宏观Chapter015

Capital, Interest, and Profits

Multiple Choice Questions

1. Capital consist of:

A) those durable produced items that are in turn used as productive inputs for further production.

B) those durable produced items that are sold to consumers.

C) only those goods that are output.

D) goods sold at Walmart.

E) none of the above.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

2. Which of the following would be considered intangible capital?

A) software.

B) patents.

C) brand name.

D) all of the above.

E) none of the above.

Answer: D

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

3. The present value of a farm is $10,000. It pays $2000 per year in net income. The interest rate per

year must be:

A) 0 percent.

B) 5 percent.

C) 10 percent.

D) 15 percent.

E) 20 percent.

Answer: E

Difficulty: Medium

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

4. Capital differs from other resources in that it:

A) is not used in socialist economies.

B) is not subject to diminishing returns.

C) cannot be augmented or exhausted.

D) is not a physical good.E) is both an input and an output of the economy.

Answer: E

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

5. From society's viewpoint, a particular new investment project is always worthwhile if:

A) the cost of borrowing is very low.

B) the new project is more roundabout than the present method of production.

C) it will increase real GDP.

D) it will increase real NDP.

E) its rate of return is greater than the market rate of interest.

Answer: E

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

6. A person who can save at 8 percent interest decided to subscribe to a magazine. A 1-year

subscription costs $12, a 2-year subscription $22. What is the cost to her of the second year?

A) $10.

B) $10.80.

C) $9.60.

D) $11.

E) $11.40.

Answer: B

Difficulty: Hard

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

7. If the rate of interest increases from 8 percent to 10 percent, the holder of a perpetuity which yields

$100 a year forever receives a capital:

A) loss of $40.

B) loss of $50.

C) gain of $50.

D) loss of $250.

E) gain of $250.

Answer: D

Difficulty: Hard

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

8. An individual who holds marketable government securities now is likely to sell them and hold

money instead if he believes that:

A) interest rates will fall far below present levels.

B) interest rates will fall below present levels for 3 months and then will rise above present levels.

C) interest rates will soon rise far above present levels.

D) interest rates will not change from present levels.E) a substantial price deflation is coming.

Answer: C

Difficulty: Hard

Topic: Simple Application

Bloom’s: Application

AACSB: Reflective Thinking

9. If net investment is positive, then:

A) the rate of interest (and the capital market) could still be in long-run equilibrium.

B) it is impossible to say whether the capital stock is growing, unless gross investment is also

known.

C) the capital stock is increasing, which might cause the interest rate to fall in the long run if the

greater capital is applied to fixed amounts of other factors.

D) the capital stock is increasing, causing the demand curve for capital to shift downward in the

long run and the interest rate to fall.

E) this could be a long-run equilibrium position, provided net saving is zero.

Answer: C

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

10. If capital has a computable rate of return, then we say that:

A) it is the yardstick against which most consumer loan applications are measured.

B) it is the time interval between future consumption goods and sacrificed present consumption

goods.

C) it is the technological factor which equates investment opportunities with people's impatience

to consume now.

D) employers should substitute capital for labor in current production processes.

E) none of the above are correct.

Answer: E

Difficulty: Hard

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

11. The rate of return on investment is:

A) the annual net return per dollar of invested capital.

B) the number of investments we do not accept.

C) the annual payment on money borrowed.

D) the monthly total return per dollar of invested capital.

E) none of the above.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

12. When you buy a bond or put money in your savings account, the financial yield on this investment

is called:

A) rate of return on investment.B) interest rate.

C) lending rate.

D) bond rate.

E) none of the above.

Answer: B

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

13. What is the dollar value today of a stream of income over time?

A) future value.

B) past value.

C) present value.

D) interest payment.

E) none of the above.

Answer: C

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

14. If the interest rate is 10% and you will receive $2000 next year and $3000 in three years, what is the

present value?

A) $5000.

B) $6000.

C) $5500.

D) $4075.

E) none of the above.

Answer: D

Difficulty: Medium

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

15. Why would asset prices tend to move inversely with interest rates?

A) their present value decreases as interest rates increase.

B) their present value increases as interest rates increase.

C) their past value decreases as interest rates increase.

D) prices tend to move the same as interest rates.

E) none of the above.

Answer: A

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

21. Nominal interest rate is:

A) the interest rate on money in terms of money.

B) the interest corrected for inflation.

C) not the interest rate.D) return on investments in terms of real goods.

E) none of the above.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

16. Real interest rate is:

A) the nominal interest rate minus inflation.

B) the interest rate including inflation.

C) not the interest rate.

D) return on investments in terms of real goods.

E) none of the above.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

17. Which of the following is not associated with the concept of profit?

A) Rewards for risk-taking.

B) Rewards for innovation.

C) Monopoly returns.

D) Implicit returns to factors supplied by owners.

E) All of the above are related to the concept of profit.

Answer: E

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

18. The reward to an entrepreneur, as such, is called by economists:

A) windfall gain.

B) rent.

C) unearned increment.

D) monopoly profit.

E) profit.

Answer: E

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

19. For an economist normal business profits are:

A) a cost, because they represent payments necessary to keep the resources owned by the

entrepreneur in the enterprise.

B) not a cost, because they cannot be accurately calculated.

C) not a cost, because they accrue to the entrepreneur.

D) not an economic cost, because they are not necessary to acquire and retain entrepreneurial

ability.E) none of the above.

Answer: A

Difficulty: Easy

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

20. Investment in capital goods involves:

A) increasing present consumption.

B) forgoing present consumption to increase future consumption.

C) consuming at the same rate.

D) consuming today and not worrying about tomorrow.

E) none of the above.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

21. In a perfectly competitive market, any larger than normal returns to transferable capital are reduced

when:

A) the government repeals an excess-profits tax.

B) businesses are able to pay other factors of production less.

C) new firms enter the industry, increasing the supply of the product and lowering product price.

D) old firms leave the industry, decreasing the supply of the product and lowering product price.

E) other factors of production agree to a smaller reward for their contribution to production.

Answer: C

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

22. Some portion of profit may sometimes be considered a component of costs because it:

A) represents a price-determined cost of production.

B) is a pure economic surplus.

C) results from business usually undertaken by corporations.

D) constitutes a premium for risk taking.

E) none of the above.

Answer: D

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

23. The demand and supply of capital is strongly affected by:

A) consumer tastes.

B) the supply of natural resources.

C) interest rates.

D) the level of real income and output.

E) the supply of labor.

Answer: D

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

24. A firm's profits equal:

A) sales minus wages.

B) net worth minus depreciation and factor costs.

C) income minus liabilities corrected for inflation.

D) total revenue minus total cost.

E) total revenue minus total labor cost only.

Answer: D

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

25. An entrepreneur who collects profits in the short run for a new invention is collecting:

A) the competitive rate of return on capital.

B) temporary monopoly profit.

C) rent on his or her effort.

D) a Ramsey surplus.

E) an illegal monopoly profit.

Answer: B

Difficulty: Hard

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

26. If an investment returns $600 a year forever and the annual rate of interest is 10%, then its present

value is:

A) $6,000.

B) $3,000.

C) $1,000.

D) $600.

E) some positive number that cannot be determined from the information provided.

Answer: A

Difficulty: Easy

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

27. The real interest rate is 2 percent per year. If, at the same time, the interest rate on money is 12

percent per year, then:

A) deflation is affecting this economy.

B) the inflation rate is 6 percent per year.

C) the inflation rate is 10 percent per year.

D) the inflation rate is 2 percent per year.

E) the inflation rate is 12 percent per year.

Answer: C

Difficulty: EasyTopic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

28. Real rates of return on capital have not been generally falling in this century because:

A) legal restrictions on interest have been removed.

B) technological progress has shifted the derived demand for capital out.

C) inflation has risen steadily.

D) capital is not subject to diminishing returns.

E) government policy has been to maintain high interest rates.

Answer: B

Difficulty: Medium

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking

29. Why is capital not considered a primary factor of production?

A) It is produced by the economic system itself.

B) It is not a physical good.

C) It is in fixed supply.

D) It does not exist in all economies.

E) None of the above.

Answer: A

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

30. In an ideal capital market:

A) competitive market forces set the riskless rate of interest.

B) there is no spread of interest rates for ventures of different riskiness.

C) the rate of interest is zero.

D) the net productivity of capital is constant.

E) competitive market forces set the rent of land.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

31. The present discounted value of $100 payable 1 year from now, assuming a market rate of interest

of 10 percent, is:

A) $100.

B) $10.

C) $90.

D) slightly less than $90.

E) slightly more than $90.

Answer: E

Difficulty: Medium

Topic: Numerical Analysis

Bloom’s: ApplicationAACSB: Analytic

32. In order to make worthwhile the construction of a bridge with a life of 200 years and an estimated

rate of return equal to 10 percent per year the market rate of interest must be:

A) not over 2 percent.

B) not over 20 percent.

C) 10 percent or less.

D) 10 percent or more.

E) not sufficient information given to answer this question.

Answer: C

Difficulty: Easy

Topic: Simple Application

Bloom’s: Application

AACSB: Reflective Thinking

33. If capital has a positive rate of return, then by devoting effort toward the production of capital

goods, future total production will:

A) increase, but not necessarily sufficiently to pay back replacement costs.

B) increase sufficiently to pay back replacement costs, no more, no less.

C) increase sufficiently to pay back replacement costs and yield a return in the form of a

percentage interest per annum.

D) increase sufficiently to pay back replacement costs, yield a return in the form of a percentage

interest per annum, and also compensate those who originally abstained from consumption.

E) do none of the above.

Answer: C

Difficulty: Medium

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking

34. Who was the economist that introduced the “time discounting” and “marginal rate of return over

cost” pillars?

A) Irving Fisher.

B) Adam Smith.

C) Joseph Schumpeter.

D) Milton Friedman.

E) Ben Bernanke.

Answer: A

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

35. "Normal profits" may properly be included in economic costs because:

A) it is normal for business people to want to make a profit.

B) only monopolies are not normal.

C) they include opportunity and implicit costs.

D) costs always include profit markups.

E) this makes private costs equal social overhead costs.

Answer: CDifficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

36. In allocating scarce resources, the market may sometimes reward entrepreneurs with a less than

normal return. A market economy may therefore be described as a system of:

A) profit.

B) socially necessary profit.

C) normal returns.

D) profit or loss.

E) monopoly profit.

Answer: D

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

37. Positive profit premiums in excess of normal profits that must be paid to attract people to risky

activities reflect payment to compensate for:

A) risk aversion.

B) temporary excess losses to innovators.

C) constant marginal utility of income.

D) contrived scarcities.

E) a lack of perfect competition.

Answer: A

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

38. In a small corporation, the economic cost most likely to be overlooked in the measurement of profit

arises from the failure to:

A) keep ownership and control separate.

B) consider corporate profits taxes as a cost.

C) amortize capital expenditures properly.

D) distinguish between long-term and short-term expenditures.

E) acknowledge the normal return to ownership capital.

Answer: E

Difficulty: Medium

Topic: Experience

Bloom’s: Application

AACSB: Reflective Thinking

39. If inflation and depreciation are equal to zero, a pinball machine which costs $2000 and produces

an annual revenue of $200 has a rate of return of:

A) 10% per year.

B) $200 per year.

C) 20% per year.

D) 0% per year.E) -10% per year.

Answer: A

Difficulty: Medium

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

40. The competitive rate of return on capital can be equal to the interest rate only if you eliminate:

A) monopolies and unions.

B) risk, inflation, and imperfect competition.

C) government intervention.

D) imperfect competition and externalities.

E) externalities.

Answer: B

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

True/False Questions

41. When interest rates rise, many asset prices fall.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

42. The present value is the dollar value today of a stream of income over time.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

43. Capital consists of both tangible and intangible assets.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

44. Capital is bought and sold in consumer markets.

Answer: False

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

45. There is only one kind of interest rate.Answer: False

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

46. The rate of return that an investment project can earn determines its place in the line for projects to

be done.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

47. A more roundabout method of production is not necessarily preferable to a less roundabout method

of production.

Answer: True

Difficulty: Easy

Topic: Simple Application

Bloom’s: Application

AACSB: Reflective Thinking

48. The real interest yield on capital allows for price changes but not for depreciation.

Answer: False

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

49. An increase in land (or labor) will tend to increase the marginal productivity of capital and thus the

rate of interest in at least the short run.

Answer: True

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

50. The demand for capital is derived ultimately from the value of the extra consumption of goods that

additional capital makes possible.

Answer: True

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

51. The nominal interest rate plus the percentage price rise equals the real interest rate.

Answer: False

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

52. The rate of return to new capital is that market rate of interest at which it would just pay to invest.

Answer: True

Difficulty: Hard

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

53. Long-run equilibrium in the market for capital is reached at the point where net investment ceases.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

54. The rule for making correct decisions about how to use a capital asset over its life is: for the same

cost, choose that use which will yield the longest life for the asset in question.

Answer: False

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

55. Profit statistics ordinarily include dividends paid out as well as undistributed corporate earnings.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

56. If a firm earning monopoly profits were sold, then the buyers would view those profits as, in effect,

interest.

Answer: True

Difficulty: Hard

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking

57. If I purchase a 1-year subscription for $30 when the interest rate is 10 percent, rather than a 2-year

subscription for $58, I have made a wise investment.

Answer: True

Difficulty: Medium

Topic: Numerical Analysis

Bloom’s: Application

AACSB: Analytic

58. If technical change ceased, then the rate of interest would continue to encourage people to increase

their saving.

Answer: False

Difficulty: MediumTopic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

59. According to the law of diminishing returns, the lower the capital stock, the higher the rate of return

to capital.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

60. U.S. Treasury bonds are generally considered a riskless investment.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

61. The theory of capital and interest explains how the supply and demand for capital determines

returns such as real interest rates and profits.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

62. The nominal interest rate is the interest rate on money in terms of money.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

63. The real interest rate is corrected for inflation and is calculated as the nominal interest rate minus

the rate of inflation.

Answer: True

Difficulty: Easy

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

. Just as the derived demand for labor is obtained from its marginal product curve, so the demand for

capital goods is derived from its marginal product curve.

Answer: True

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

65. A capital project has a positive rate of return if the present value of total future receipts resultingfrom its use exceeds its original cost.

Answer: True

Difficulty: Medium

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking

66. The long-run equilibrium rate of interest in the capital market can be described as either the one at

which the stock of capital stops increasing or the one at which there is no net saving.

Answer: True

Difficulty: Medium

Topic: Definition

Bloom’s: Knowledge

AACSB: Reflective Thinking

67. Society should consider any investment projects whose rate of return is greater than the rate of

interest.

Answer: True

Difficulty: Easy

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking

68. In a competitive system, profits from innovation represent a transitory income that will later tend to

be competed away.

Answer: True

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

69. Much of what is ordinarily called profit is really nothing but interest, rents, and wages under a

different name.

Answer: True

Difficulty: Medium

Topic: Simple Application

Bloom’s: Comprehension

AACSB: Reflective Thinking

70. In risky but competitive industries, long-run costs of production do not include a positive profit

premium to compensate for risk aversion.

Answer: False

Difficulty: Medium

Topic: Simple Application

Bloom’s: Knowledge

AACSB: Reflective Thinking