Deck 18: Rent, Interest, and Profit

Question 1

The economist who advocated a single tax on land was

A) Adam Smith.
B) John Maynard Keynes.
C) Henry George.
D) Milton Friedman.

Answer 1

Henry George.

Question 2

Henry George advocated a single tax on

A) real capital.
B) entrepreneurial profits.
C) land.
D) labor income.

Answer 2

land.

Question 3

The demand for land is

A) perfectly elastic.
B) perfectly inelastic.
C) upsloping.
D) downsloping.

Answer 3

downsloping.

Question 4

Economic rent refers to the price paid for land and other natural resources that

A) are fixed in total supply.
B) vary directly with their market prices.
C) vary inversely with their market prices.
D) are available in nearly unlimited quantities.

Question 5

The total supply of land is

A) upsloping.
B) perfectly elastic.
C) perfectly inelastic.
D) greater in the short run than in the long run.

Question 6

For all practical purposes, the supply of land is

A) almost perfectly inelastic.
B) negatively sloped.
C) relatively elastic.
D) perfectly elastic.

Question 7

Which of the following is correct?

A) Although land has no production cost from society's viewpoint, rental payments are costs to individual producers.
B) Land rent is not a cost to either society or individual producers.
C) Although land rent is a cost from society's viewpoint, it is not a cost to individual producers.
D) Land rent is a cost to both society and individual producers.

Question 8

In his book Progress and Poverty, Henry George argued that

A) poverty is associated with the personal characteristics of individuals and therefore cannot be remedied by government antipoverty programs.
B) economic rent could be heavily taxed without impairing the supply of land or, therefore, the productive capacity of the economy.
C) rents should not be taxed, because rental income is the basic source of saving, which ultimately permits a high level of investment and economic growth.
D) taxes on rents are undesirable because they have a severe disincentive effect on landlords.

Question 9

The demand for farmland will increase if

A) the demand for food decreases.
B) technological advances make land more productive.
C) the price of farm labor increases and the output effect exceeds the substitution effect.
D) the supply of farmland increases.

Question 10

The marginal revenue product (MRP) of land declines as more land is brought into use. As a result, the

A) demand curve for land is downsloping.
B) demand curve for land is upsloping.
C) supply curve for land is downsloping.
D) supply curve for land is upsloping.

Question 11

Economic rent, or pure rent, is

A) a payment made for the use of housing, factory buildings, or capital goods.
B) a payment for resources used in the production of "free goods."
C) a payment for the use of those resources whose supply is perfectly elastic.
D) the price paid for the use of land and other nonreproducible resources.

Question 12

To say that land rent performs no incentive function means that

A) higher rental payments will not bring forth a larger quantity of land.
B) rent is not a cost to specific firms, but it is a cost from the standpoint of the economy as a whole.
C) rent does not allocate land in terms of productive efficiency.
D) rent tends to allocate land into the most productive uses.

Question 13

Which of the following statements is correct?

A) Economic profits can properly be regarded as the salaries received by the hired managers of corporations.
B) Economic rent is a price paid for productive land resources whose supply is perfectly inelastic.
C) Economic profits would be nonexistent in a dynamic, purely competitive economy.
D) Economic, or pure, profit is the minimum return that entrepreneurs must receive to continue in a particular line of production.

Question 14

The rent paid for the pasture land used to graze cattle would increase if

A) the productivity of the land increased.
B) people decided to consume more beef.
C) oil deposits were discovered on the land.
D) any of these occurred.

Question 15

The marginal revenue product (MRP) of land declines as more land is brought into production because

A) land is a "free and nonreproducible gift of nature."
B) of diminishing returns.
C) land rent has no incentive function.
D) the supply of land is fixed.

Question 16

A unique characteristic of taxes on economic rents is that such taxes

A) stimulate aggregate production.
B) do not lead to a reallocation of the resource.
C) are paid by consumers.
D) are always regressive.

Question 17

Landowners will not receive any rent so long as

A) there is any tax on land.
B) the supply and demand curves for land intersect.
C) the supply curve of land is perfectly inelastic.
D) the supply curve lies entirely to the right of the demand curve.

Question 18

Henry George's single-tax movement was based on the argument that

A) the tax structure should consist solely of a highly progressive tax on nonwage incomes.
B) interest is unearned income and should be taxed away by government.
C) in less-developed countries the supply of and demand for land will be such that land will be a free good and therefore capable of bearing sizable taxes.
D) a high tax on land rent is justified because land rent performs no incentive function.

Question 19

The incentive function of prices

A) indicates that price increases bring forth more of that resource.
B) is the idea that competitive markets will always clear.
C) applies to all resources.
D) only applies to land.

Question 20

Some economists advocate taxes on land because such taxes

A) do not affect the supply of land.
B) increase the supply of land.
C) improve the allocation of land by shifting it from low-productivity to high-productivity uses.
D) have a positive incentive function.

Question 21

In the market for loanable funds,

A) an increase in available bank lending will increase the interest rate.
B) a decrease in saving will reduce the interest rate.
C) an increase in borrowing for investment will increase the interest rate.
D) a decrease in government borrowing will increase the interest rate.

Question 22

The fact that people prefer present consumption to future consumption results in

A) an upsloping supply of loanable funds curve.
B) a downsloping demand for loanable funds curve.
C) a downsloping supply of loanable funds curve.
D) an upsloping demand for loanable funds curve.

Question 23

Suppose a person pays $80 of annual interest on a loan that has a 5 percent annual interest rate. The loan amount is

A) $400.
B) $1,600.
C) $160.
D) $85.

Question 24

If Congress were to pass a law exempting interest on saving from taxation, the

A) supply of loanable funds would decrease and the equilibrium interest rate would rise.
B) supply of loanable funds would increase and the equilibrium interest rate would fall.
C) demand for loanable funds would increase and the equilibrium interest rate would rise.
D) equilibrium interest rate would be unaffected.

Question 25

Which of the following is not a source of loanable funds?

A) the saving of households
B) business saving
C) commercial bank lending
D) government budget deficits

Question 26

The demand for loanable funds is downsloping

A) because businesses find that more investments are profitable at low interest rates than at high interest rates.
B) because households are willing to save more at high interest rates than at low interest rates.
C) only when the nominal interest rate exceeds the real interest rate.
D) because the amount of profitable business investment varies directly with the interest rate.

Question 27

Critics of a single tax on land oppose the idea because

A) it would overtax the population.
B) changes in land ownership would cause the tax burden to fall unfairly on people who did not receive economic rents.
C) it would disproportionately tax the richest members of society.
D) it would cause too much land to be brought out of production.

Question 28

The "time-value of money" refers to the fact that

A) a given amount of money becomes more valuable over time.
B) a given amount of money is more valuable the sooner it is obtained.
C) people expect monetary compensation for their labor time.
D) a given amount of money today is equivalent to a smaller amount of money in the future.

Question 29

"Present value" refers to the

A) value today of a specific amount of money to be received in the future.
B) current value of money held in a bank account.
C) amount to which some current amount of money will grow over time.
D) interest rate specified when a loan contract is signed.

Question 30

The equilibrium interest rate equates

A) nominal and real interest rates.
B) the quantities demanded and supplied of loanable funds.
C) consumption and saving.
D) taxes and government spending.

Question 31

Interest is the

A) price paid for the use of money.
B) opportunity cost of time.
C) expectation of a future return on investment.
D) reward for consuming rather than saving.

Question 32

The value today of a specific sum of money to be received in the future is referred to as

A) the future value of that sum of money.
B) the present value of that sum of money.
C) compound interest.
D) the time-value of money.

Question 33

On January 1, 2016, Alex deposited $5,000 into a savings account that pays interest of 5 percent, compounded annually. If he makes no further deposits or withdrawals, how much will Alex have in his account on December 31, 2018 (3 years later)?

A) $5,750.
B) $5,788.
C) $5,813.
D) $5,825.

Question 34

Suppose that interest payments are $140 per year on a $1,000 loan and $1,188 per year on an $8,485 loan. The interest rates on the two loans are

A) 14 percent and 20 percent, respectively.
B) 14 percent on both loans.
C) 18.8 percent on both loans.
D) 1.4 percent and 11.8 percent, respectively.

Question 35

If Kelly deposits $10,000 into an account that pays 8 percent interest, compounded annually, and she makes no further deposits or withdrawals, how much will Kelly have in her account at the end of 5 years?

A) $14,000
B) $14,482
C) $14,693
D) $15,000

Question 36

Other things equal, an increase in the productivity of capital goods will

A) increase the demand for loanable funds and decrease the equilibrium interest rate.
B) increase the demand for loanable funds and increase the equilibrium interest rate.
C) increase the supply of loanable funds and decrease the equilibrium interest rate.
D) increase the supply of loanable funds and increase the equilibrium interest rate.

Question 37

Which of the following is not a component of the demand for loanable funds?

A) household purchases of housing and durable consumer goods
B) business purchases of capital goods
C) government financing of the public debt
D) household saving

Question 38

Which of the following is correct?

A) Money is a resource, but real capital is not.
B) Real capital is a resource, but money is not.
C) Neither money nor real capital is a resource.
D) Both money and real capital are resources.

Question 39

The supply curve of loanable funds is upsloping because

A) businesses find more investments to be profitable at low interest rates than at high interest rates.
B) government budget deficits vary inversely with the equilibrium interest rate.
C) households are willing to save more at high interest rates than they are at low interest rates.
D) banks lend more at low interest rates than they do at high interest rates.

Question 40

Which of the following statements best illustrates the time-value of money concept?

A) Bob is willing to forgo receiving $100 today in order to receive $110 next month.
B) Tom is indifferent between receiving $50 now and receiving $50 six months from now.
C) Terry works for an hourly wage instead of a fixed salary.
D) Jeff would prefer to receive $200 at the end of the year instead of $220 now.

Question 41

The real rate of interest is the interest rate

A) charged on long-term government bonds.
B) associated with a riskless loan.
C) that large commercial banks charge their best customers.
D) after adjustment has been made for inflation.

Question 42

Which of the following is incorrect?

A) The nominal interest rate is the rate of interest expressed in terms of current dollars.
B) The real interest rate is the rate of interest expressed in terms of dollars of constant, or inflation-adjusted, value.
C) The nominal interest rate is the real interest rate less the rate of inflation.
D) During periods of inflation, the nominal interest rate will exceed the real interest rate.

Question 43

In year 1 the price level is constant and the nominal rate of interest is 6 percent. But in year 2 the inflation rate is 3 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must

A) rise by 9 percentage points.
B) rise by 3 percentage points.
C) fall by 3 percentage points.
D) rise by 6 percentage points.

Question 44

The XYZ Corporation determines it can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the

A) investment will be profitable.
B) investment will be unprofitable.
C) real rate of interest is 4 percent.
D) real rate of interest is 2 percent.

Question 45

The real interest rate can be estimated by

A) subtracting the pure interest rate from the nominal interest rate.
B) dividing the nominal interest rate by the consumer price index.
C) subtracting the nominal interest rate from the rate of inflation.
D) subtracting the rate of inflation from the nominal interest rate.

Question 46

Other things equal, an increase in the equilibrium interest rate will

A) increase R&D spending.
B) rise when the supply of loanable funds increases.
C) decrease purchases of capital goods and reduce R&D spending.
D) increase bank lending.

Question 47

Suppose that in some year nominal interest rates are less than the rate of inflation. This means that

A) money demand exceeds money supply.
B) real interest rates are negative.
C) real interest rates are positive and unusually high.
D) real interest rates exceed nominal interest rates.

Question 48

Which of the following generalizations is false? Other things equal,

A) interest rates are higher if lenders are imperfectly, rather than purely, competitive.
B) the interest rate is less on small loans than on larger loans.
C) long-term loans normally command higher interest rates than short-term loans.
D) the greater the risk on a loan, the greater the interest rate.

Question 49

Usury laws

A) allocate funds from low-productivity to high-productivity investments.
B) establish a legal ceiling on interest rates.
C) make more funds available to low-income borrowers.
D) create a surplus of loanable funds.

Question 50

The equilibrium interest rate

A) affects both the size of total output and its composition.
B) falls when the demand for loanable funds increases.
C) determines the composition of R&D spending but not its total amount.
D) increases when the expected rate of return on R&D spending falls.

Question 51

The equilibrium interest rate

A) allocates the available supply of loanable funds to investment projects that have high enough rates of return to justify the borrowing.
B) rises when the supply of loanable funds increases.
C) is the price paid for the use of any resource.
D) affects the size of total output but not the composition of that output.

Question 52

A lower equilibrium interest rate

A) increases saving, reduces total spending, and increases total output.
B) decreases saving, increases total spending, and decreases total output.
C) increases investment, increases total spending, and increases total output.
D) decreases investment, decreases total spending, and increases total output.

Question 53

The "future value" of a sum of money refers to

A) the estimated value of that money invested in a stock portfolio at some future date.
B) the purchasing power of a given amount of money adjusted for price changes.
C) today's value of a sum of money to be received in the future.
D) the amount to which some current sum of money will grow over time.

Question 54

Other things equal, interest rates are

A) higher on large loans than on small loans.
B) higher on loans with tax-exempt interest payments.
C) lower on less risky loans than on riskier loans.
D) lower on short-term loans than on long-term loans.

Question 55

In making an investment decision, a business firm is most interested in the

A) nominal interest rate.
B) real interest rate.
C) nominal interest rate minus the real interest rate.
D) future supply of loanable funds.

Question 56

Changes in the equilibrium interest rate will

A) affect both the size of the domestic output and the allocation of capital goods among industries.
B) affect the size of the domestic output but not the allocation of capital goods among industries.
C) affect the allocation of capital goods among industries but not the size of the domestic output.
D) have no perceptible effect on either the size of the domestic output or the allocation of capital goods among industries.

Question 57

The pure rate of interest is approximated by the

A) rate that savings and loan associations charge on mortgage loans.
B) rate charged consumers by credit card companies.
C) rate paid on long-term government bonds.
D) announced rate at which commercial banks make business loans.

Question 58

Effective usury laws cause

A) a surplus in the market for loanable funds.
B) the quantity of loanable funds demanded to be brought into balance with the quantity supplied.
C) the quantity of loanable funds demanded to exceed the quantity supplied.
D) the quantity of loanable funds supplied to exceed the quantity demanded.

Question 59

The amount to which some current amount of money will grow as interest compounds over time is known as

A) the future value of that sum of money.
B) the present value of that sum of money.
C) compound interest.
D) the time-value of money.

Question 60

Effective usury laws cause

A) a surplus of money in money markets.
B) the quantity of money demanded to be brought into balance with the quantity supplied.
C) the quantity of money supplied to exceed the quantity demanded.
D) a shortage of money in money markets.

Question 61

If labor's share of the income paid to American resource suppliers is broadly defined as the sum of wages and salaries and proprietors' income, we can say that labor's relative share has

A) remained approximately constant since 1900.
B) increased dramatically at the expense of capitalist income.
C) declined by about one-third since 1900.
D) decreased because of the decline of unionism.

Question 62

Economic profit affects

A) the allocation of resources but not the level of resource use.
B) the level of resource use but not the allocation of resources.
C) the allocation of resources and the level of resource use.
D) neither the allocation of resources nor the level of resource use.

Question 63

Currently, capitalist income, that is, corporate profits, interest, and rent, accounts for about what percentage of the income paid to American resource suppliers?

A) 10 percent
B) 20 percent
C) 50 percent
D) 80 percent

Question 64

(Last Word) Suppose you borrow $500 and agree to pay this $500 plus $75 of interest at the end of a year. The interest rate is

A) 10 percent.
B) 15 percent.
C) 12.5 percent.
D) 7.5 percent.

Question 65

Which of the following represents an uninsurable risk to a business firm?

A) the possibility that its warehouse will burn down
B) the possibility that several of its workers will be injured at work
C) the possibility that an adverse change in consumer tastes will decrease the demand for the firm's product
D) the possibility that a tornado will damage the plant and stop production for a month

Question 66

Pure, or economic, profit is

A) the amount by which accounting profits exceed normal profits.
B) determined by subtracting explicit costs from total revenue.
C) the return required to retain entrepreneurial talent in some particular line of production.
D) the return to any resource the supply of which is perfectly inelastic.

Question 67

A normal profit is

A) the average profitability of a firm over one complete business cycle.
B) calculated by subtracting explicit costs from total revenue.
C) the "price" required to retain entrepreneurial talent in some particular line of production.
D) the amount by which total revenue exceeds total operating costs.

Question 68

(Consider This) The story about economist Irving Fisher's conversation with his masseuse illustrates that

A) other things equal, interest rates are higher on smaller loans than on larger loans.
B) interest is a payment required for someone to give up the present use of their money.
C) other things equal, longer-term loans have lower interest rates than shorter-term loans.
D) real interest rates differ from nominal interest rates.

Question 69

(Consider This) Entrepreneurs' singular focus on profit

A) often comes at the expense of efficiency.
B) encourages efficiency.
C) causes them to neglect other aspects of the business.
D) discourages use of the MB = MC rule.

Question 70

Effective usury laws

A) subsidize lenders.
B) penalize those who borrow at the below-market interest rate.
C) improve efficiency in investing.
D) keep some low-income people from obtaining credit and loans.

Question 71

Defined narrowly as wages and salaries, labor's share of the national income is about

A) 70 percent.
B) 53 percent.
C) 42 percent.
D) 89 percent.

Question 72

The largest single share of all income earned by Americans consists of

A) wages and salaries.
B) interest.
C) rents.
D) corporate profits.

Question 73

(Consider This) The story about economist Irving Fisher's conversation with his masseuse illustrates that interest payments arise because of

A) the possibility of inflation.
B) the reality of credit risk.
C) imperfect information about the future.
D) the time-value of money.

Question 74

A major purpose of usury laws is to make more funds available to low-income borrowers. Economic analysis suggests that usury laws

A) are effective in achieving this goal.
B) allocate available funds to high-income borrowers.
C) have no impact on the allocation of funds between high-income and low-income people.
D) help low-income people only when the legal interest rate is above the market rate.

Question 75

Economic profit might result from

A) easy entry into industries.
B) dynamic change and uncertainty.
C) X-inefficiency.
D) a decline in entrepreneurship.

Question 76

(Consider This) Entrepreneurs' focus on profit encourages efficiency

A) at the expense of employees.
B) except in a market system.
C) when properly regulated by the government.
D) by encouraging the entrepreneur to use the MB = MC rule for every aspect of the business.

Question 77

Economic profit is most closely associated with

A) the process of saving and investing.
B) monopoly, innovation, and uninsurable risks.
C) long-run competitive equilibrium.
D) a static economy.

Question 78

(Last Word) Suppose you borrow $500 for a year and the lender discounts $75 of interest at the time the loan is made (giving the borrower only $425). The interest rate on this loan is about

A) 12.5 percent.
B) 14.5 percent.
C) 17.6 percent.
D) 10 percent.

Question 79

Capitalist income (corporate profits, interest, and rent) has

A) declined sharply since 1900 because of the growing strength of labor unions.
B) remained approximately constant since 1900.
C) increased significantly because of rising rents.
D) fallen since 1900 because of the declining importance of corporations.

Question 80

(Last Word) Suppose you deposit $5,000 in a bank that pays 10 percent interest compounded twice a year. The actual annual interest rate you receive is

A) 10 percent.
B) 11 percent.
C) 10.25 percent.
D) 12 percent.