25 paying funds into a tax-free investment account or pension
earning a 7 percent real return, how much would they have to save annually in order for the funds to be
worth a million dollars (measured in the purchasing power of today’s dollar) when they reach age 65?
a.
approximately $5,000 annually
b.
approximately $10,000 annually
c.
approximately $20,000 annually
d.
approximately $50,000 annually
51. Which of the following will most directly determine the market price of a business or physical asset?
a.
cost of the asset
b.
expected future net earnings derived from the asset
c.
book value (original purchase price minus depreciation) of the asset
d.
age of the asset
52. As the present value of the future earnings from owning an asset ____, the market value of the asset
____.
a.
decreases; increases
b.
increases; decreases
c.
increases; increases
d.
increases; is uncertain
53. As the present value of the future earnings from owning an asset ____, the market value of the asset
____.
a.
decreases; increases
b.
increases; decreases
c.
decreases; decreases
d.
decreases; is uncertain
54. If Microsoft stock has a constant net return each year, then the value of a share of Microsoft stock is
determined by
a.
subtracting Microsoft’s total costs from its total revenue.
b.
multiplying the annual net income by the number of shares.
c.
dividing the annual net income from the asset by the interest rate.
d.
both a and b above.
55. Which of the following indicates why the role of vigilant investors is important for the efficient
operation of an economy?
a.
These investors generally serve on the boards of directors of corporations.
b.
These investors tend to buy and sell stocks in a way that provides feedback to management
about the quality of its decisions.
c.
These investors help allocate capital efficiently among investment projects.
d.
Both b and c are true.
56. If most people found the lifestyle of an assembly-line worker less desirable relative to that of persons
in other professions, one would expect the return on the human capital investment of
a.
assembly-line workers to be higher than that of persons in other professions.