Question 1

The &#34;rate of return&#34; refers to:&#10;A)the increase in future output made possible by investing one unit of current output in capital accumulation.&#10;B)the dividend payments made on corporate issued stock.&#10;C)the increase in current output made possible by investing in units of future output in capital accumulation.&#10;D)the rate at which capital depreciates.

Accepted Answer

The "rate of return" refers to the increase in future output made possible by investing one unit of current output in capital accumulation. It measures the profitability of an investment in terms of the increase in future output that can be achieved. It is often used to compare different investment opportunities and to make investment decisions. Options B, C, and D do not accurately describe the concept of "rate of return."

Question 2

A rise in interest rates leads to:&#10;A)an increase in the PDV of profits from owning a machine.&#10;B)a decrease in the PDV of profits from owning a machine.&#10;C)offsetting the effects on the costs and benefits of owning a machine.&#10;D)no effect on either the costs or benefits of owning a machine.

Accepted Answer

A rise in interest rates increases the cost of borrowing, which in turn decreases the present discounted value (PDV) of profits from owning a machine. Therefore, option B, which states that a rise in interest rates leads to a decrease in the PDV of profits from owning a machine, is the correct answer.

Question 3

Adding uncertainty to future consumption will tend to increase savings providing:&#10;A)  &#10;B)  &#10;C)  &#10;D)

Accepted Answer

11ea69cd_9b54_814e_b0c5_0df4b47ce12d_TB5166_11

Question 4

A firm that is maximizing its profits will keep renting machines up to the point where:&#10;A)the marginal productivity of a capital is maximized.&#10;B)the marginal value product of machines is maximized.&#10;C)the marginal value product of machines is equal to the market rental rate for machines.&#10;D)the machine's market rental rate is minimized.

Accepted Answer

When a firm rents a machine, it is likely to achieve maximum profits as long as the additional value that the machine adds to the production process (i.e. the marginal value product) is equal to the cost of renting the machine (i.e. the market rental rate). At this point, any additional rental cost would exceed the additional revenue generated by the machine, resulting in lower profits. Therefore, the firm will rent machines up to the point where the marginal value product of machines is equal to the market rental rate for machines (i.e. choice C).

Question 5

A consumption-based theory of the determination of the real interest rate is based on the assumption that:&#8203;&#10;A)&#8203;a rise in the real interest rate will increase current consumption.&#10;B)&#8203;the real interest rate must adjust to make people willing to experience changing consumption levels over time.&#10;C)&#8203;the real interest rate is determined by the supply and demand for investment and is therefore unaffected by consumption decisions.&#10;D)the real interest rate must be positive.

Accepted Answer

A consumption-based theory of the determination of the real interest rate posits that the real interest rate has to adjust so as to make individuals willing to experience changes in their consumption levels over time. In other words, this theory suggests that people determine how much they consume and save, based on expected future income and current interest rate. Thus, the theory suggests an intertemporal tradeoff between consumption and investment that is determined by the real interest rate. Therefore, choice B is the correct answer. Choice A is incorrect because an increase in the real interest rate is likely to reduce current consumption rather than increase it. Choice C is incorrect because a consumption-based theory suggests that the real interest rate is not determined by the supply and demand for investment alone. Finally, choice D is incorrect because the statement is a tautology that does not add any meaningful insight into the consumption-based theory of interest rate determination.

Question 6

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (c₁ and c₂).Any funds not spent in period 1 will earn interest (at the rate r)which will increase purchasing power in period 2.Consider four possible reactions to an increase in r:
I.c₁ increases.
II.c₁ decreases.
III.c₂ increases.
IV.c₂ decreases.
Which of these is consistent with the hypothesis that both c₁ and c₂ are normal goods?

A)I,II,III,and IV
B)I,II,and IV,but not III
C)I,III,and IV,but not II
D)I,II and III,but not IV

Accepted Answer

If both c₁ and c₂ are normal goods, then as interest rates increase, the individual would want or be able to spend more in both periods, so choices I, II, and III are consistent with this. However, if c₂ were an inferior good (meaning demand decreases as income or purchasing power increases), then choice IV would be inconsistent with the hypothesis. Therefore, since all four choices are consistent with the hypothesis that both goods are normal, the answer is D.

Question 7

The present value of $1 payable in two years is: A)$1. B)$1/(1 + 2r). C)$1/(1 - 2r). D)$1/(1 + r)².

Accepted Answer

The present value of $1 payable in two years is calculated using the formula for present value, which is $1 divided by (1 + r) raised to the power of the number of years, in this case, 2.

Question 8

In a perfectly competitive market,a firm's rental rate for a machine (v)will be given by:
Where r is the prevailing rate of interest and d is the depreciation rate.In this formula,p represents:

A)the present market price of the machine.
B)the initial purchase price of the machine (assuming this differs from its present market price).
C)the price of the firm's product.
D)the depreciated value of the machine.

Accepted Answer

The answer of In a perfectly competitive market,a firm's rental...

Question 9

Under a consumption-based theory of the pricing of risky assets,uncertain returns on such an asset should be discounted by a &#34;stochastic discount factor&#34; that takes into account:&#8203;&#10;A)&#8203;the mean and standard deviation of the uncertain return.&#10;B)&#8203;whether the uncertain return has a normal distribution.&#10;C)&#8203;both the nominal and real interest rates.&#10;D)&#8203;the rate of time preference and present and future marginal utility of wealth.

Accepted Answer

A consumption-based theory of asset pricing assumes that investors' preferences are based on their consumption rather than their wealth. Therefore, the pricing of risky assets should consider the rate of time preference (i.e., how much an individual prefers a good or service now compared to the future) and present and future marginal utility of wealth (i.e., how much an individual values additional wealth now and in the future). This results in a stochastic discount factor that reflects these preferences and is then used to discount the uncertain future returns of the asset. The other options (A, B, and C) do not fully capture the considerations necessary for a consumption-based theory.

Question 10

A fall in interest rates leads to:&#10;A)an increase in the rental rate on a machine.&#10;B)a decrease in the rental rate on a machine.&#10;C)no change in the rental rate on a machine.&#10;D)a fall in the marginal productivity of capital.

Accepted Answer

A fall in interest rates makes it cheaper for firms to borrow money to purchase machines. This increases the supply of machines available for rental, leading to a decrease in the rental rate.

Question 11

The present value of $1 payable in the future decreases:&#10;A)the higher r is and the sooner it is to be paid.&#10;B)the lower r is and the sooner it is to be paid.&#10;C)the higher r is and the longer time until it is paid.&#10;D)the lower r is and the longer time until it is paid.

Accepted Answer

The answer of The present value of $1 payable in...

Question 12

Accelerated depreciation laws may increase firms' investment in equipment because:&#10;A)machines will wear out more rapidly.&#10;B)profits will be increased.&#10;C)the rental rate on capital will be reduced.&#10;D)the price of machines will fall.

Accepted Answer

The answer of Accelerated depreciation laws may increase firms' investment...

Question 13

Under competitive conditions,the relative price of a finite resource would be expected to:&#10;A)rise at an increasing rate.&#10;B)rise at a rate equal to the real interest rate.&#10;C)rise at a rate equal to the nominal interest rate.&#10;D)rise at a rate determined by demand conditions.

Accepted Answer

The answer of Under competitive conditions,the relative price of a...

Question 14

An increase in the corporate profits tax will most likely lead to:&#10;A)a decrease in the rental rate of capital in the corporate sector.&#10;B)no change in the rental rate of capital in the corporate sector.&#10;C)no change in the rental rate of capital in the non-corporate sector.&#10;D)an increase in the rental rate of capital in the corporate sector.

Accepted Answer

The answer of An increase in the corporate profits tax...

Question 15

If the interest rate rises,the present discounted value of a stream of payments owed in the future:&#10;A)rises.&#10;B)stays constant.&#10;C)falls.&#10;D)may rise or fall depending on the shape of the stream.

Accepted Answer

The answer of If the interest rate rises,the present discounted...

Question 16

In Fisher's model of the determination of the rate of return,the price of a &#34;future good&#34; is:&#10;A)less than the price of a current good if the interest rate is negative.&#10;B)equal to the price of a current good if the interest rate is positive.&#10;C)greater than the price of a current good if the interest rate is positive.&#10;D)less than the price of a current good if the interest rate is positive.

Accepted Answer

The answer of In Fisher's model of the determination of...

Question 17

If a person's inter-temporal utility function is given by   ,lower values for   Will:&#10;A)make this person more averse to consumption fluctuations.&#10;B)make this person less averse to consumption fluctuations.&#10;C)reduce overall consumption levels.&#10;D)reduce savings.

Accepted Answer

The answer of If a person's inter-temporal utility function is...

Question 18

The annual rental rate for a machine is:&#10;A)the yearly depreciation and maintenance costs for the machine.&#10;B)the yearly interest costs associated with owning the machine.&#10;C)the initial purchase price of the machine divided by the number of years the machine is expected to last.&#10;D)the sum of the yearly depreciation,maintenance,and interest costs associated with owning the machine.

Accepted Answer

The answer of The annual rental rate for a machine...

Question 19

&#8203;If individuals make intertemporal choices using &#34;hyperbolic discounting&#34;,this may create inefficient choices because individuals will:&#10;A)&#8203;not take account of their time preferences.&#10;B)&#8203;make choices that are inconsistent over time.&#10;C)&#8203;have a preference for only consuming in the future.&#10;D)&#8203;confuse nominal and real interest rates.

Accepted Answer

The answer of &#8203;If individuals make intertemporal choices using &#34;hyperbolic...

Question 20

If a tree's value (v)is growing according to the equation
With an annual interest rate of 5 percent,the tree should be harvested when t =:

A)5 years.
B)10 years.
C)25 years.
D)100 years.

Accepted Answer

The answer of If a tree's value (v)is growing according...

Deck 15: Capital and Time