Question 1

The term "present value" refers to the

Accepted Answer

Present value refers to the value today of a payment or receipt to occur in the future. This is important in calculating the time value of money, where the value of money today can be compared to its value in the future, taking into account inflation and other factors. Choices A, B, C, and E are incorrect as they do not accurately describe present value.

Question 2

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 firms to increase their desired investment,

Accepted Answer

B

Question 3

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 is usually plotted with the interest rate on the vertical axis because as the interest rate increases, individuals and firms are incentivized to save more due to the higher return they will receive on their savings. As a result, the quantity of desired saving in the economy will increase at higher interest rates, leading to an upward sloping supply curve.

Question 4

When we consider any future stream of benefits, and we seek to determine its value today, we
That steam of benefits using the market interest rate.

Accepted Answer

To determine the present value of future benefits, we need to discount those benefits using the market interest rate. Discounting the future cash flows to its present value is called discounting. Therefore, the correct answer is E, discount.

Question 5

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. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline \text { Number of } & \text { Annual MRP } \
\text { Sew ing Machines } & \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}\
\text { TABLE 15- } 2
\end{array}$$
-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

When the interest rate rises, the cost of capital increases, making it less profitable to hold as many machines. The firm will reduce its capital stock to maintain optimal profitability.

Question 6

A firm's demand for physical capital leads to its and a household's supply of saving leads to its .

Accepted Answer

A firm's demand for physical capital refers to the demand for financial capital to invest in new equipment, buildings, or other productive assets. On the other hand, a household's supply of saving refers to the supply of financial capital available for investment. Therefore, the best choice is E - demand for financial capital and supply of financial capital. The other options (A, B, C, and D) are not accurate as they do not reflect the relationship between a firm's demand for physical capital and a household's supply of saving.

Question 7

In any given period, a firm's flow of investment demand is determined by

Accepted Answer

A firm's flow of investment demand in a given period is determined by the change in the firm's optimal capital stock. This is because a firm's investment demand depends on the level of capital stock that maximizes its profits. As the optimal capital stock changes due to changes in market conditions, technology, or other factors, the firm's flow of investment demand will also change to reflect this new optimal level. Option B is incorrect because it refers to the rate of change of investment demand, which is not the same as the level of investment demand. Option C is incorrect because it refers to the change in the optimal flow of investment, which is not the same as the flow of investment demand itself. Option D is incorrect because it refers to the rate of change of the capital stock in the entire economy, which could affect a firm's investment decisions indirectly, but is not the primary determinant of the firm's investment demand.

Question 8

The present value of a given future stream of benefits will be lower when the benefits are and the interest rate is .

Accepted Answer

The present value decreases when benefits are more distant in time and the interest rate is higher, as the discounting effect is stronger.

Question 9

In general, a profit- maximizing firm will purchase a piece of capital equipment if the

Accepted Answer

A profit-maximizing firm will purchase a piece of capital equipment if the present value of the stream of future MRPs exceeds the purchase price. This is because the firm wants to maximize its profits and purchasing the equipment will increase its productivity and lead to higher revenue in the future. The present value is used because it accounts for the time value of money and discounts the future MRPs to their present value, allowing the firm to compare the purchase price to the value of the future benefits.

Question 10

Suppose a new piece of capital equipment will deliver a stream of MRPs of $1000 each year for 3 years (beginning one year from today). What is the present value of this stream of benefits, assuming that the annual rate of interest is 5 percent?

Accepted Answer

The answer of Suppose a new piece of capital equipment...

Question 11

Consider a manufacturing firm that contemplates buying a lathe with an annual MRP of $1000 (beginning one year from now). Suppose the interest rate is 5% per year. If the lathe is obsolete after the fourth MRP is generated, the maximum the firm is prepared to pay now for the lathe is

Accepted Answer

The answer of Consider a manufacturing firm that contemplates buying...

Question 12

Households' supply of financial capital is derived from

Accepted Answer

Households' supply of financial capital comes from their savings. They save a portion of their income, which can then be invested in financial assets such as stocks and bonds, providing firms with the financial capital they need to invest in physical capital.

Question 13

The textbook presentation of present value involves an important simplification of reality in order to analyze the concept. That simplification is in assuming that

Accepted Answer

The answer of The textbook presentation of present value involves...

Question 14

Suppose the nominal interest rate is 10 percent. The rate of inflation has been 4 percent and is expected to continue at 4 percent in the future. The real interest rate, which determines the firm's decision to purchase capital, is therefore

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 10% - 4% = 6% 
Therefore, the real interest rate is 6%.

Question 15

Suppose you are working as an intern at a large financial firm with an annual salary of $30 000, but you are guaranteed a salary increase to $85 000 at the end of the internship. In general, we can expect that

Accepted Answer

In anticipation of higher future income, individuals may reduce current savings and increase current consumption, leading to a decrease in the supply of financial capital to the economy.

Question 16

In general, a profit- maximizing firm will purchase a unit of capital as long as its purchase price is

Accepted Answer

The answer of In general, a profit- maximizing firm will...

Question 17

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 and an increase in the amount of investment.

Question 18

FIGURE 15- 2
-Refer to Figure 15- 2. Suppose the economy begins at point E1. If technology changes in a way that increases the marginal product of capital, which movement best depicts the change in equilibrium in the market for financial capital?

Accepted Answer

The increase in the marginal product of capital will lead to an increase in the demand for capital, which will shift the equilibrium to the right, from E1 to E4.

Question 19

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. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline \text { Number of } & \text { Annual MRP } \
\text { Sew ing Machines } & \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}\
\text { TABLE 15- } 2
\end{array}$$
-Refer to Table 15- 2. If the annual interest rate is 4%, what is the present value of the 11th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts 2 years.

Accepted Answer

The present value (PV) of the 11th sewing machine's MRP is calculated using the formula for the present value of an annuity: PV = MRP / (1 + r)^1 + MRP / (1 + r)^2, where MRP is $1800 and r is 0.04. Calculating gives: PV = 1800 / 1.04 + 1800 / (1.04)^2 = $3395.

Question 20

To determine an individual profit- maximizing firm's maximum purchase price for a unit of capital it is necessary to

Accepted Answer

The individual profit-maximizing firm's maximum purchase price for a unit of capital can be determined by computing the present value of the stream of benefits produced by the unit of capital. This takes into account both the future benefits and the time value of money, which is reflected in the interest rate. Option A is incorrect because computing the rental price of the unit of capital is not sufficient to determine the maximum purchase price. Option B is also incorrect because it only considers the future value of benefits without considering the time value of money. Option C is not directly related to determining the maximum purchase price. Option E is also incorrect as the firm's decision should not solely rely on what competing firms are willing to pay.

Quiz 15: Interest Rates and the Capital Market

The term "present value" refers to the

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 firms to increase their desired investment,

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

When we consider any future stream of benefits, and we seek to determine its value today, we That steam of benefits using the market interest rate.