Deck 14: Investment, the Capital Market, and the Wealth of Nations

Question 1

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.

Answer 1

B

Question 2

If Susan 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.

Answer 2

C

Question 3

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.

Answer 3

D

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

Higher real interest rates indicate that people who are saving now will be able to purchase more in the future. This statement is

A)true.
B)always false.
C)never true.
D)either true or false, depending on the rate of inflation.

Question 19

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.

Question 20

If Michael 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.

Question 21

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

Question 22

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.

Question 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.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

If the interest rate is 1 percent, the net present value of $1,000 to be received two years from now is

A)$980.30.
B)$826.44.
C)$1,000.
D)$1,020.

Question 28

If the interest rate is 10 percent, the current value of $400 to be received two years from now is

A)$330.58.
B)$363.64.
C)$376.77.
D)$389.48.

Question 29

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.

Question 30

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

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

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.

Question 37

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.

Question 38

Assume that Bill is interested in buying a computer. Right now, interest rates are very high, but he believes they will soon start to fall. If Bill purchases the computer 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.

Question 39

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.

Question 40

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.

Question 41

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.

Question 42

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.

Question 43

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

Question 44

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

Question 45

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

Question 46

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.
B)assembly-line workers to be lower than that of persons in other professions.
C)assembly-line workers and that of persons in other professions to be nonetheless equal.
D)both assembly-line workers and persons in other professions to be unaffected by the subjective preferences of investors.

Question 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.

Question 48

Would it be feasible for a person earning $75,000 per year over a 40-year time period to save enough to become a millionaire?

A)No; even if the person saved $10,000 per year (more than 10 percent of their income), they would have only $400,000 after 40 years.
B)Yes; if a person saved $5,000 per year (6.7 percent of their income) and invested it in a diverse stock portfolio earning a real annual rate of return of 7 percent (the long-term average of the stock market), the person would be a millionaire after 40 years.
C)No; unless they were extremely fortunate, the person would have to save approximately $50,000 per year (two-thirds of their income) in order to become a millionaire.
D)Yes: but only if they were able to earn an annual real rate of return of at least 15 percent, which is well above the long-term average of stocks.

Question 49

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.

Question 50

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.

Question 51

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.

Question 52

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.

Question 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)increases; increases
D)increases; is uncertain

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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

Question 58

Stacy is contemplating investing $10,000 in a gizmo machine. The investment 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

Question 59

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.

Question 60

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.

Question 61

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.

Question 62

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.

Question 63

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

Question 64

In a world of imperfect knowledge and uncertainty, the return to investors who undertake projects that increase the value of resources is called

A)economic profit.
B)accounting profit.
C)the inflationary premium.
D)the real interest rate.

Question 65

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.

Question 66

Ryan must decide whether or not to go to law school. He knows that he can earn $50,000 per year with his bachelor's degree, but he expects to earn a minimum of $58,000 per year with the law degree. An economist would advise him to

A)take the job that just requires the bachelor's degree.
B)go to law school, but only if he can finish within 3 years.
C)go to law school.
D)consider costs, revenues, and any nonmonetary job considerations he might have also.

Question 67

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

Question 68

In a world of perfect knowledge and communication, competitive markets, and no uncertainty,

A)there would be neither economic profits nor economic losses.
B)economic profits would exist, but losses would be eliminated.
C)economic profits and losses would exist to a greater degree than presently is the case.
D)there would be economic profits; there is not enough information to comment on economic losses.

Question 69

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.

Question 70

A student entering college wants to assess the value of investing in human capital. To determine whether the investment will be profitable, she should compare the

A)value of her total expected future earnings with the total of her direct and indirect costs of college.
B)present discounted value of future earnings with the total of her direct and indirect costs of her education.
C)present discounted value of her additional future earnings as the result of the college education with the present discounted value of only her direct costs of college.
D)present discounted value of her additional future earnings as the result of the college education with the present discounted value of her direct and indirect costs of college.

Question 71

An investment in human capital will be financially profitable if the present discounted value of the future earnings generated by the investment exceeds the

A)present discounted value of both the direct and indirect costs of the investment.
B)dollar amount of the direct and indirect costs of the investment.
C)present discounted value of only the direct costs of the investment.
D)present discounted value of only the indirect costs of the investment.

Question 72

Physical and human capital investments are

A)different in that the opportunity for economic profit is present for physical capital but not human capital decisions.
B)different in that human capital decisions do not involve future income considerations while physical capital investments do.
C)similar in that non-pecuniary considerations do not influence the choices of utility-maximizing decision makers in either case.
D)similar in that both involve forgoing current income (and consumption) with the objective of increasing one's future income (and consumption).

Question 73

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.

Question 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.

Question 75

Which one of the following economists is best known for his view that innovation by entrepreneurs is the major source of economic growth?

A)Joseph Schumpeter
B)Karl Marx
C)Joan Robinson
D)Alfred Marshall
E)David Ricardo

Question 76

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.

Question 77

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.

Question 78

Entrepreneurship is characterized by

A)the ability to visualize and undertake economically beneficial projects.
B)originality and innovation.
C)leadership and discovery.
D)all of the above.

Question 79

Economic profit that stems from entrepreneurship reflects

A)market power achieved through the use of public policy that restricts entry into a market.
B)the ability of some individuals to recognize and undertake economically beneficial projects that have gone unnoticed by others.
C)windfall gains due to unanticipated changes in weather.
D)the influence of special interest groups on the market process.

Question 80

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.