Arnold Quiz: Interest, Rent, and Profit

Quiz
Interest, Rent, and Profit

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1. The term interest refers to: a. the price paid by borrowers for loanable funds.
b. the return received by lenders of loanable funds.
c. the return on capital used in the production process.
d. all of the above.
e. the share of profit received by a partner in a partnership.

2. Which of the following correctly describes the loanable funds market?: a. The price for loanable funds, which is the equilibrium interest rate, is determined by the demand for and supply of credit.
b. The demand for loanable funds is composed of the demand for consumption and investment loans minus the government's demand for deficit financing.
c. The supply of loanable funds comes from newly created money minus people's saving.
d. The higher is the interest rate, the smaller is the demand for and the greater is the supply of loanable funds.
e. All of the above.

3. The term time preference describes an attitude typical of consumers everywhere that: a. makes them subjectively value future goods more highly than current goods of like kind and number.
b. makes them subjectively value current goods more highly than future goods of like kind and number.
c. makes them favor the production of capital goods to that of consumption goods.
d. makes them favor the production of consumption goods to that of capital goods.
e. makes them demand a certain percentage increase in current consumption before they are willing to sacrifice some amount of future consumption.

4. Investors are able and willing to pay interest for loanable funds because: a. they have a positive rate of time preference.
b. they have a negative rate of time preference.
c. they can cut the production of consumption goods now, use the resources so released to make capital goods, and then employ these capital goods to produce a permanently larger flow of consumption goods in the future.
d. it helps them avoid roundabout methods of production.
e. all of the above, except (b).

5. The price for loanable funds, P, and the return on capital, R, tend to equality because: a. P < R leads to increased borrowing and, ceteris paribus, to higher P.
b. P < R leads to increased production and use of capital goods and, ceteris paribus, to lower R (remember the law of diminishing marginal returns!).
c. P > R leads to decreased borrowing and, ceteris paribus, to lower P.
d. P > R leads to decreased production and use of capital goods and, ceteris paribus, to higher R (remember the law of diminishing marginal returns!).
e. of all of the above.

6. Many different types of interest rates exist in any economy; their differentials can be explained by: a. positive rates of time preference.
b. negative rates of time preference.
c. roundabout methods of production.
d. religious prohibitions.
e. none of the above.

7. All else being equal, the interest rate charged on a loan is likely to be: a. higher with higher risk.
b. lower with longer term.
c. lower with lower amount.
d. lower with more frequent repayments.
e. all of the above.

8. Consider an economy in which the forces of supply and demand in the loanable funds market have established an interest rate of 8% per year. Let the actual as well as the expected inflation rate be 0% per year. In that case,: a. the nominal interest rate is 8% per year.
b. the real interest rate is 0% per year.
c. new inflationary expectations of 10% per year will decrease the demand for loanable funds, while raising their supply.
d. new inflationary expectations of 10% per year will lower the real interest rate to –2% per year.
e. all of the above occur.

9. The current value of some future dollar amount is called its: a. economic rent.
b. nominal interest.
c. present value.
d. real interest.
e. time preference.

10. If PV is a present value, FV_n is a future value n years from now, and r is the rate of interest, then: a. PV = FV_n (r).
b. PV/r = FV_n.
c. PV (1 + r) = FV_n.
d. PV (r) = FV_n.
e. none of the above is correct.

11. Given a future value of $500 precisely 7 years from now and an interest rate of 12% per year, the present value is: a. $112.98
b. $222.01.
c. $226.17.
d. $344.78.
e. $456.89.

12. Given a future value of $500 precisely 7 years from now and an interest rate of 12% per year, the present value is: a. $500 (1.12)⁷.
b. $500 (1.07)¹².
c. $500 (12)⁷.
d. $500 (7)¹².
e. none of the above.

13. The use of a truck is expected to yield $5,000 precisely 1 year from now, $6,000 precisely 2 years from now, and, upon its sale, $11,500 precisely 3 years from now. Given an interest rate of 9 percent, the truck's present value is: a. $5,000 / (1.01)⁹ plus $6,000 / (1.02)⁹ plus $11,500 / (1.03)⁹.
b. $18,406.03.
c. both (a) and (b).
d. $18,517.35.
e. impossible to calculate without further information.

14. Suppose you own a plantation abroad. You expect to earn the following profits from its use: $1 million in precisely 1 year from now, $23 million in precisely 2 years from now, negative $5 million in precisely 3 years from now, and $9 million in precisely 4 years from now, at which point you can also sell the plantation for $30 million. If the foreign government threatens to expropriate you now, but is officials can be bribed to forget it, what is the maximum bribe worth paying? (Assume an interest rate of 10% per year.): a. $909,090.90.
b. $19,008,264.
c. $26,637,524.
d. $42,798,304.
e. $46,554,878.

15. Ceteris paribus, which of the following statements about present values is correct?: a. As interest rates decrease, present values decrease as well.
b. As interest rates decrease, present values increase.
c. As interest rates increase, present values increase as well.
d. As interest rates decrease, present values increase, and firms will buy fewer (of the then more expensive) capital goods.
e. Both (b) and (d).

16. The income generated by a resource that can neither be produced nor destroyed by people (and that is supplied by nature in a fixed amount that is forever unresponsive to the resource's rental price) would be called: a. economic profit.
b. opportunity cost.
c. pure economic rent.
d. real interest.
e. none of the above.

17. Which of the following statements correctly characterizes the concept of economic rent?: a. A factor of production can only earn it if the factor's supply curve is perfectly inelastic with respect to price.
b. A factor of production can only earn it if the factor's supply curve is vertical.
c. A factor of production can only earn it if the factor in question is land.
d. Any factor of production can earn it, even if its supply curve is upward-sloping.
e. Any factor of production can earn it, but only if its opportunity cost is zero.

18. Suppose you were earning $100,000 a year as a television newscaster. If the best offer you could get from another TV station were $90,000 a year, and if the best job you could get outside the television industry were $40,000,: a. you would be earning a $10,000 a year pure economic rent as a newscaster at your current station.
b. you would be earning a $60,000 a year economic rent as a newscaster.
c. you would be earning a $60,000 a year pure economic rent as a newscaster.
d. both (a) and (c) would hold.
e. none of the above would hold.

19. Which of the following statements correctly characterizes the concept of profit?: a. Economists emphasize economic profit over accounting profit because it is the former that determines a matter of great interest to them: entry into and exit from an industry.
b. The existence of uncertainty is one possible source of economic profit: it enables some people to earn income by selling insurance against uncertainty to other people.
c. The opportunity for arbitrage is another possible source of economic profit: it enables some people to create artificial rents by "buying low and selling high."
d. The appearance of innovative genius is another possible source of economic profit: it enables entrepreneurs to transform residual profit income into contractual payments.
e. All of the above.

20. Which of the following statements correctly characterizes the concept of profit?: a. Monopoly profit is temporary by nature.
b. Monopoly profit may be competed for, become capitalized, and disappear altogether if the monopoly market is contestable.
c. High profits are clear evidence of corruption and manipulation.
d. Profits exist largely because people naturally have a positive time preference.
e. None of the above.