70. If profit-seeking major oil companies began to use current profits from the oil business to buy
department stores and hotel chains, economic analysis suggests that
a.
oil company profits were high relative to other possible investment opportunities.
b.
oil company executives thought profits from investment outside the oil industry would be
lower than oil-industry investments.
c.
oil company executives must believe these other investments will be more profitable than
investments in the oil industry.
d.
the government would be justified in subsidizing oil companies on grounds of economic
efficiency.
71. Economic profit provides an incentive for persons investing in human and physical capital to
a.
undertake investment projects yielding an uncertain return.
b.
discover and develop beneficial (productive) investment opportunities.
c.
produce products that increase the value of resources.
d.
do all of the above.
72. Which of the following encourages people to engage in activities that yield uncertain returns?
a.
perfect information
b.
economic profit
c.
accounting profit
d.
all of the above
73. Most of the income of Americans comes from
a.
transfer payments.
b.
the ownership of bonds and physical assets.
c.
the ownership of bonds and corporate stocks.
d.
the ownership of human capital.
74. For the past several decades, the percentage of national income in the United States allocated to human
capital (employees and self-employed workers) has been approximately
a.
20 percent.
b.
40 percent.
c.
60 percent.
d.
80 percent.
75. For the past several decades, the percentage of national income in the United States allocated to
physical capital (rents, interest, profit) has been approximately
a.
20 percent.
b.
40 percent.
c.
60 percent.
d.
80 percent.
76. Which one of the following is least likely to influence the investment choices of decision makers?
a.
the pure interest yield
b.
the expectation of profit
c.
the risk associated with the investment
d.
the general level of prices
77. Which of the following is true?
a.
Uncertainty accompanies investment decisions.
b.
At any given time, there are a virtually infinite number of potential investment projects
that might be undertaken by investors.
c.
In order to be successful, entrepreneurs must be good at recognizing and undertaking
economically beneficial projects.
d.
All of the above are correct.
78. If a nation is going to benefit fully from technological advances and entrepreneurial ideas, it must
a.
be relatively easy for persons from diverse backgrounds to try out their ideas at a relatively
low cost.
b.
have a mechanism that will bring unsound projects to a halt.
c.
have a central investment authority that will review projects and decide which should be
undertaken.
d.
be both a and b.
79. In order to fully realize the gains from entrepreneurial innovation,
a.
the government should subsidize potential entrepreneurs.
b.
it must be relatively easy for people to put their ideas in motion.
c.
it must be relatively difficult to continue implementing a bad idea.
d.
both a and b must be true.
e.
both b and c must be true.
80. In a market economy, persons undertaking an investment project must
a.
obtain approval from political authorities before the project can be undertaken.
b.
either personally supply the required funds or convince other investors and financiers to do
so.
c.
finance the project entirely with equity capital.
d.
arrange for bank financing before the project can be undertaken.
81. Which of the following is most important for the growth of income and full realization of an
economy’s potential?
a.
a positive rate of time preference that motivates a high rate of current consumption
b.
low real interest rates
c.
the use of central planning to allocate investment funds
d.
a mechanism capable of attracting savings and channeling them into investment projects
that create wealth
82. Economic profit provides both human and physical capital decision makers with an incentive to
a.
exploit workers.
b.
reject investments yielding an uncertain return.
c.
discover and develop beneficial and productive investment opportunities.
d.
do both b and c.
83. Investments that are mistakenly made and generate losses
a.
will occur when future revenues are known with certainty.
b.
indicate that the capital market is incapable of generating wealth.
c.
are normal costs of developing new projects and technologies in a world of uncertainty.
d.
will not occur when capital markets are operating efficiently.
84. When an investment project generates output that is valued more highly than the value of the resources
required for its production,
a.
undertaking the project will create wealth.
b.
it will generally be profitable to undertake the project if property rights are securely
defined and enforced .
c.
entrepreneurs seeking profit will have little incentive to undertake such projects.
d.
both a and b are correct.
85. When investment funds are allocated by government rather than by markets,
a.
profitable investments are more likely to take place.
b.
political influence replaces market return as the basis for allocating funds.
c.
funds will consistently be channeled into wealth-creating projects.
d.
projects that are political boondoggles will be unlikely to be undertaken.
86. The experience of the former Soviet bloc countries illustrates that high rates of investment may fail to
promote rapid economic growth when a country
a.
uses central government planning rather than capital markets to allocate investment funds.
b.
has a strong education system.
c.
has secure property rights.
d.
has a tax system that encourages savings.
87. The development and construction of machines that enhance our ability to produce goods and services
in the future requires
a.
devoting more resources toward investment.
b.
devoting fewer resources toward current consumption.
c.
a negative rate of time preference.
d.
both a and b.
88. A positive rate of time preference implies that a person would value
a.
receiving $100 today more than receiving $100 one year from now.
b.
receiving $100 today less than receiving $100 one year from now.
c.
receiving $100 today equally to receiving $100 one year from now.
d.
any amount, no matter how small, today more than receiving $100 one year from now.
89. The net present value of $100, delivered one year from now, would
a.
fall if the rate of interest increased.
b.
fall if the rate of interest decreased.
c.
rise if the rate of interest increased.
d.
not change if the interest rate changed.
90. If the interest rate was 6 percent, the net present value of $100 to be received one year from now
would be
a.
$94.34.
b.
$98.04.
c.
$100.00.
d.
$106.00.
91. If the interest rate was 6 percent, the net present value of $100 to be received two years from now
would be
a.
$89.00.
b.
$94.34.
c.
$100.00.
d.
$112.00.
92. If the interest rate was 6 percent, the combined net present value of two payments of $100, one to be
received one year from now and the other two years from now, would be
a.
$89.00.
b.
$94.34.
c.
$183.34.
d.
$200.00.
93. If the interest rate was 6 percent, the net present value of a contract or asset that generated a repeating
payment of $100 each year forever would be
a.
$100.00.
b.
$666.67.
c.
$1,000.00.
d.
$1,666.67.
94. The net present value of $100 to be received one year from now will
a.
increase if the interest rate rises.
b.
increase if the payment is delayed until two years from now.
c.
be greater than the net present value of $95 to be received one year from now.
d.
be greater than the value of having $95 now if the interest rate is 10 percent.
95. (I) Discounting procedures apply to decisions to invest in physical capital but are not relevant to
human capital investment decisions.
(II) Nonmonetary considerations are usually more important in human capital investment decisions
than in nonhuman capital investment decisions.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
96. Some governments enact usury laws, which hold the interest rate below its equilibrium level.
Economic analysis indicates that under such laws,
a.
saving would increase.
b.
borrowers would demand less from the loanable funds market.
c.
anyone who wanted to borrow would be happy with the lower interest rate.
d.
there would be a shortage of loanable funds, necessitating rationing by some means other
than the price (interest rate).
97. A company that mines coal on federally owned land is about to be told by the federal government that,
beginning in five years, it must abandon the mine it expected to operate for another twenty years. This
will mean a reduction in accounting profits beginning in five years. If the announcement of this ruling
was made tomorrow, the price of the firm’s stock would fall
a.
in about five years, just before the reduction in accounting profits was to begin.
b.
gradually, as the reduction in the firm’s accounting profit drew near.
c.
immediately by the full amount of the discounted value of the decrease in future profit.
d.
immediately because some investors would panic irrationally, whereas smart investors
would put the same value on the stock as before, up to the time of the decline in
accounting profit.
98. (I) Countries with high rates of investment also tend to have high rates of growth.
(II) A country with a high rate of investment but a poorly functioning capital market will tend to have
a lower rate of growth than a country with a comparable rate of investment but a capital market that
functions well.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
99. Which of these are the major sources of economic profit?
a.
uncertainty, entrepreneurial alertness, and barriers to entry
b.
competition, perfect information, and elasticity of market demand
c.
size of firm, economies of scale, and freedom from unionism
d.
externalities, inflation, and size of firm
100. Which of the following would reduce the net present value of your college education?
a.
higher interest rates
b.
earlier retirement age
c.
higher wages for high school graduates
d.
all of the above
101. Economists refer to the desire of consumers 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.
102. 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.
103. If the money rate of interest is 10 percent and the real rate of interest is 7 percent, the inflationary
premium is
a.
3 percent.
b.
7 percent.
c.
10 percent.
d.
17 percent.
104. The yield that one can expect to receive on loanable funds without taking significant risk is called the
a.
risk premium.
b.
pure interest yield.
c.
inflationary premium.
d.
nominal interest yield.
105. 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.
106. 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.
107. You are considering buying a business that currently earns $15,000 per year in after-tax profit. If these
conditions are expected to continue into the future, and the interest rate is currently 10 percent, the
current market value of this business is
a.
$1,500.
b.
$15,000.
c.
$150,000.
d.
$1,500,000.
108. Which of the following is true?
a.
if an investment project is going to be undertaken, someone must increase his current
consumption.
b.
saving and investment must always be undertaken by different individuals.
c.
if we invest more and use more of our resources to produce capital goods today, fewer
current resources will be available to produce consumption goods.
d.
all of the above are correct.
109. When economists say an individual possesses a “positive rate of time preference,” they mean that she
prefers to
a.
save rather than consume.
b.
invest now rather than in the future.
c.
consume goods and services in the future rather than now.
d.
consume goods and services now rather than in the future.
110. If we want to produce more capital goods during the present time period, we must
a.
increase current consumption.
b.
lower future consumption.
c.
reduce current consumption.
d.
reduce our savings rate.
111. Interest is
a.
the price paid for early availability of funds.
b.
the risk of extending a loan.
c.
an unnecessary premium charged for the use of money.
d.
the price one must pay when she does not save.
112. The additional amount a person is willing to pay to obtain a good or resource now rather than later is
called the
a.
interest rate.
b.
nominal price of future goods.
c.
inflationary premium.
d.
risk premium.
113. If the interest rate is 5 percent, what is the current value of $110 to be received one year from now?
a.
$104
b.
$73
c.
$220
d.
$116
114. If an investment project costing $2,800 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 was low enough.
d.
undertake the project if the interest rate exceeded 12 percent.
115. What are the major sources of economic profit?
a.
certainty, monopolistic competition, and inelastic supply.
b.
competition, perfect information, and elasticity of market demand.
c.
barriers to entry, uncertainty, and entrepreneurial alertness.
d.
externalities, inflation, and size of firm.
116. What role do non-monetary considerations play in physical capital investment decisions as opposed to
human capital investment decisions?
a.
they play a minor to nonexistent role in both.
b.
they play an equally important role in both.
c.
they are probably more important in physical capital investment decisions.
d.
they are probably more important in human capital investment decisions.
117. Megan must decide whether or not to go to college. She can either continue to work as a waitress and
earn $22,000 per year or she can go to school and expect to earn $32,000 per year when she finishes.
She should:
a.
continue to work as a waitress.
b.
go to school, but only if she knows she can finish in four years.
c.
go to school no matter what.
d.
we cannot tell since there may be important nonmonetary considerations that Megan will
take into account.
118. Most of the income of Americans comes from
a.
transfer payments.
b.
individuals selling their labor services.
c.
the ownership of bonds and corporate stocks.
d.
the ownership of small businesses.
119. In an uncertain world, private investors
a.
always make decisions that lead to economic profit.
b.
never make decisions that generate economic losses.
c.
sometimes make decisions that lead to economic losses.
d.
rarely invest in human capital.
120. Data shows that countries that invest more and channel more of those investments into productive
projects will generally have
a.
higher rates of current consumption.
b.
higher future incomes.
c.
lower rates of economic growth.
d.
lower real interest rates.
121. The net present value of $1,000 received one year from now will
a.
increase with the interest rate.
b.
exceed $1,000 as long as the interest rate is positive.
c.
exceed the net present value of $1,000 to be received two years from now.
d.
equal $1,100 if the current interest (discount) rate is 10 percent.
122. If the money rate of interest is 15 percent and the real rate of interest is 5 percent, the inflationary
premium is
a.
zero.
b.
5 percent.
c.
10 percent.
d.
15 percent.
ESSAY
123. If people prefer to consume goods now rather than in the future, how does anyone save money?
124. Professor Smith completed a study that showed that 60 percent of all the students who graduated from
her college purchased new cars. What might explain this?
ANS:
125. In a barter economy that had no form of currency, how could interest exist?
126. Erin just won Lotto America, which will pay her $40 million over the next 20 years at a rate of $2
million a year. Is Erin $40 million richer today?
127. The Shackled Foot Corporation is a conglomerate with four major divisions. Each division has
performed poorly over the years and none has a return greater than 2 percent. Karen, who could have
invested her money at 5 percent, buys the company. What does her action imply?
128. Arnold is considering purchasing a business for $100,000. It will pay him an annual return of $8,000.
If the interest rate is 10 percent, should he buy the business? What if the interest rate was 6 percent?
ANS:
129. The Jones family has always been in the business of manufacturing and selling automobile tires.
Usually the profit they earn is reinvested in the business. This year Seth, the youngest son, wants to
invest the profit into starting a candy company. If Seth is a shrewd businessman, what does his
suggestion indicate?