Question 1

Economic profit

Accepted Answer

A)   does not exist in competitive markets.
B)   provides an incentive for investors to undertake risky projects.
C)   motivates entrepreneurial innovation.
D)   does all of the above.
E)   is both b and c.

Question 2

If the interest rate is 10 percent, the net present value of $500 to be received one year from now is

Accepted Answer

A)   $413.22.
B)   $450.
C)   $454.55.
D)   $500.

Question 3

If the money rate of interest is 9 percent and the real rate of interest 6 percent, the inflationary premium is

Accepted Answer

A)   3 percent.
B)   6 percent.
C)   9 percent.
D)   12 percent.

Question 4

In a world of imperfect knowledge and uncertainty, the return to investors who undertake projects that increase the value of resources is called

Accepted Answer

A)   economic profit.
B)   accounting profit.
C)   the inflationary premium.
D)   the real interest rate.

Question 5

If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end)  for each of the next three years, a profit-maximizing entrepreneur would

Accepted Answer

A)   definitely undertake the project.
B)   never undertake the project.
C)   undertake the project if the interest rate exceeded 12 percent.
D)   undertake the project if the interest rate was 5 percent or less.

Question 6

Which of the following statements is correct?

Accepted Answer

A)   If the inflation rate is steady at 5 percent, for example, the real and nominal interest rates will be equal.
B)   An increase in the demand for goods now compared with goods in the future would cause the real interest rate to rise.
C)   A "positive rate of time preference" means that an individual would rather save than consume.
D)   During an extended inflationary period, the money (or nominal)  interest rate will usually be lower than the real rate of interest.

Question 7

Which one of the following is least likely to influence the investment choices of decision makers?

Accepted Answer

A)   the pure interest yield
B)   the expectation of profit
C)   the risk associated with the investment
D)   the general level of prices

Question 8

In a world of perfect knowledge and communication, competitive markets, and no uncertainty,

Accepted Answer

A)   there would be neither economic profits nor economic losses.
B)   economic profits would exist, but losses would be eliminated.
C)   economic profits and losses would exist to a greater degree than presently is the case.
D)   there would be economic profits; there is not enough information to comment on economic losses.

Question 9

Investment in capital goods only makes sense when

Accepted Answer

A)   the capital goods can be used to increase the future output of consumption goods.
B)   the savings rate of a country is low.
C)   the interest rate is high and people have a positive rate of time preference.
D)   economies are organized along capitalist lines.

Question 10

If the interest rate was 5 percent and an investment project was expected to yield net revenue of $3,000 per year (to be received at year end)  for each of the next three years, profit-maximizing decision makers would undertake the investment only as long as it cost less than

Accepted Answer

A)   $7,461.
B)   $8,170.
C)   $8,652.
D)   $9,000.

Question 11

Economic efficiency requires that costs associated with the expansion and utilization of capital be balanced against the

Accepted Answer

A)   future increases in output derived from improved tools and production methods.
B)   reduction in future employment due to automation.
C)   indirect costs of capital goods.
D)   need to maintain a reserve army of the unemployed.

Question 12

What role do non-monetary considerations play in physical capital investment decisions as opposed to human capital investment decisions?

Accepted Answer

A)   they play a minor to nonexistent role in both.
B)   they play an equally important role in both.
C)   they are probably more important in physical capital investment decisions.
D)   they are probably more important in human capital investment decisions.

Question 13

As the present value of the future earnings from owning an asset ____, the market value of the asset ____.

Accepted Answer

A)   decreases; increases
B)   increases; decreases
C)   increases; increases
D)   increases; is uncertain

Question 14

Which of the following would reduce the net present value of your college education?

Accepted Answer

A)   higher interest rates
B)   earlier retirement age
C)   higher wages for high school graduates
D)   all of the above

Question 15

If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end)  for each of the next three years, a profit-maximizing entrepreneur would

Accepted Answer

A)   definitely undertake the project.
B)   never undertake the project.
C)   undertake the project if the interest rate exceeded 12 percent.
D)   undertake the project if the interest rate was 5 percent or less.

Question 16

As the present value of the future earnings from owning an asset ____, the market value of the asset ____.

Accepted Answer

A)   decreases; increases
B)   increases; decreases
C)   decreases; decreases
D)   decreases; is uncertain

Question 17

The net present value of $100, delivered one year from now, would

Accepted Answer

A)   fall if the rate of interest increased.
B)   fall if the rate of interest decreased.
C)   rise if the rate of interest increased.
D)   not change if the interest rate changed.

Question 18

The net present value of $1,000 received in the future would

Accepted Answer

A)   decline if the $1,000 were received sooner.
B)   increase if the delivery date for the $1,000 were set farther into the future.
C)   decrease if the interest rate fell.
D)   decrease if the interest rate rose.

Question 19

The net present value of $100 to be received one year from now will

Accepted Answer

A)   increase if the interest rate rises.
B)   increase if the payment is delayed until two years from now.
C)   be greater than the net present value of $95 to be received one year from now.
D)   be greater than the value of having $95 now if the interest rate is 10 percent.

Question 20

At a discount rate of 10 percent, what is the net present value of an investment expected to yield $1,000 per year (to be received at year end)  for the next two years?

Accepted Answer

A)   $1,859.41
B)   $1,801.23
C)   $1,735.54
D)   $1,527.78

Exam 14: Investment, the Capital Market, and the Wealth of Nations

Investment in capital goods only makes sense when

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If the money rate of interest is 9 percent and the real rate of interest 6 percent, the inflationary premium is

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As the present value of the future earnings from owning an asset ____, the market value of the asset ____.

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The net present value of $1,000 received in the future would

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At a discount rate of 10 percent, what is the net present value of an investment expected to yield $1,000 per year (to be received at year end) for the next two years?

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Which of the following would reduce the net present value of your college education?

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Which of the following statements is correct?

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As the present value of the future earnings from owning an asset ____, the market value of the asset ____.

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Economic profit

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If the interest rate is 10 percent, the net present value of $500 to be received one year from now is

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If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for each of the next three years, a profit-maximizing entrepreneur would

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In a world of imperfect knowledge and uncertainty, the return to investors who undertake projects that increase the value of resources is called

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What role do non-monetary considerations play in physical capital investment decisions as opposed to human capital investment decisions?

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In a world of perfect knowledge and communication, competitive markets, and no uncertainty,

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Economic efficiency requires that costs associated with the expansion and utilization of capital be balanced against the

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The net present value of $100, delivered one year from now, would

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If the interest rate was 5 percent and an investment project was expected to yield net revenue of $3,000 per year (to be received at year end) for each of the next three years, profit-maximizing decision makers would undertake the investment only as long as it cost less than

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Which one of the following is least likely to influence the investment choices of decision makers?

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If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for each of the next three years, a profit-maximizing entrepreneur would

Correct AnswerverifiedShow Answer

The net present value of $100 to be received one year from now will

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As the present value of the future earnings from owning an asset , the market value of the asset .

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As the present value of the future earnings from owning an asset , the market value of the asset .

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