Question 1

The Canadian government introduced the Tax- Free Savings Account (TFSA)in 2009,which allows Canadians to earn tax- free investment returns on a limited amount of savings each year.What is the underlying goal of such a government policy?

Accepted Answer

The underlying goal of the TFSA policy is to increase desired saving of Canadian households by providing them with a tax-free investment option, which would incentivize them to save more. This increased saving can then be used for investments and other economic activities, leading to economic growth.

Question 2

If the annual interest rate is 6%,the present value of $100 paid 3 years from now is

Accepted Answer

D

Question 3

Consider a firm making a decision to purchase a unit of capital - let's say,a forklift.In terms of capital markets,which of the following would we consider to be the opportunity cost of the forklift ?

Accepted Answer

The opportunity cost of purchasing a forklift would be the interest that the firm could earn by investing the same amount of money in a bond instead. This is because the firm could potentially earn a return on their investment by investing in a bond, and purchasing the forklift would mean that they are sacrificing this potential return. The other choices - A, B, C, and E - do not represent the opportunity cost of the forklift, but rather other factors such as future revenue, resale value, potential revenue from the forklift, and purchase price respectively.

Question 4

The law of diminishing marginal returns tells us that the more capital the firm uses,the

Accepted Answer

The law of diminishing marginal returns states that as a firm uses more and more of a variable input (such as capital), while holding all other inputs constant, the marginal product of that variable input will eventually begin to decline. This means that the additional output produced by each additional unit of capital will be lower than the previous unit, and therefore the marginal revenue product (MRP) of the capital will decrease. Therefore, Choice C is correct in stating that the more capital the firm uses, the lower is the MRP of the firm's capital.

Question 5

How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200,5 years from now?

Accepted Answer

The answer of How much would you have to deposit...

Question 6

FIGURE 15- 2
-Refer to Figure 15- 2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages individuals to increase their desired saving,

Accepted Answer

When individuals increase their desired saving, the supply of financial capital increases, leading to a lower equilibrium interest rate. This lower interest rate encourages more investment, thus increasing the amount of investment.

Question 7

In a competitive market for capital equipment,the purchase price of a piece of capital equipment is predicted to be

Accepted Answer

In a competitive market for capital equipment, the purchase price of a piece of capital equipment is predicted to be the present value of its stream of MRPs. This is because buyers will consider the future income generated by the equipment and discount it back to the present to determine its current value. Therefore, the present value of its stream of MRPs is the most suitable option.

Question 8

If the annual interest rate is 10%,the present value of $200 paid 3 years from now is

Accepted Answer

To find the present value, we use the formula:

Present value = Future value / (1 + r)^n

where r is the annual interest rate and n is the number of years.

Plugging in the values, we get:

Present value = $200 / (1 + 0.10)^3  = $150.26 (rounded to the nearest cent)

Therefore, the best choice is B.

Question 9

An economy's upward- sloping supply curve of desired saving is usually plotted with on the vertical axis.

Accepted Answer

The supply curve of desired saving represents the amount of saving that households and firms are willing to undertake at different interest rates. Therefore, the vertical axis represents the interest rate, which is the cost of holding savings. As the interest rate increases, it becomes more expensive to save, and the quantity of saving decreases. Similarly, as the interest rate decreases, it becomes cheaper to save, and the quantity of saving increases. Therefore, the supply curve of desired saving is upward-sloping, indicating a positive relationship between the interest rate and the quantity of saving.

Question 10

The diagram below shows the market for financial capital for a closed economy.
  FIGURE 15- 3
-Refer to Figure 15- 3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point D?

Accepted Answer

The answer of The diagram below shows the market for...

Question 11

Economists use the concept of present value to determine

Accepted Answer

Present value is the concept used to determine the value of a payment or a stream of payments in the future, in terms of its discounted value today. It is used in financial analysis, investment decisions, and capital budgeting to assess the profitability and feasibility of a project or an investment. The present value is calculated by discounting the future cash flows by a rate that reflects the time value of money and the risk associated with the investment. The higher the discount rate, the lower the present value, and vice versa. Therefore, the present value captures the opportunity cost of the capital invested today, and the expected return on that investment.

Question 12

Consider the flow of investment and saving in a small economy.Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion.Now suppose,all else remaining equal,that there is sustained population growth over several years.What will be the effect in the capital market?

Accepted Answer

The answer of Consider the flow of investment and saving...

Question 13

Carol can borrow $13 000 to buy a new car from the bank at 8% for five years,or from her friend Eric,who is willing to lend her the money at 7% for five years.If Carol accepts Eric's offer,he can expect a lump- sum repayment in five years of approximately

Accepted Answer

The lump-sum repayment can be calculated using the formula for compound interest: A = P(1 + r)^n, where P is the principal amount ($13,000), r is the annual interest rate (7% or 0.07), and n is the number of years (5). Plugging in the values, A = 13000(1 + 0.07)^5 ≈ $18,233.

Question 14

It is useful to think of physical capital in terms of a variable,.

Accepted Answer

Physical capital is a stock variable because it represents the accumulated investment in physical equipment, machines, buildings, and other tangible assets. Any additional investments add to the current stock of physical capital.

Question 15

The table below shows the payments at the end of each year from three different assets. $$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \
\hline \text { A } & \$ 1000 & \$ 1000 & \$ 1000 & \$ X \
\hline \text { B } & \$ 1000 & \$ 0 & \$ 2000 & \$ Y \
\hline \text { C } & \$ 0 & \$ 2000 & \$ 1000 & \$ Z \
\hline \text { Interest Rate } & 5 \% & 6 \% & 5 \% & 7 \% \
\hline
\end{array}$$ TABLE 15- 1
-Refer to Table 15- 1.A,B,and C are possible investment opportunities that expire at the end of Year 4,each offering a stream of payments as indicated in the table.The interest rates in each year are also specified in the table.Assuming that X,Y,and Z are zero,which investment is the most valuable if an investor contemplates them at the beginning of Year 1?

Accepted Answer

Investment A is the most valuable because it provides consistent payments each year, which can be discounted back to the present value using the given interest rates. The consistent payments make it more valuable compared to the other options with zero payments in some years.

Question 16

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing. $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Number of } \
\text { Sewing Machines }
\end{array} & \text { Annual MRP } \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}$$ TABLE 15- 2 
-Refer to Table 15- 2.Suppose the interest rate is 4%,the purchase price of a sewing machine is $3000,and the firm is holding its optimal capital stock.If the interest rate rises to 7%,how will this firm adjust its capital stock?

Accepted Answer

The answer of The firm in the table below produces...

Question 17

The present value of a piece of capital equipment that generates future MRPs will increase if

Accepted Answer

According to the time value of money principle, the present value of future cash flows decreases as the interest rate increases. Therefore, if the interest rate decreases, the present value of the capital equipment and its future MRPs will increase.

Question 18

The Canadian government introduced the Tax- Free Savings Account (TFSA)in 2009,which allows Canadians to earn tax- free investment returns on a limited amount of savings each year.One objective is to increase the total supply of saving in the economy.Why might a policy such as this not have the desired effect on the economy?

Accepted Answer

The funds deposited to a TFSA could simply be substituted from other saving that would happen anyway. This means that individuals may not actually increase their total savings, but rather allocate their existing savings differently. Therefore, the TFSA may not have the desired effect on the economy of increasing the total supply of savings.

Question 19

How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 each year for the next 2 years,beginning one year from today?

Accepted Answer

This is a present value of an annuity due problem. We need to find the present value of the annuity due that pays $200 each year for two years beginning one year from today. We can use the formula:
PV = PMT * ((1 - (1 + r)^-n) / r) * (1 + r)
where PV is the present value, PMT is the payment amount ($200), r is the interest rate per period (8% per year), and n is the number of periods (2).

Plugging in the values, we get:
PV = $200 * ((1 - (1 + 0.08)^-2) / 0.08) * (1 + 0.08)
PV = $356.66

Therefore, the amount that needs to be deposited today is $356.66. The correct answer is (C).

Question 20

If the annual interest rate is currently 3.5%,Joan is a $1000 payment in exactly two years.

Accepted Answer

The answer of If the annual interest rate is currently...

Quiz 15: Interest Rates and the Capital Market

The Canadian government introduced the Tax- Free Savings Account (TFSA) in 2009,which allows Canadians to earn tax- free investment returns on a limited amount of savings each year.What is the underlying goal of such a government policy?