Deck 18: Rent, Interest, and Profit

Question 1

The demand side, not supply, is the major factor determining how high land's rent will be.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

The present value of $4,000 deposited today at 8 percent interest is $5,038.85 three years from now.

Answer 3

False

Question 4

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

Question 5

The basic function of profits and losses is to allocate society's scarce resources to their highest valued uses.

Question 6

Economic profits are the salaries received by the hired managers of business corporations.

Question 7

Different rents on land reflect differences in the marginal revenue product of land.

Question 8

The future value of $3,000 deposited today at 5 percent interest is $3,646.52 four years from now.

Question 9

The time-value of money refers to the idea that a given amount of money is more valuable to a person the sooner it is received.

Question 10

Present value is the amount to which some current amount of money will grow as interest compounds over time.

Question 11

Reducing the payment of rent to landowners will decrease the quantity of land supplied.

Question 12

Rent performs an incentive function, but no rationing function.

Question 13

Other things equal, the shorter the loan period and the larger the loan size, the higher is the interest rate charged by the lender.

Question 14

Money is an economic resource referred to as capital.

Question 15

As viewed by society, economic rent is not a cost but rather a surplus payment.

Question 16

Economic rent is the payment made to a resource that has a perfectly inelastic demand curve.

Question 17

The supply of loanable funds is perfectly elastic.

Question 18

The free-land era of U.S. history reflected a situation in which the quantity of land available at a zero price exceeded the quantity of land demanded.

Question 19

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

Question 20

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

Question 21

The risk that the firm's employees might get hurt while working is an example of the uninsurable risks faced by an entrepreneur.

Question 22

Other things equal, short-term loans usually have lower rates of interest than do long-term loans.

Question 23

For a given future value and interest rate, the discounted present value will become larger as the time period gets longer.

Question 24

In time-value of money calculations, discounting is the reverse of compounding.

Question 25

The demand curve for loanable funds illustrates the behavior of lenders or savers.

Question 26

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.

Question 27

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

Question 28

A decrease in the supply of loanable funds would tend to lower the interest rate.

Question 29

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

Question 30

An increase in the expected rates of return on investments would most likely increase the supply of loanable funds.

Question 31

Investment and R&D decisions by firms are based on nominal interest rates, not real interest.

Question 32

If people became thriftier and saved more, the loanable funds theory predicts that the equilibrium interest rate would decrease.

Question 33

The quantity of loanable funds supplied is inversely related to the interest rate.

Question 34

For a given future value, the higher the interest rate is, the higher the present value will be.

Question 35

Usury laws will result in a shortage of loanable funds and nonmarket rationing in credit markets.

Question 36

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

Question 37

Normal profit is considered an economic cost.

Question 38

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

Question 39

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.

Question 40

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

Question 41

Refer to the table representing Darcy's bank account. If she deposited $2,000 into her account at the beginning of year 1 and made no further deposits or withdrawals, which cell(s)represents the future value(s)of the initial deposit if the money remains in the account for three years?

A)cell B only
B)cell A only
C)cells A and D
D)cells B and C

Question 42

Profits account for a smaller share of total U.S. income than rents.

Question 43

Refer to the table, in which the values for columns (2)through (5)are in acres. If the relevant columns are (1), (2), and (4), land rent will be

A)$100 per acre.
B)$300 per acre.
C)$200 per acre.
D)$400 per acre.

Question 44

If the interest rate is 15 percent, what is the future value of $10,000 two years from now?

A)$13,225
B)$225
C)$13,000
D)$7,576

Question 45

Refer to the table representing Kara's bank account. If the $3,000 was deposited into her account at the beginning of year 1 and no further deposits or withdrawals were made, the value for cell E.

A)cannot be determined.
B)is $3,472.88.
C)is $3,165.38.
D)is $3,307.50.

Question 46

Suppose a person pays $80 of annual interest on a loan that has a 5 percent annual interest rate. The loan amount is

A)$400.
B)$1,600.
C)$160.
D)$85.

Question 47

Refer to the table representing Darcy's bank account. If she deposited $2,500 into her account at the beginning of year 1 and made no further deposits or withdrawals, the $3,149 value at the end of year 3 represents the

A)discounted value of the $2,500 deposit made at the beginning of year 1.
B)present value of the $2,500 deposit made at the beginning of year 1.
C)future value of the $2,500 deposit made at the beginning of year 1.
D)present value of the interest earned over the three-year period.

Question 48

Refer to the table, in which the values for columns (2)through (5)are in acres. If the relevant columns are (1), (2), and (3), land rent will be

A)$100 per acre.
B)$400 per acre.
C)$200 per acre.
D)$300 per acre.

Question 49

Suppose that interest payments are $280 per year on a $4,000 loan and $274 per year on an $5,479 loan. The interest rates on the two loans are

A)decrease from G to F.
B)increase from E to F.
C)increase from B to C.
D)decrease from B to A.

Question 50

On January 1, 2019, Alex deposited $3,500 into a savings account that pays interest of 8 percent, compounded annually. If he makes no further deposits or withdrawals, how much will Alex have in his account on December 31, 2021 (3 years later)?

A)$4,340.
B)$4,409.
C)$3,780.
D)$4,478.

Question 51

Refer to the table, in which the values for columns (2)through (5)are in acres. If the relevant columns are (1), (2), and (5), land rent will be

A)$200 per acre.
B)$0 per acre.
C)$300 per acre.
D)$100 per acre.

Question 52

Refer to the table representing Kara's bank account. If the $4,000 was deposited into her account at the beginning of year 1 and no further deposits or withdrawals were made, the value for cell B

A)cannot be determined.
B)$4,494.40.
C)$4,294.40.
D)$4,734.40.

Question 53

Refer to the table representing Kara's bank account. If the $4,000 was deposited into her account at the beginning of year 1 and no further deposits or withdrawals were made, the interest rate Kara is receiving on her account

A)cannot be determined.
B)is 6.00 percent.
C)is 12.50 percent.
D)is 19.00 percent.

Question 54

Refer to the table representing Darcy's bank account. If she deposited $4,500 into her account at the beginning of year 1 and made no further deposits or withdrawals, what is the value for cell D?

A)$93.20
B)$270
C)$275
D)It cannot be determined.

Question 55

Labor's share of income earned by Americans is smaller than the share of capital.

Question 56

Refer to the table representing Darcy's bank account. If she deposited the $2,000 into her account at the beginning of year 1 and made no further deposits or withdrawals, how much interest would Darcy receive in Year 2 only?

A)$100
B)$105.00
C)$200
D)$205.00

Question 57

Refer to the table representing Darcy's bank account. If she deposited the $4,500 into her account at the beginning of year 1 and made no further deposits or withdrawals, what interest rate is being paid on Darcy's account?

A)2.30 percent
B)2 percent
C)6.10 percent
D)4 percent

Question 58

Refer to the table representing Kara's bank account. If the $5,000 was deposited into her account at the beginning of year 1, the value for cell A is

A)$4.
B)$200.
C)$20.
D)$208.00.

Question 59

If Kelly deposits $10,000 into an account that pays 8 percent interest, compounded annually, and she makes no further deposits or withdrawals, how much will Kelly have in her account at the end of 5 years?

A)$14,000
B)$14,482
C)$14,693
D)$15,000

Question 60

Refer to the table representing Kara's bank account. If the $3,000 was deposited into her account at the beginning of year 1 and no further deposits or withdrawals were made, the value for cell D

A)cannot be determined.
B)is $472.88.
C)is $165.38.
D)is $307.50.

Question 61

To say that land rent performs no incentive function means that

A)higher rental payments will not bring forth a larger quantity of land.
B)rent is not a cost to specific firms, but it is a cost from the standpoint of the economy as a whole.
C)rent does not allocate land in terms of productive efficiency.
D)rent tends to allocate land into the most productive uses.

Question 62

Refer to the diagram. If demand is D ₂, a tax of $ X per acre will

A)encourage the substitution of land for other productive resources.
B)lower the cost of land to individual farmers.
C)reduce the demand for land to, say, D₃ or D₄.
D)not affect the quantity of land available to society.

Question 63

Refer to the diagrams. Assume that only wheat can be grown on the three grades of land shown in Figures (a), (b), and (c). Also assume that identical amounts of labor, capital, and other needed inputs are used in farming each grade of land. On the basis of these three figures, we

A)the land shown in both Figures (a)and (b)is a "free good."
B)the land shown in Figure (a)only is a "free good."
C)the land shown in all three figures is a "free good."
D)land is not a "free good" in any of the three figures.

Question 64

The XYZ Corporation determines it can make a real (inflation-adjusted)return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the

A)investment will be profitable.
B)investment will be unprofitable.
C)real rate of interest is 4 percent.
D)real rate of interest is 2 percent.

Question 65

Suppose you borrow $1,000 for a year and the lender discounts $100 of interest at the time the loan is made (giving the borrower only $900). The interest rate on this loan is about

A)10.0 percent.
B)11.1 percent.
C)9.0 percent.
D)19.0 percent.

Question 66

Refer to the diagram. Land

A)will cease to be used in production if demand falls below D₄.
B)would be a free resource if demand were D₄ or less.
C)would be an economic (scarce)resource in the case of all four demand curves.
D)would be a free resource in the case of all four demand curves.

Question 67

Landowners will not receive any rent so long as

A)there is any tax on land.
B)the supply and demand curves for land intersect.
C)the supply curve of land is perfectly inelastic.
D)the supply curve lies entirely to the right of the demand curve.

Question 68

The total supply of land is

A)upsloping.
B)perfectly elastic.
C)perfectly inelastic.
D)greater in the short run than in the long run.

Question 69

The incentive function of prices

A)indicates that price increases bring forth more of that resource.
B)is the idea that competitive markets will always clear.
C)applies to all resources.
D)only applies to land.

Question 70

If the interest rate is 11 percent, what is the future value of $6,000 three years from now?

A)$8,206
B)$7,980
C)$7,500
D)$8,460

Question 71

Which of the following statements is correct?

A)Economic profits can properly be regarded as the salaries received by the hired managers of corporations.
B)Economic rent is a price paid for productive land resources whose supply is perfectly inelastic.
C)Economic profits would be nonexistent in a dynamic, purely competitive economy.
D)Economic, or pure, profit is the minimum return that entrepreneurs must receive to continue in a particular line of production.

Question 72

For all practical purposes, the supply of land is

A)almost perfectly inelastic.
B)negatively sloped.
C)relatively elastic.
D)perfectly elastic.

Question 73

In year 1 the price level is constant and the nominal rate of interest is 10 percent. But in year 2 the inflation rate is 6 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must

A)rise by 16 percentage points.
B)rise by 6 percentage points.
C)fall by 6 percentage points.
D)rise by 12 percentage points.

Question 74

Economic rent, or pure rent, is

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.

Question 75

Suppose you deposit $3,000 in a bank that pays 5 percent interest compounded twice a year. The actual annual interest rate you receive is

A)5 percent.
B)5.06 percent.
C)5.18 percent.
D)6 percent.

Question 76

Economic rent refers to the price paid for land and other natural resources that

A)are fixed in total supply.
B)vary directly with their market prices.
C)vary inversely with their market prices.
D)are available in nearly unlimited quantities.

Question 77

The demand for farmland will increase if

A)the demand for food decreases.
B)technological advances make land more productive.
C)the price of farm labor increases and the output effect exceeds the substitution effect.
D)the supply of farmland increases.

Question 78

The rent paid for the pasture land used to graze cattle would increase if

A)the productivity of the land increased.
B)people decided to consume more beef.
C)oil deposits were discovered on the land.
D)any of these occurred.

Question 79

Suppose you borrow $500 and agree to pay this $500 plus $75 of interest at the end of a year. The interest rate is

A)10 percent.
B)15.0 percent.
C)12.5 percent.
D)7.5 percent.

Question 80

Which of the following is correct?

A)Although land has no production cost from society's viewpoint, rental payments are costs to individual producers.
B)Land rent is not a cost to either society or individual producers.
C)Although land rent is a cost from society's viewpoint, it is not a cost to individual producers.
D)Land rent is a cost to both society and individual producers.