Deck 17: Allocating Goods Over Time

Question 1

It is wise to purchase an artist's work when it is expected to appreciate in value,whether or not you like it.

Answer 1

False

Question 2

Deficit spending by the government is unwise,because taxpayers receive nothing of value when their taxes are used to make interest payments.

Answer 2

False

Question 3

Treasury bills are sold at face value and buyers received annual interest payments from the government.

Answer 3

False

Question 4

A borrower sells bonds,and a lender buys bonds.

Question 5

A perpetuity is a bond with an established maturity date.

Question 6

No one benefits when interest rates rise,because everyone's current consumption will be lowered.

Question 7

It would be irrational to promise to make an infinite number of payments in exchange for a finite amount of goods.

Question 8

Future productivity increases will be reflected in higher interest rates today.

Question 9

Artists as a whole would be better off if they received royalty payments each time their work was resold.

Question 10

Firms have an incentive to practice planned obsolescence,because it increases their volume of sales and gives them higher profits.

Question 11

The present value of a perpetuity falls when the interest rate rises.

Question 12

A bond that promises a series of payments on different dates is a perpetuity.

Question 13

Without inflation the real interest rate is always greater than the nominal interest rate.

Question 14

Increases in interest rates lead to overall net gains.

Question 15

The market interest rate equals the absolute slope of the representative agent's indifference curve at the endowment point,minus 1.

Question 16

If an annual tax of $560 per acre is levied on land,then land values will fall by $560 per acre.

Question 17

The value of a productive asset is equal to the present value of the stream of dividends that it produces.

Question 18

A change in the price of bonds causes a change in interest rates.

Question 19

If water can be bottled at zero marginal cost,and if water prices are growing slower than the rate of interest,then owners would benefit by increasing their current bottling operations.

Question 20

A higher demand for capital implies a lower supply of current consumption.

Question 21

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 9%.If you expect inflation to be 5% or lower,then you are expecting to earn a real interest rate of at least

A) 1.8%.
B) 3%.
C) 4%.
D) 5%.

Question 22

If the real interest rate is 5% and the inflation rate is 3% then the real growth rate in your purchasing power is 8%.

Question 23

A bond with a $90,000 face value sells at a $10,000 discount one year prior to maturity.What is the nominal interest rate paid by the bond?

A) 8.0%.
B) 8.9%.
C) 11.1%.
D) 12.5%.

Question 24

The relative price of a pineapple today in terms of pineapples tomorrow is given by

A) 1 - r
B) r
C) 1 + r
D) 1/(1 + r)

Question 25

If a project costs $2000 up front and generates revenues of $500 per year for ten years,then any profit maximizing company will choose to undertake the project.

Question 26

When the interest rate is 7.5%,what is the present value of a perpetuity paying $50 a year forever?

A) $375.00.
B) $465.11.
C) $537.50.
D) $666.67.

Question 27

A dividend is the amount of money a shareholder is paid (per share)at years end.

Question 28

When a bond is sold at a discount,the term discount refers to

A) the rate of interest.
B) the face value of the bond minus its current price.
C) its current price.
D) its face value multiplied by 1 + r.

Question 29

Anna and Howard both own 100 shares of Photo-Hut.Anna buys stocks for income for current consumption,Howard buys stocks for their future growth.This year the firm has paid out all its profits to its stockholders.We can expect that

A) Anna and Howard will both spend the income.
B) Howard will spend the income,while Anna will use the money to buy more stock in the firm.
C) Howard will sell the stock since it is not reinvesting its profits.
D) Anna will spend the income,while Howard will use the money to buy more stock in the firm.

Question 30

A perpetuity is selling for $20,000 when the interest rate is 6%.What must the expected annual payment be?

A) $600.
B) $1,200.
C) $3,333.
D) $6,000.

Question 31

A representative agent is someone that acts as a proxy for an investor during corporate votes.

Question 32

Your artistically talented friend Pablo offers to sell you one of his paintings that he knows you enjoy looking at.You value this enjoyment at $100 and then expect to sell the painting at the end of one year for $500.You would buy the painting when interest rates are at 5% so long as the price he asks for is no greater than

A) $600.
B) $576.
C) $500.
D) $400.

Question 33

The price of a bond can be expressed as its Face Value minus its Discount.

Question 34

If marginal costs are significant,then the price of an exhaustible resource grows at the rate of interest.

Question 35

When the annual interest rate is 7 percent,what is the present value of receiving a payment of $10,000 three years from now?

A) $10,700.00.
B) $10,244.89.
C) $9,300.00
D) $8,162.98.

Question 36

A promise to pay at some time in the future

A) indicates the present value of a future payment.
B) is a bond.
C) is the interest rate on debt.
D) is a dividend.

Question 37

If a bond with face value $100 sells for $75,then we say that the bond is selling for a discount of 25%.

Question 38

Consider a bond with a $100,000 face value that matures in 1 year.If the bond pays a nominal interest rate of 8%,what is the bond's discount?

A) $8,000.
B) $7,407.
C) $4,000.
D) $1,250.

Question 39

The price of a bond with a maturity date one time period into the future is equal to its face value

A) multiplier by 1 - r.
B) multiplied by 1 + r.
C) divided by 1 + r.
D) divided by 1 - r.

Question 40

The higher the interest rate,the higher the price of a bond.

Question 41

According to most economists,when can government debt lead to higher interest rates?

A) Always.
B) Never.
C) When government spends money wastefully.
D) When misperceptions or default risks are significant.

Question 42

Current and Future Consumption

The following questions refer to the accompanying diagram, which shows a consumer's choice between current and future consumption.



-Refer to Current and Future Consumption.This consumer can lend and borrow at an interest rate of

A) 8%.
B) 25%.
C) 64%.
D) 100%.

Question 43

Suppose coal is mined at a zero marginal cost and is priced competitively.If the price of coal is growing faster than the interest rate,then coal miners

A) are making positive economic profits.
B) will increase the amount of coal left unmined.
C) should extract more coal now and less coal in the future.
D) will exit the industry in the long run.

Question 44

If the marginal product of capital is smaller than the interest rate,then

A) investment in capital will fall.
B) people are earning negative rents from capital.
C) the supply of current consumption will decline.
D) borrowing will increase.

Question 45

Suppose the government spends $5,000 per person this year.The market for borrowing and lending is competitive,and the market interest rate is 6%.Which of the following plans to finance the government's spending is best for consumers?

A) A tax of $5,000 per person this year.
B) A tax of $5,300 per person next year.
C) An annual tax of $300 per person forever.
D) All of the above plans have the same effect on consumers.

Question 46

An increase in the marginal productivity of capital will lead to

A) an increase in current consumption.
B) a rise in the interest rate.
C) a decline in the demand for current consumption.
D) a fall in the demand for capital.

Question 47

Assume investment is possible.Which of the following will decrease the supply of current consumption?

A) Decreased productivity of capital.
B) A plague that kills half of the economy's laborers.
C) Increased productivity of capital.
D) A temporary rise in people's wealth.

Question 48

A copper mining firm has discovered that there is gold mixed in with its copper ore.Since the marginal cost of mining the gold is negligible,they are willing to sell it at the current market price of $500 an ounce.If the rate of interest is 5%,the firm should expect the price next year

A) to rise to $505.
B) to rise to $525.
C) to rise to over $525.
D) to remain constant.

Question 49

When a consumer is impatient,his indifference curves for current and future consumption

A) are flatter than the budget line at the endowment point.
B) must be straight lines.
C) have absolute slopes less than 1 along the 45° line.
D) have absolute slopes greater than 1 along the 45° line.

Question 50

Which of the following is not a reason to expect the slope of a consumer's indifference curve for current and future consumption to be greater than 1 with an endowment along the 45° line?

A) People are naturally impatient.
B) One is never sure if he will be alive in the future.
C) A unit consumed today offers memories of consumption into the future.
D) A decline in interest rates.

Question 51

Suppose the market rate of interest is 5%.The local government imposes a tax of $40 per acre on all land located within city limits.The year after the tax is imposed,Val sells an acre of land on which she had planned to build a house.How much was Val's share of the economic burden of the tax?

A) $0.
B) $40.
C) $200.
D) $800.

Question 52

When interest rates come down,

A) people on average are better off since borrowing is now less expensive.
B) people on average are worse off since the income of lenders will now decrease.
C) social welfare is left unchanged since what borrowers gain is exactly offset by what lenders lose.
D) people on average may or may not be better off,depending on how high the rate was to begin with.

Question 53

An economic analysis of "planned obsolescence" shows that

A) monopolies have an incentive to produce shorter-lived products,even when longer-lived products can be produced at the same cost.
B) firms prefer to produce shorter-lived products,because these result in greater sales and hence larger profits.
C) competitive firms are forced to produce the product with greatest longevity,but monopolies can successfully use planned obsolescence.
D) firms will make a longer-lived product if the additional cost is less than the present value of the benefits received by consumers.

Question 54

When the government wants to spend money

A) current consumption will fall only if the government borrows.
B) current consumption will fall only if the government raises taxes.
C) current consumption will fall if the government borrows or raises taxes.
D) current consumption will not be affected.

Question 55

When the interest rate is low

A) much capital is demanded and few resources are available for current consumption.
B) much capital is demanded and many resources are available for current consumption.
C) little capital is demanded and few resources are available for current consumption.
D) little capital is demanded and many resources are available for current consumption.

Question 56

The representative agent chooses to consume

A) his endowment point.
B) equal amounts of current and future goods.
C) more future goods than current goods.
D) the basket of goods where the slope of the indifference curve equals -1.

Question 57

Suppose pizzas are the only good and people have homothetic preferences.The supply of pizzas today is perfectly inelastic and determined solely by people's endowments.Which of the following would cause the interest rate to rise?

A) A 50% increase in pizza production,this year and throughout the future.
B) A 50% increase in this year's pizza production that is not expected to affect future harvests.
C) An expected 50% increase in future pizza production.
D) A hurricane that permanently destroys 50% of all pizza parlors.

Question 58

Current and Future Consumption

The following questions refer to the accompanying diagram, which shows a consumer's choice between current and future consumption.


-Refer to Current and Future Consumption.The diagram shows the case of a

A) representative agent.
B) net borrower.
C) net lender.
D) disequilibrium situation.

Question 59

The light bulbs currently made by a manufacturer currently last 1 year.People place a value of $2.42 on one year's worth of light from a light bulb,and the market rate of interest is 10%.The manufacturer is considering a quality improvement that would make its light bulbs last 3 years.Should the manufacturer make the quality improvement?

A) No,because it will substantially reduce the number of light bulbs sold.
B) Yes,as long as it costs less than $2.42 per light bulb.
C) Yes,as long as it costs less than $4.20 per light bulb.
D) Yes,as long as it costs less than $4.84 per light bulb.

Question 60

When the supply of land is perfectly inelastic,the economic burden of an annual tax on land

A) falls entirely on the people who owned land when the tax was imposed.
B) is passed on to future buyers of land in the form of higher prices.
C) is split between present and future landowners.
D) cannot be determined without information on the elasticity of the demand for land.

Question 61

Determine how each of the following situations would affect the demand for current consumption,the supply of current consumption,and the interest rate.

Question 62

If a coupon bond that pays one hundred dollars at the end of the next three years is worth three hundred dollars,then the interest rate must be

A) one percent
B) one hundred percent
C) ten percent
D) zero percent

Question 63

Consider the following:

Question 64

Which of the following results in the greatest present value if the interest rate is 10%?

A) A perpetuity that pays $10 per year.
B) One hundred dollars tomorrow.
C) A payment of $111 at the end of this year.
D) One hundred dollars today.

Question 65

Consider the following:

Question 66

Beginning in 2013,a local government in Georgia is instituting a tax on owners of land at a flat rate of $100 per acre every year.

Question 67

When making a purchase,it is least costly to

A) pay cash.
B) put it on a credit card and pay off the balance plus interest in one year.
C) put it on a credit card and pay off the balance at the end of the month before interest accrues.
D) it doesn't matter because all three have the same present value.

Question 68

Suppose favorable weather conditions temporarily raise the marginal productivity of existing capital.Weather conditions are expected to return to normal next year,so there is no change in the expected marginal productivity of future capital.In this situation,the interest rate will

A) rise.
B) fall.
C) remain unchanged.
D) react unpredictably.

Question 69

You have a bond that will pay you one hundred dollars one year from today.If the prevailing interest rate is r,the bond is currently worth

A) 100/r
B) 100r
C) 100/(1 + r)
D) 100

Question 70

A local government can spend $800 today on a project that will yield $968 of benefits two years from today.

Question 71

At Olive's Oranges customers may pick oranges from a 100-tree orchard at the price of 15¢ per orange.Olive's orchard currently produces 8,000 oranges annually.Olive estimates that installing a new irrigation system would increase her annual yield by 200 oranges,beginning next year.The irrigation system requires an immediate cost of $600.

Question 72

You have won a lottery prize that promises to pay you and your descendants $1,000 a year forever.If the lowest price you are willing to sell this perpetuity for is $20,000,then you must be assuming that the relevant interest rate is

A) 5%
B) 10%
C) 15%
D) 20%

Question 73

A risk premium is additional interest,in excess of the market rate,that a bondholder receives in order to compensate him for

A) systematic risk.
B) inflation.
C) default risk.
D) the bond discount.

Question 74

Your company is considering a project that generates a revenue stream of $250 a year for four years.If the market interest rate is 8%,then the present value of this project is approximately

A) $-171.97
B) $828.03
C) $1,000.00
D) $1,080.00

Question 75

Your company is considering a project that costs $1,000 up front.It generates a revenue stream of $250 a year for four years.The present value of this project is approximately

A) $0.00
B) $790.46
C) $-209.54
D) It cannot be determined with the information given.

Question 76

What claim is made by the Ricardian Equivalence Theorem? Why must it hold in a simple economy? If it fails to hold for our economy,what do economists expect the reason(s)may be?