econ ch 18 hw

The pure rate of interest is best approximated by which of the following?

The interest paid on long-term, virtually riskless securities

The ______ interest rate is the rate of interest expressed in purchasing power after being adjusted for inflation.

real

The ______ interest rate, not the ______ rate, affects investment and R&D decisions.

real; nominal

Economic profit is the reward to residual claimants for assuming financial _____.

risk

In the figure, the equilibrium interest rate of 8% shows ______.

the rate at which the quantities of loanable funds supplied and demanded are equal

Demand is the only active determinant of land rent because ______.

the supply of land is fixed

True or false: Interest earned on certain state and municipal bonds is exempt from federal income tax.

true

Most income earned by Americans in a typical year is derived from ______.

wages

People who borrow money value it for ______.

what it can purchase

How is the real interest rate determined?

By subtracting the inflation rate from the nominal interest rate

In the figure provided, the demand for land with very little, if any, resource value in the middle of a desert is best exemplified by which demand curve?

D4

Which of the following illustrates a change in the general economic environment that could affect a firm's economic profits?

Diminishing demand caused by an extended recession

What type of profit remains after all explicit and implicit costs have been subtracted from total revenue?

Economic profit

What is the term for payment received by an owner of a factor of production in excess of the opportunity cost of producing that factor?

Economic rent

Which of the following are considered insurable risks?

Loss from theft; Damage from fire

Businesses are likely to spend borrowed loanable funds on which of the following?

Machinery; Warehouses

Which of the following describes why money is not an economic resource?

Money cannot produce goods and services.

Under which circumstances do state and municipal bonds attract buyers even when they have lower rates of interest than other bonds of similar maturity and risk?

When the interest is exempt from federal income taxes

Due to technological improvements a firm now expects a 15% increase on the rate of return of an investment as opposed to a 7% return on investment. They demanded no ($0) loanable funds at an interest rate of 10%. Would it be in the best interest of the firm to reconsider its level of demand of loanable funds?

Yes, because its rate of return is now greater than the cost of the loanable funds.

When the interest rate _______, more people will delay their consumption today for the future and make more loanable funds available to borrowers.

increases

Because the supply of land and other natural resources is perfectly _____ , demand is the sole active determinant of land rent.

inelastic

Risks that are measurable, such as floods and on-the-job accidents, are said to be ______.

insurable risks

_____ rates on money loans determine the interest incomes earned by the owners of capital goods.

interest

_______ is the price that is paid for the use of borrowed money.

interest

The ______ allocates research and development (R&D) funds to firms and industries for which the expected rate of return on R&D is the greatest.

interest rate

Supply is perfectly inelastic for which factor of production?

land

Which resource does not have a cost of production?

land

Socialists believe that land should be ______ for the sake of improving society as a whole.

nationalized

The ______ interest rate is the rate of interest expressed in dollars of current value with no adjustment for inflation.

nominal

Land has no _______ cost; it is a free and nonreproducible resource.

production

What motivates firms to innovate?

The expectation of economic profit

Why do socialists believe that all land should be owned by the state?

So that payments for its use can be used by the government to further the well-being of the entire population.

In the table, what is the present value of the value of money earned after 3 years at 10% interest?

$1000

In the table, the future value of $1,000 at 10% interest after 3 years is ______.

$1331

Wages and salaries from labor comprise about ______ percent of all income earned by Americans in a standard year.

70%

Which of the following describes the incentive function for suppliers of non-land resources?

A low price provides an incentive to offer less of the resource. A high price provides an incentive to offer more of the resource.

Which of the following government policies may reduce the economic profits of a firm?

A regulation forcing firms to reduce their carbon output The removal of a tariff on imported goods

Which of the following exemplifies the flow of research and development funds going to firms whose expected rate of return on R&D is the greatest?

Ace Microcircuits has an expected rate of return on R&D of 16% with an interest rate of 8%

A lower equilibrium interest rate results in which of the following?

An increase in total output if the economy has unused resources An increase in business borrowing for investment An increase in total spending in the economy

Which of the following would cause the supply of loanable funds to shift to the left?

Anything that causes a decline in savings

Which of the following would result in a rightward shift of the supply curve for loanable funds?

Anything that causes households to increase savings

Which factor would increase the demand for loanable funds?

Anything that increases the rate of return on potential investments

As shown in the diagram, what happens to the quantity supplied of loanable funds as interest rates change?

As interest rates increase, the quantity supplied of loanable funds also increases. As interest rates decrease, the quantity supplied of loanable funds also decreases.

How does the entrepreneur's pursuit of profit benefit society?

By improving allocative and productive efficiency

How do financial institutions generate profits?

By loaning funds at higher interest rates than they pay on deposited funds

Which of the following best explains how banks attract loanable funds?

By paying interest to savers

What are the three main methods entrepreneurs use to generate economic profits?

Establishing a profitable monopoly Creating popular new products Keeping production costs below competitors' costs

Which of the following exemplifies how the interest rate rations the available supply of loanable funds to investment projects that have expected rates of return at or above the interest rate cost of borrowed funds?

If the expected rate of return on capital is 6%, an industry will find it unprofitable to expand its capital at 8% interest If the expected rate of return on capital is 16%, an industry will find it profitable to expand its capital at 8% interest

Which of the following represents the income earned by households for providing capital to firms?

Interest

What are the critical prices that determine the level and composition of new capital goods investments?

Interest rates

A higher equilibrium interest rate has which of the following effects?

It discourages business from borrowing for investment. It reduces investment and total spending.

Which of the following statements about land are true?

It has no opportunity cost. It has no production cost.

Which of the following outcomes are most likely when wheat producers bid on land on which to grow their crops?

Land rent is near zero in non-fertile areas. Land rent is low in less fertile areas. Land rent is highest in more fertile areas.

Which of the following exemplify how the interest rate does not perfectly ration capital to its most productive uses?

Large oligopolistic borrowers that pass interest costs on to consumers because they can change prices by controlling output Large corporate borrowers that use their size and prestige to negotiate more favorable terms than smaller firms

Anything that increases the rate of return on potential investments will increase the demand for which of the following?

Loanable funds

Which of the following are the general sources of uninsurable risks?

New products or production methods pioneered by rivals Changes in the general economic environment Changes in the structure of the economy Changes in government policy

______ value is the value of some amount of money today to be received in the future.

Present

Which of the following helps allocate resources among alternative lines of production, distribution, and sales?

Profit

Firms can acquire capital in which of the following ways?

Purchasing it themselves Leasing it from households

In the figure, supply of land is perfectly inelastic, meaning that demand is the sole active determinant of land rent. Match the following demand levels with their corresponding rent level. Instructions D1 D2 D3 D4

R1$ R2$ R3$ 0$

Other things equal, how does a lower interest rate affect research and development (R&D)?

The amount of R&D spending that is potentially profitable is greater. The cost of borrowing funds for R&D is lower.

Which of the following determines whether firms will use borrowed funds for investment projects?

The interest rate in relation to the rate of return on the project

Which of the following explains the interest rate in terms of the supply of and demand for funds available for lending and borrowing?

The loanable funds theory of interest

Which of the following is true when the chance is low that a borrower will not repay a loan?

The lower the interest rate the lender will charge to compensate for that risk

What will happen to the land rental price when demand shifts from D2 to D1?

The price will increase.

Which of the following are determinants of demand for land?

The prices of other resources that are combined with the land The prices of the products produced on the land The productivity of the land

The allocation of funds to R&D projects benefits society when which of the following is true?

The projects have high enough expected rates of return to justify the use of scarce resources.

Which of the following describes how the supply curve of loanable funds would be affected if the government expanded programs to cover medical costs more fully?

The supply of loanable funds would decrease and shift to the left

Which of the following describes the effect on the supply of loanable funds if interest earned on savings were to be suddenly exempted from taxes?

The supply of loanable funds would increase and shift to the right

Which of the following conveys the idea that a specific amount of money is more valuable to a person the sooner it can be obtained?

The time-value of money

Which of the following describe the primary roles of entrepreneurs?

They introduce new products or new processes of production They bear the economic risk associated with production They combine resources to produce a good or service

The supply curve of non-land resources is upward-sloping and provides a(n) ______ function.

incentive

Businesses borrow loanable funds primarily to increase their stock of _____ goods.

capital

The reason that money has time value is because of the potential for _____ interest.

compound

The total interest that accumulates over time on both the principle money deposited and accumulating interest in an interest-bearing savings account is known as ______ interest.

compound

Economic profit is a type of ______.

economic rent

Profit functions as a reward for ______ for taking on the uninsurable risks associated with running a business.

entrepreneurs

The fact that interest is paid on invested funds means that a specific amount of money today is ______ in the future.

equal to a larger amount of money

True or false: Economic profit is expressed as a positive number.

false

True or false: The interest rate is a mechanism that perfectly rations capital to its most productive uses.

false

What is the term that describes the amount to which some current amount of money will grow as interest compounds over time?

future value

The cost of issuing a large loan and a small loan are about the same in dollars, but the cost is ______.

greater as a percentage of the smaller loan

The interest rate on a smaller loan will be ______ the interest rate on a larger loan, assuming equal maturity and risk.

greater than

A hypothetical interest rate whose only function is to compensate lenders for the opportunities they forgo by not having access to the loaned funds is called the ______.

pure rate of interest

Because a firm's entrepreneurs receive only the revenue left over after all other factors of production have been paid, they are considered ______.

residual claimants

Differences in land productivity are reflected in ______.

resource demands and economic rents

If a firm is willing to borrow more funds at the same interest rate, it is implied that the demand curve for loanable funds has shifted to the ______.

right

The greater the chance that a borrower will not repay a loan ______.

the higher the interest rate the lender will charge to compensate for that risk

The interest rate serves to allocate money and, consequently, physical capital to ______.

the industries in which the capital will be most productive and profitable

Interest is the price that borrowers pay to a lender so that they can purchase goods and services today rather than in the future.

true

True or false: Interest rates are rationing devices.

true

Changes in the general economic environment, changes in the structure of the economy, and changes in government policy are three general sources of ______.

uninsurable risk