Question 1

Investment is an addition to the capital stock.

Accepted Answer

Investment refers to the purchase of goods that are not consumed today but rather used in the future to create wealth. This includes investments in capital goods such as machines, equipment, and buildings, which add to the capital stock of an economy.

Question 2

Saving adds to a household's wealth.

Accepted Answer

When a household saves money, it increases its wealth by accumulating assets over time, such as savings accounts or investments. Thus, saving does add to a household's wealth.

Question 3

If an economy is operating on its production possibilities curve, production of more capital goods require that consumption be sacrificed.

Accepted Answer

The production possibilities curve shows the maximum combination of two goods that can be produced given the available resources and technology. Any point on the production possibilities curve represents an efficient use of resources. If an economy decides to produce more capital goods, it needs to allocate some of its resources previously used for producing consumption goods. This means sacrificing some of the consumption goods to produce more capital goods. Therefore, production of more capital goods require that consumption be sacrificed.

Question 4

An individual's wealth is the sum of all liabilities minus assets.

Accepted Answer

The statement is incorrect as an individual's wealth is the sum of all assets minus liabilities.

Question 5

The desire for more capital means an increase in the demand for loanable funds.

Accepted Answer

When a person or business desires more capital (money), they often turn to borrowing from financial institutions. This increases the demand for loanable funds.

Question 6

Oil and coal are exhaustible natural resources.

Accepted Answer

Oil and coal are formed over millions of years under specific geological conditions, which means they cannot be replenished in a short period of time. Therefore, they are classified as exhaustible natural resources.

Question 7

The amount by which the current price of a resource exceeds the minimum price necessary to make the resource available is economic rent.

Accepted Answer

Economic rent is the difference between the price at which a resource is sold and its minimum supply price. In other words, it is the surplus value gained from the use or ownership of a resource beyond what would have been earned at the minimum price necessary to get that resource.

Question 8

The supply curve of loanable funds is likely to be horizontal.

Accepted Answer

The supply curve of loanable funds is not likely to be horizontal because the supply of loanable funds is influenced by factors such as the interest rate, government policies, and the level of saving and investment in the economy. As the interest rate increases, the quantity supplied of loanable funds is likely to increase as people are more willing to save and lend at higher rates of return. Therefore, the supply curve of loanable funds slopes upwards, not horizontally.

Question 9

The interest rate is the payment made to people who agree to postpone their use of wealth, expressed as a percentage of the amount of wealth whose use is postponed.

Accepted Answer

The statement accurately defines the concept of interest rate.

Question 10

If consumption exceeds income, saving takes place.

Accepted Answer

If consumption exceeds income, saving cannot take place as there is no surplus left to save. In fact, it would lead to borrowing or a decrease in savings.

Question 11

A bond is essentially the same thing as a stock.

Accepted Answer

A bond and a stock are not the same thing. A bond represents a debt that is owed by a corporation, government, or other entity, while a stock represents ownership or equity in a corporation.

Question 12

The present value (P₀)of any payment to be received n periods from now (P_n), if r is the interest rate, is P₀ = P_n/ (1 + r)ⁿ.

Accepted Answer

This is the formula for present value, also known as discounting future cash flows.

Question 13

Payments that are distributed over time are linked to one another by the interest rate.

Accepted Answer

This is true because the interest rate determines the cost of borrowing money over time, and therefore impacts the size and timing of payments.

Question 14

The substitution effect of a higher interest rate boosts saving.

Accepted Answer

When the interest rate increases, the opportunity cost of spending money today as opposed to saving it and earning interest increases. This makes saving relatively more attractive, leading to an increase in saving. This is known as the substitution effect of a higher interest rate.

Question 15

Saving is income not spent on consumption.

Accepted Answer

Saving is the portion of income that is not spent on consumption. It can be kept in a savings account or invested in various assets.

Question 16

If consumption exceeds income, dissaving takes place.

Accepted Answer

Dissaving occurs when consumption exceeds income, meaning that individuals are either tapping into their savings or borrowing money to maintain their current level of consumption.

Question 17

In general, high interest rates make lending less attractive.

Accepted Answer

High interest rates make borrowing less attractive due to higher costs, but they make lending more attractive because lenders can earn more interest on the money they lend out.

Question 18

In the short run capital is generally treated as a variable factor.

Accepted Answer

In the short run, capital is generally treated as a fixed factor, while labor is considered a variable factor.

Question 19

The supply curve of land is a horizontal line.

Accepted Answer

The supply curve for land is generally upward sloping, meaning as the price of land increases, more landowners are willing to sell their land. However, in the short-run, the supply of land may be fixed, leading to a perfectly inelastic supply curve.

Question 20

The interest rate is determined in the market for loanable funds.

Accepted Answer

The market for loanable funds determines the interest rate based on the supply of and demand for funds. The interest rate serves as the price of borrowing and lending money, and it can fluctuate depending on factors such as inflation, government policies, and the overall state of the economy.

Quiz 13: Interest Rates and the Markets for Capital and Natural Resources