Question 10 A bank charges one borrower (A) 8 percent interest per year and anot

Question

Question 10

A bank charges one borrower (A) 8 percent interest per year and another borrower (B) 10 percent interest per year. Which of the following is a plausible reason for the higher interest rate for B?

A is borrowing the money for a longer period than B

A is borrowing a larger amount than B

B is using the money for a less risky project than A

B has a better credit rating than A

1.66 points   

Question 11

A characteristic of a purely competitive labor market would be:

"price maker" behavior by the workers

"wage taker" behavior by workers

Many firms selling the same product

Many workers with different skills

1.66 points   

Question 12

A firm considering whether to borrow money to purchase a capital good will compare the rate of interest for the loan with the:

Opportunity cost of the capital good

Rate of return on the investment

Length of the investment

Treasury bill rate

1.66 points   

Question 13

An increase in the demand for loanable funds may be caused by a(n):

Increase in the availability of loanable funds

Increase in consumers' willingness to save

Increase in business borrowing

Decrease in the interest rate

1.66 points   

Question 14

6 percent

8 percent

10 percent

12 percent

1.66 points   

Question 15

Compared to a purely competitive firm, a monopsonist will pay:

A higher wage rate to its workers

Lower wages but hire more workers than the purely competitive firm

Lower wage rates and hire fewer workers than the purely competitive firm

Lower wages while hiring the same quantity of workers as the purely competitive firm

1.66 points   

Question 16

Critics contend that imposing a minimum wage higher than the equilibrium wage in a competitive industry would:

Decrease the number of workers employed in that industry

Decrease the quantity of labor supplied to that industry

Increase the demand for labor in the industry

Increase employment in that industry

1.66 points   

Question 17

Critics of large pay packages for CEOs argue that they:

Are based on a faulty calculation of piece rate

Are an ineffective form of an efficiency wage

Bear little relation to marginal revenue product

Would be better if they were determined by royalty payments

1.66 points   

Question 18

Economic profits:

Are identical to accounting profits

Must be earned by every firm which continues to produce in the long run

Serve no useful economic purpose and should never occur in a competitive economy

Serve in the short run as an incentive to guide production decisions, but indicate the existence of barriers to entry in the long run

1.66 points   

Question 19

Entrepreneurs normally do all of the following except:

Take the initiative in combining other resources to produce goods or services

Make the basic, nonroutine policy decisions for their organization

Bear the risks involved in introducing new products or production innovations

Get hired as a top executive in established corporations

1.66 points   

Question 20

Equilibrium price differentials for productive resources:

Tend to be self-eliminating

May be caused by differences in the quality of those resources

Are eliminated when the allocation of resources is in a state of equilibrium

Are unrelated to differences in nonmonetary benefits

1.66 points   

Question 21

Henry George claimed that land-rent taxes would not impair economic efficiency because:

They do not result in a change in the amount of land available

Landowners are, as a group, financially secure and able to pay the taxes

The supply of land is infinitely elastic

Rents represent a small part of income paid to American resource suppliers, so taxes on wages and salaries are more disruptive

1.66 points   

Question 22

If a factor of production has no production cost and has a fixed supply, then payments to that factor constitute what economists call:

Abnormal profits

Economic rent

Normal profits

Interest payments

1.66 points   

Question 23

If the desired real rate of interest is 5 percent and the expected rate of inflation is 15 percent, what is the nominal rate of interest?

5 percent

10 percent

15 percent

20 percent

1.66 points   

Question 24

If the inflation rate is 10 percent, what is a bank's real rate of return on a loan of $100 at 10 percent interest?

$100

$10

10 percent

0 percent

1.66 points   

Question 25

If the interest rate is 10%, what is the present value of $25,000 received two years from now?

$20,000

$20,661

$30,250

$30,000

1.66 points   

Question 26

If the interest rate is 5%, what is the future value of $5,000 three years from now?

$4,310

$5,500

$5,010

$5,788

1.66 points   

Question 27

If the wage rate in a purely competitive labor market increases, it will cause the:

Marginal resource cost curve for a single competitive firm in the industry to shift down

Marginal resource cost curve for a single competitive firm in the industry to shift up

Labor supply curve for a single competitive firm to shift downward

Labor supply curve for the industry to shift rightward

1.66 points   

Question 28

$33

$48

$65

$84

1.66 points   

Question 29

$13

$15

$17

$19

1.66 points   

Question 30

Models that analyze how labor unions attempt to raise wage rates include the following, except:

Demand-enhancement model

Exclusive union model

Industrial union model

Credit union model

1.66 points   

Question 31

Other things equal, the interest rate on a loan will be larger:

The less the risk involved

The larger the amount of the loan

The longer the length of the loan

If loan interest is exempt from taxation

1.66 points   

Question 32

Other things equal, the interest rate on a loan will be larger:

The higher the risk involved

The larger the amount of the loan

The shorter the length of the loan

If loan interest is exempt from taxation

1.66 points   

Question 33

Other things equal, the interest rate on a loan will be smaller:

The greater the risk involved

The smaller the amount of the loan

The longer the length of the loan

If the loan interest is exempt from taxation

1.66 points   

Question 34

Productivity measures (such as output per worker-hour) and wage rates adjusted for inflation in the United States are:

Inversely related

Unrelated

Directly, but not closely, related

Directly and closely related

1.66 points   

Question 35

Pure rate of interest refers to the interest rate that:

Borrowers pay to lenders in their own family or circle of close friends

Serves solely as payment to lenders for giving up current use of their funds

Is the difference between the actual rate and the theoretical rate

Measures the compensation to lenders for taking on the risks involved

1.66 points   

Question 36

Real wages would rise if the:

Prices of goods and services rose more rapidly than nominal-wage rates

Prices of goods and services rose less rapidly than nominal-wage rates

Prices of goods and services and wage rates both rose

Prices of goods and services and wage rates both fell

1.66 points   

Question 37

Suppose a firm is considering the purchase of a machine which when used will increase its total revenues by $10,000 for the year. The machine costs $8,000 and has a useful life of one year. The interest rate is 20 percent. This investment should:

Be undertaken because the rate of return is 2 percent greater than the interest rate

Be undertaken because the rate of return is 5 percent greater than the interest rate

Be undertaken because the rate of return is 7 percent greater than the interest rate

Not be undertaken because the rate of return is 7 percent less than the interest rate

1.66 points   

Question 38

300

450

600

750

1.66 points   

Question 39

Employment would decrease by 150 to 600 workers total

Employment would increase by 150 to 750 workers total

Employment would decrease by 150 to 750 workers total

Employment would increase by 150 to 900 workers total

1.66 points   

Question 40

$50 and 400,000 acres

$400 and 50,000 acres

$150 and 400,000 acres

$250 and 50,000 acres

1.66 points   

Question 41

Suppose the wage rate is $5, and the marginal revenue product (MRP) of the seventh worker at a yo-yo factory is also equal to $5. The labor market was originally purely competitive, but is then monopsonized without changing the MRP of the seventh worker. That means:

More workers will be hired but they will be paid lower wages

More workers will be hired and they will be paid higher wages

Fewer workers will be hired and they will be paid lower wages

Fewer workers will be hired and they will be paid higher wages

1.66 points   

Question 42

Taking unauthorized work breaks would be an example of:

Compensating differences

Noncompeting groups

Piece rate incentives

Shirking

1.66 points   

Question 43

The basic explanation for high real wages in the United States and other industrially advanced economies is that the:

Labor supply has increased more rapidly than labor demand in these nations

Labor demand has increased more rapidly than labor supply in these nations

Unemployment in these nations has remained relatively stable over the years

Inflation rate in these nations has been higher than the rate of increase in nominal wages

1.66 points   

Question 44

The demand curve for loanable funds represents the behavior of:

Lenders

Savers

Borrowers

Bankers

1.66 points   

Question 45

The individual firm which hires labor under competitive conditions faces a labor supply curve which:

Slopes downward to the right

Is perfectly elastic

Is perfectly inelastic

Is of unit elasticity

1.66 points   

Question 46

The labor market for teachers in a small, isolated community that has one school district would be best described as a(n):

Natural monopoly

Bilateral monopoly

Monopsony

Oligopsony

1.66 points   

Question 47

The major reason that presidents of major corporations receive an average salary of over $1 million a year while police officers receive an average salary of about $56,000 a year can best be explained by:

Discrimination

Lack of job information

Compensating differences

Noncompeting labor groups

1.66 points   

Question 48

The prices paid to a productive resource usually perform an incentive function except with what resource?

Land

Labor

Capital

Entrepreneurial ability

1.66 points   

Question 49

The principal-agent problem as it applies to labor employment refers to:

Employer and workers wanting the firm to survive and thrive

Firms having the profit motive, while workers may be shirking on the job

Employers having a problem finding qualified workers

Workers facing a problem finding employment

1.66 points   

Question 50

The reason that unskilled construction workers typically receive higher wages than retail sales clerks is best explained by:

Discrimination

Geographic immobilities

Compensating differences

Noncompeting labor groups

1.66 points   

Question 51

4 percent

6 percent

8 percent

10 percent

1.66 points   

Question 52

The supply curve for a productive resource wherein price provides an incentive function is:

Vertical

Horizontal

Upsloping to the right

Downsloping to the right

1.66 points   

Question 53

The supply curve for loanable funds is upward-sloping because:

Lenders are more willing to lend at lower, rather than higher, interest rates

Lenders are more willing to lend at higher, rather than lower, interest rates

Borrowers are more willing to borrow at lower, rather than higher, interest rates

Borrowers are more willing to borrow at higher, rather than lower, interest rates

1.66 points   

Question 54

A

B

C

D

1.66 points   

Question 55

Which expression is used to calculate the present value of an amount of money?

Future Value x (1 + interest rate)time

Future Value/(1 + interest rate)time

Future Value x (1 + time)interest rate

(1 + interest rate)time/Future Value

1.66 points   

Question 56

Which of the following economic effects of unions tends to improve efficiency?

Featherbedding

Strike or lockout

Union wage advantage

Voice mechanism

1.66 points   

Question 57

Which of the following interest rates is usually the highest?

30-year mortgage rate

20-year Treasury bond rate

Consumer credit-card rate

Prime rate of banks

1.66 points   

Question 58

Which of the following resource payments is considered by economists as surplus payments?

Wages for labor

Rent for land

Interest for capital

Profits for entrepreneurship

1.66 points   

Question 59

Which of the following will increase the supply of loanable funds? An increase in the:

Rates of return on potential investments

Productivity of business firms

Demand for business products

Savings of households

1.66 points   

Question 60

Which would usually not be an entrepreneurial function?

Introducing a new product in a business

Assuming uninsurable risks of owning a business

Combining and directing resources in an uncertain business environment

Managing the accounting department of a Fortune 500 corporation

A is borrowing the money for a longer period than B

A is borrowing a larger amount than B

B is using the money for a less risky project than A

B has a better credit rating than A

Explanation / Answer

10. The interest rate depends upon basically 2 important variables—

Here, since A’s interest rate is less than that of B’s, we could say that either A’s loan time period is longer than B’s, or his risk factor is less than B’s.

So, option (1) is the correct answer.

11. Purely competitive labor market mirrors the condition of purely competitive product market. Here, every firm and labor would be wage taker as there would be large number of labor demand and labor supply, as in the product market there would exist large number of buyers and sellers.

Hence, option (2) is the right answer.

12. The purchase of capital good is made based on the expectation of future return, and it is termed as an investment as the capital good is used to produce further products which will fetch profit.

On the other hand, we could put that amount of investment in banks to fetch interest.

So, whether to buy the capital good or to put the money into the bank will depend upon the rate of return on capital good and the present interest rate of the bank or the difference of the two rates, known as the opportunity cost. In other words it’ll depend upon the opportunity cost of the capital goods purchased.

So, option (1) is the right answer.

13. The demand for loanable fund increases when the consumer or the investor needs to borrow more money from the banks in order to fund their projects. For example, if the aggregate demand increases, then to meet the increased demand the investors would demand more money from the banks to business activities. So, an increase in demand is the reason for increased business borrowing and so increased demand for lonable fund.

Also, a decrease in interest rate also gives investors to borrow more as the rate of return to the borrowed amount would be less, so the demand for lonable fund would rise.

So, option (4) is the correct answer.

15. A monopolist is price maker unlike perfect competition where the price is fixed based on the market demand and supply condition. So, the monopolist extract higher profit by keeping the price of the product high and the level of output produced small.

Since, the output produced under monopoly is less than that of the perfect competition, the firm will recruit fewer laborers than that of the perfect competition and also would give them lower wages as they have the control over the market assuming the reserve army of labor.

So, option (3) is the right answer.

16. Under perfect competition the price and wage are determined based on the market demand and supply condition, where the causation runs from the product market to the labor market. Now, imposing a minimum wage higher than the equilibrium wage into the labor market would lead to market distortion, where the supply of labor rises and the demand for labor falls, which will lead to lowering of output produced in the product market and increase in price due to excess demand. So, the employment in the industry would fall.

Hence, option (1) is the correct answer.

17. The CEOs actually doesn’t take part into the production process directly and so is the case for other officers; they basically put their emphasis on the marketing, R&D and other aspect which sustain the company in the competition and also fetches higher profit. So, they are responsible for the increase in the valuation of the product but their contribution in the production is negligible and so in case of marginal revenue calculation, it would not carry much weight.

So, option (3) is the correct answer.

18. Economic profit is defined as,

Economic Profit = Accounting Profit + Opportunity Cost.

In case of perfect competition, since the opportunity cost is zero (as there is no other way the resources could be put into use for higher return); we could say that the Economic Profit would be same as the Accounting profit. If there arises some opportunity cost, then one firm would get the edge over the other firms and that would simply demolish the entire concept of perfect competition. Hence, there should not arise any opportunity cost in case of competitive market.

So, option (3) is the correct answer.

19. Entrepreneurs might merge their corporations with that of the leaders in the market, but they do not get hired by top executive, otherwise if they do, they would be called an employee of that established corporation and not entrepreneur anymore.

Hence, option (4) is the correct answer.

20. According to the convergence theory of economics, the rate of return for the industries tends to converge to a long-run rate. When the distribution of resources reaches its optimum level, the equilibrium price should converge as well, which eliminates the difference between the rates of return between the industries.

Hence, option (3) is the correct answer.

21. The group of landowners is very small in number, who actually rent their lands for different purposes. Hence, if we look into the total income of the Americans, the income from rent for the landowners would occupy a very small portion and so taxing them would not disrupt the economic efficiency to large extend; whereas taxing the salaries would be more disruptive as that would lower the demand to large extend.

Hence, option (4) is the correct answer.

22. The organization is an important factor of production, which uses other factors in order to produce the output. It has no cost of production and is fixed in supply. The payment to the organization is profit, which is why the profit also appears as a factor payment in case of national income accounting. The payment should be positive to have been included into the national income. So, the abnormal profit or the profit which is greater than zero is the payment to the factor of production, organization.

Hence, option (1) is the correct answer.

23. The relation between the nominal rate of interest, real rate of interest and the inflation rate is given by the following expression—

Real rate of Interest = Nominal rate of Interest – Rate of Inflation

Here, the real rate of interest and the inflation rate is given as 5% and 15% respectively. So, the nominal rate of interest would be,

Nominal rate of Interest = Real rate of Interest + Rate of Inflation

Hence, option (4) is the correct answer.

24. Here, the nominal rate of interest is 10% and the inflation rate is also 10%, so the real rate of interest in this case is, (10% - 10%) = 0%. This means, even if the bank gets higher amount than $100 loan given to the borrower, the valuation of the loan remains stagnant as the inflation rate is same as the nominal rate of interest.

So, the correct option is (4).

25. The present value of some amount can be calculated according to the following formula—

Present Value = F.V./ (1 + r)n

Where, F.V. is the future value of the loan amount, r = rate of interest, n = number of years.

Here, F.V. = $25,000

r = 10%

n = 2 years

Therefore, Present Value = $25,000/(1 + 10%)2 = $25,000/(1 + 0.1)2 = $25,000/1.12 = $20,661 (approx.)

So, option (2) is the correct answer.

26. We could find the future value according to the following formula—

F.V. = P.V. * (1 + r)n

Here, P.V. = $5,000

r = 5%

n = 3 years

Therefore, F.V. = $5,000 * (1 + 5%)3 = $5,000 * (1 + 0.05)3 = $5,000 * 1.053 = $5,788.

So, option (4) is the correct answer.

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