ECON EXAM
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Changes in the equilibrium interest rate will
affect both the size of the domesticoutput and the allocationof capital goods among industries.
affect the size of the domesticoutput but not the allocation of capital goods among industries.
affect the allocation of capital goods among industriesbut not the size of the domestic output.
have no perceptible effect on either the size of the domestic output or the allocation of capitalgoods among industries.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
The real rate of interest is the interest rate
charged on long-termgovernment bonds.
associated with a riskless loan.
that large commercialbanks charge their best customers.
D. after adjustment has been made for inflation.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
The real interest rate can be estimated by
subtracting the pure interest rate from the nominal interestrate.
dividing the nominal interest rate by the consumer price index.
subtracting the nominal interest rate from the rate of inflation.
D. subtracting the rate of inflation from the nominalinterest rate.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
In year 1 the price level is constantand the nominal rate of interest is 6 percent.But in year 2 the inflationrate 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
rise by 9 percentage points.
B. rise by 3 percentagepoints.
fall by 3 percentage points.
rise by 6 percentage points.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
The XYZ Corporation determines it can make a real (inflation-adjusted) return on an investment of 9 percent.The nominal rate of interestis 13 percent and the rate of inflationis 7 percent.We can conclude that the
investment will be profitable.
investment will be unprofitable.
real rate of interest is 4 percent.
real rate of interest is 2 percent.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Which ofthefollowing is incorrect?
The nominal interest rate is the rate of interest expressed in terms of current dollars.
The real interest rate is the rate of interest expressedin terms of dollars of constant,or inflation-adjusted, value.
C. The nominal interestrate is the real interestrate less the rate of inflation.
D. During periods of inflation,the nominal interest rate will exceed the real interest rate.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Suppose that in some year nominal interest rates are less than the rate of inflation. This means that
money demand exceeds money supply.
B. real interest rates are negative.
real interest rates are positive and unusually high.
real interest rates exceed nominal interestrates.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
In making an investment decision, a businessfirm is most interested in the
nominal interestrate.
B. real interest rate.
nominal interestrate minus the real interestrate.
future supply of loanable funds.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Effective usury laws cause
a surplus in the market for loanable funds.
the quantity of loanable funds demanded to be brought into balance with the quantity supplied.
C. the quantityof loanable funds demandedto exceed the quantity supplied.
D. the quantityof loanable funds suppliedto exceed the quantity demanded.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Usury laws
allocate funds from low-productivity to high-productivity investments.
B. establish a legal ceiling on interest rates.
make more funds availableto low-income borrowers.
create a surplus of loanablefunds.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Effective usury laws cause
a surplus of money in money markets.
the quantity of money demanded to be broughtintobalance with the quantity supplied.
the quantity of money supplied to exceed the quantity demanded.
D. a shortage of money in money markets.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Effective usury laws
subsidize lenders.
penalize those who borrow at thebelow-market interest rate.
improve efficiency in investing.
D. keep some low-income people from obtainingcredit and loans.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
A major purpose of usury laws is to make more funds available to low-income borrowers. Economic analysis suggests thatusury laws
are effective in achieving this goal.
B. allocate availablefunds to high-income borrowers.
have no impact on the allocation of funds between high-income and low-income people.
help low-income people only when the legal interestrate is above the market rate.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping todetermine the economystotal output of goods and services.
Test Bank: I Topic: Role of Interest Rates
Economic profitis most closelyassociated with
the processof saving and investing.
B. monopoly,innovation, and uninsurable risks.
long-run competitive equilibrium.
a static economy.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Which of the followingrepresents an uninsurable risk to a businessfirm?
the possibility that its warehouse will burn down
the possibility that severalof its workers will be injured at work
C. the possibility that an adverse change in consumer tastes will decreasethe demand for the firm's product
D. the possibility that a tornado will damage the plant and stop production for a month
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Economic profit mightresult from
easy entry intoindustries.
B. dynamicchange and uncertainty.
X-inefficiency.
a decline in entrepreneurship.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
A normal profitis
the average profitability of a firm over one completebusiness cycle.
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 bywhich total revenue exceeds total operating costs.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Pure, or economic,profit is
the amount by which accounting profits exceed normal profits.
determined by subtracting explicit costs from total revenue.
the return requiredto retain entrepreneurial talent in some particular line ofproduction.
the return to any resource the supply of which is perfectlyinelastic.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Economic profit affects
the allocationof resources but not the level of resource use.
the level of resource use but not the allocation of resources.
C. the allocation of resources and the level of resourceuse.
D. neither the allocation of resourcesnor the level of resource use.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
The largestsingle share of all income earned by Americansconsists of
wages and salaries.
interest.
rents.
corporate profits.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
Currently, capitalist income, that is,corporate profits, interest, and rent, accounts for aboutwhat percentage of the income paid to American resource suppliers?
10 percent
B. 20 percent
50 percent
80 percent
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
If labor'sshare of the income paid to American resource suppliersis broadly defined as the sum of wages and salaries and proprietors' income, we can say that labor'srelative share has
remained approximately constant since 1900.
increased dramatically at the expense of capitalist income.
declined by about one-third since 1900.
decreased becauseof the declineof unionism.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
Capitalist income (corporate profits, interest, and rent) has
declined sharply since 1900 becauseof the growingstrength of labor unions.
B. remainedapproximately constant since 1900.
increased significantly because of rising rents.
fallen since 1900 because of the declining importance of corporations.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
Defined narrowlyas wages and salaries, labor's share of thenational income is about
70 percent.
53 percent.
42 percent.
89 percent.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
(Consider This) The story about economistIrving Fisher's conversation with his masseuse illustrates that
other things equal, interestrates are higher on smaller loans than on larger loans.
B. interestis a paymentrequired for someone to give up the present use of their money.
other things equal, longer-term loans have lower interest rates than shorter-term loans.
real interest rates differ from nominal interest rates.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
(Consider This) The story about economistIrving Fisher's conversation with his masseuse illustrates that interest payments arise because of
the possibility of inflation.
the reality of creditrisk.
imperfect information about the future.
D. the time-valueof money.
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
(Consider This) Entrepreneurs’ singular focus on profit
often comes at the expense of efficiency.
B. encouragesefficiency.
causes them to neglect other aspects of the business.
discourages use of the MB = MC rule.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
(Consider This) Entrepreneurs’ focus on profit encourages efficiency
at the expense ofemployees.
except in a market system.
when properlyregulated by the government.
D. by encouraging the entrepreneur to use the MB = MCrule for every aspect of the business.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
(Last Word) Supposeyou borrow $500 and agree to pay this $500 plus $75 of interest at the end of a year. The interest rate is
10 percent.
B. 15 percent.
12.5 percent.
7.5 percent.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-02 Define interestand explain how interest rates vary based on risk, maturity, loan size,and taxability.
Test Bank: I Topic: Interest
(Last Word) Suppose you borrow $500 for a year and the lender discounts$75 of interest at the time the loan is made (givingthe borrower only $425). The interest rate on this loan is about
12.5 percent.
14.5 percent.
C. 17.6 percent.
D. 10 percent.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-02 Define interestand explain how interest rates vary based on risk, maturity, loan size,and taxability.
Test Bank: I Topic: Interest
(Last Word) Suppose you deposit $5,000in a bank that pays 10 percent interest compounded twice a year. The actual annual interest rate you receive is
10 percent.
11 percent.
C. 10.25 percent.
D. 12 percent.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-02 Define interestand explain how interest rates vary based on risk, maturity, loan size,and taxability.
Test Bank: I Topic: Interest
(Last Word) Late paymentfees and overdraftprotection
are illegal under the Truth in LendingAct.
do not have to be reportedunder the provisionsof the Truth in Savings Act.
C. effectively charge high rates of interest on loans to bank customers.
D. are unrelatedto interest rates because they are fees.
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-02 Define interestand explain how interest rates vary based on risk, maturity, loan size,and taxability.
Test Bank: I Topic: Interest
True / False Questions
Demand is the active and supply the passive determinant of land rent.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: I Topic: Economic Rent
Different rents on land reflectdifferences in the marginal revenue productof land.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: I Topic: Economic Rent
The free-land era of U.S. history reflected a situationin which the quantity of land available at a zero price exceeded the quantity of land demanded.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: I Topic: Economic Rent
Rent performsan incentive function,but no rationing function.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: I Topic: Economic Rent
The interest rate is the price paid for the use of money.
TRUE
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-02 Define interestand explain how interest rates vary based on risk, maturity, loan size,and taxability.
Test Bank: I Topic: Interest
Unlike most demand curves, the demand curve for loanable funds is upsloping.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: I Topic: Loanable Funds Theory of Interest Rates
Present value is the amount to which some current amount of money will grow as interest compounds over time.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
The time-value of money refers to the idea that a given amount of money is more valuable to a person the sooner it is received.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
The future value of$3,000 deposited today at 5 percent interest is $3,646.52four years from now.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
The present value of $4,000 deposited today at 8 percent interest is $5,038.85 three years from now.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
Other things equal, the shorter the loan period and the larger the loan size, the higher is the interest rate charged by the lender.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.
Test Bank: I Topic: Time-Value of Money
The supply of loanable funds is perfectlyelastic.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: I Topic: Loanable Funds Theory of Interest Rates
Economic profits are the salariesreceived by the hired managersof business corporations.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
The basic function of profits and losses is to allocatesociety's scarce resourcesto their highest valueduses.
TRUE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Economic profits are the entrepreneur’s reward for taking on the insurable risks of running abusiness.
FALSE
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-06 Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
Test Bank: I Topic: Economic Profit
Broadly defined,labor's share of national income has been remarkably stable since 1900.
TRUE
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Blooms:Remember Difficulty: 01 Easy
Learning Objective: 18-07 List the share of U.S. earnings received by each of the factors of production.
Test Bank: I Topic: Income Shares
Multiple Choice Questions
If a factor of production has no production cost and has a fixed supply, then payments to that factor constitute whateconomists call
A. abnormalprofits.
B. economicrent.
normal profits.
interest payments.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
The characteristic that makes economic rent distinctfrom wages, interest, and profit is that it is
A. payment for a resource that is completely fixed in total supply.
always expressed in dollars,never in percent.
fixed by annual or monthlycontracts.
makes the supply of the resourceincrease if its rent rises.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
Which of the followingresources is a "free and nonreproducible gift of nature"?
labor
entrepreneurship
capital
D. land
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Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
Which of the followingfactors is not a typical cause of changes in land rent?
A. demand for land
B. supply of land
prices of the products produced from the land
prices of other resources employed along with land
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
123.
What line in the graph would best represent the supply curve for land?
A. 1
B. 2
3
4
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
Resource SupplyDemandPriceABCD100$12040606080240606080603608060904048010060100 124.
Refer to the demand schedule and possiblesupply schedules, A–D. There would be no incentive function performed by price in which of the given resourcesupply schedules?
A
B
C. C
D. D
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
Resource SupplyDemandPriceABCD100$12040606080240606080603608060904048010060100 125.
Refer to the demand schedule and possiblesupply schedules, A–D. Suppose that price influencesthe availability of the economic resource, and the equilibrium price is $2. Which resourcesupply schedule would apply in this case?
A
B
C
D. D
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and howit is determined.
Test Bank: II Topic: Economic Rent
Resource SupplyDemandPriceABCD100$12040606080240606080603608060904048010060100 126.
Refer to the demand schedule and possiblesupply schedules, A–D. Suppose thatthesupply of a resource is given by the schedule that exhibitsa zero price elasticity. If demand for the resourceincreases from the original demand schedule by 20 units at each price, then the equilibrium economic rent would be
A. $4.
B. $3.
C. $2.
D. $1.