Question 1

A firm considering whether to borrow money to purchase a capital good will compare the rate of interest for the loan with the

Accepted Answer

A)  opportunity cost of the capital good.
B)  rate of return on the investment.
C)  length of the investment.
D)  Treasury bill rate.E) B) and C)
F) A) and C)

Question 2

If the expected rates of return on investments increased, the loanable funds theory predicts that the equilibrium interest rate would decrease.

Accepted Answer

A) True 
 B)False

Question 3

Interest represents a cost to the borrower, but an income to the lender.

Accepted Answer

A) True 
 B)False

Question 4

Unlike most demand curves, the demand curve for loanable funds is upsloping.

Accepted Answer

A) True 
 B)False

Question 5

For a usury law to be effective, the interest rate must be

Accepted Answer

A)  determined by borrowing and lending.
B)  set at the market equilibrium interest rate.
C)  set above the market equilibrium interest rate.
D)  set below the market equilibrium interest rate.E) A) and C)
F) A) and B)

Question 6

A lower equilibrium interest rate

Accepted Answer

A)  increases saving, reduces total spending, and increases total output.
B)  decreases saving, increases total spending, and decreases total output.
C)  increases investment, increases total spending, and increases total output.
D)  decreases investment, decreases total spending, and increases total output.E) A) and B)
F) C) and D)

Question 7

The total supply of land is

Accepted Answer

A)  upsloping.
B)  perfectly elastic.
C)  perfectly inelastic.
D)  greater in the short run than in the long run.E) B) and D)
F) All of the above

Question 8

If the interest rate is 5 percent, what is the present value of $10,000 received three years from now?

Accepted Answer

A)  $8,638
B)  $9,000
C)  $11,600
D)  $11,000E) A) and B)
F) None of the above

Question 9

David Ricardo, a nineteenth-century economist, wrote, "The price of corn is high not because a rent is paid, but a rent is paid because the price of the corn is high." Which of the following correctly explains Ricardo's assertion?

Accepted Answer

A)  The high rents landowners charge tenant farmers cause high corn prices.
B)  If landowners weren't so greedy and lowered the rents they charge tenant farmers, the price of corn would fall.
C)  If the price of corn rises because of increased demand for corn, land rents will rise to absorb most of the extra revenue received by tenant corn farmers.
D)  If the price of corn rises, all other things being equal, increases in rent will cause some tenant farmers to stop growing corn.E) A) and B)
F) A) and C)

Question 10

Broadly defined, labor's share of national income has been remarkably stable since 1900.

Accepted Answer

A) True 
 B)False

Question 11

A firm wants to borrow funds to purchase a new piece of equipment that costs $20,000 and has a useful life of one year.The investment is expected to produce an additional $1,500 in total revenue.The firm will most likely make the investment if the interest rate is

Accepted Answer

A)  6 percent.
B)  8 percent.
C)  10 percent.
D)  12 percent.E) All of the above
F) A) and C)

Question 12

Which of the following represents an uninsurable risk to a business firm?

Accepted Answer

A)  the possibility that its warehouse will burn down
B)  the possibility that several of its workers will be injured at work
C)  the possibility that an adverse change in consumer tastes will decrease the demand for the firm's product
D)  the possibility that a tornado will damage the plant and stop production for a monthE) A) and D)
F) A) and B)

Question 13

Which would usually not be an entrepreneurial function?

Accepted Answer

A)  introducing a new product in a business
B)  assuming uninsurable risks of owning a business
C)  combining and directing resources in an uncertain business environment
D)  managing the accounting department of a Fortune 500 corporationE) B) and D)
F) C) and D)

Question 14

The interest rate is the price paid for the use of money.

Accepted Answer

A) True 
 B)False

Question 15

Usury laws are a special case of "price floors" applied to the loanable funds market.

Accepted Answer

A) True 
 B)False

Question 16

Economic profits are the entrepreneur's reward for taking on the insurable risks of running a business.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following resource payments is considered by economists as surplus payments?

Accepted Answer

A)  wages for labor
B)  rent for land
C)  interest for capital
D)  profits for entrepreneurshipE) A) and B)
F) A) and C)

Question 18

A firm will undertake investments as long as the expected rate of return is less than the interest rate.

Accepted Answer

A) True 
 B)False

Question 19

The payment earned for taking uninsurable risks in owning and running a business is called profit.

Accepted Answer

A) True 
 B)False

Question 20

Economic rent, or pure rent, is

Accepted Answer

A)  a payment made for the use of housing, factory buildings, or capital goods.
B)  a payment for resources used in the production of "free goods."
C)  a payment for the use of those resources whose supply is perfectly elastic.
D)  the price paid for the use of land and other nonreproducible resources.E) A) and C)
F) A) and D)

Exam 18: Rent, Interest, and Profit

Interest represents a cost to the borrower, but an income to the lender.

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A firm will undertake investments as long as the expected rate of return is less than the interest rate.

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The total supply of land is

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Which of the following resource payments is considered by economists as surplus payments?

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Unlike most demand curves, the demand curve for loanable funds is upsloping.

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A lower equilibrium interest rate

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If the expected rates of return on investments increased, the loanable funds theory predicts that the equilibrium interest rate would decrease.

Correct AnswerverifiedShow Answer

David Ricardo, a nineteenth-century economist, wrote, "The price of corn is high not because a rent is paid, but a rent is paid because the price of the corn is high." Which of the following correctly explains Ricardo's assertion?

Correct AnswerverifiedShow Answer

The interest rate is the price paid for the use of money.

Correct AnswerverifiedShow Answer

For a usury law to be effective, the interest rate must be

Correct AnswerverifiedShow Answer

A firm wants to borrow funds to purchase a new piece of equipment that costs $20,000 and has a useful life of one year.The investment is expected to produce an additional $1,500 in total revenue.The firm will most likely make the investment if the interest rate is

Correct AnswerverifiedShow Answer

Which of the following represents an uninsurable risk to a business firm?

Correct AnswerverifiedShow Answer

A firm considering whether to borrow money to purchase a capital good will compare the rate of interest for the loan with the

Correct AnswerverifiedShow Answer

Which would usually not be an entrepreneurial function?

Correct AnswerverifiedShow Answer

Broadly defined, labor's share of national income has been remarkably stable since 1900.

Correct AnswerverifiedShow Answer

The payment earned for taking uninsurable risks in owning and running a business is called profit.

Correct AnswerverifiedShow Answer

Economic profits are the entrepreneur's reward for taking on the insurable risks of running a business.

Correct AnswerverifiedShow Answer

If the interest rate is 5 percent, what is the present value of $10,000 received three years from now?

Correct AnswerverifiedShow Answer

Economic rent, or pure rent, is

Correct AnswerverifiedShow Answer

Usury laws are a special case of "price floors" applied to the loanable funds market.

Correct AnswerverifiedShow Answer

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