Q&A Hero

Q: An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn the same rate of return over the 6-year time horizon if he or she buys a 6-year bond or a 3-year bond now and another 3-year bond three years from now (ignore transaction costs). a. True b. False

Q: If you believe that all workers should be paid the same, you believe in theA) egalitarian principle. B) productivity standard.C) benefits standard. D) comparative worth principle.

Q: If the liquidity preference theory of the term structure is correct, we would expect the size of the maturity risk premium to increase with maturity. Thus, we might observe an upward sloping yield curve, even if future short-term rates are expected to decrease. a. True b. False

Q: Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00According to the above table, the marginal factor cost of the seventh worker isA) $24.00. B) $126.00. C) $42.00. D) $168.00.

Q: The market segmentation theory of the term structure is, essentially, the expectations theory with the addition of maturity risk premiums. a. True b. False

Q: A firm that wants to maximize profits should hire each input to the point whereA) its marginal revenue product divided by the price of the input equals one.B) its marginal revenue product divided by its marginal physical product equals the wage.C) its marginal revenue product divided by the product price equals one.D) its marginal physical product divided by the price of the input equals the product price.

Q: The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short. a. True b. False

Q: The wage rate for widget makers is currently $25 per hour and Ajax hires 20 widget makers. If the wage rate were decreased to $20, what would happen to the marginal revenue product for labor at Ajax?A) It would remain the same.B) It would increase since Ajaxʹs demand for labor curve will shift.C) It would increase since the price of widgets would decrease.D) It would decrease since Ajax will hire more workers.

Q: If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt. a. True b. False

Q: A potential benefit that comes from social regulations would beA) higher costs. B) a cleaner environment. C) higher tax collections. D) more layoffs.

Q: Suppose your firm must raise funds immediately, and it has decided to use debt financing to do so. If you believe that the economy is at the peak of a boom, but it is just about to enter a recession, your firm would probably be better off if it issued long-term debt rather than short-term debt. a. True b. False

Q: When oligopolistic firms in an industry form a cartel, then it is most likely that A) both industry output and prices will increase. B) both industry output and prices will decrease. C) industry output will increase while prices will decrease. D) industry output will decrease while prices will increase.

Q: If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British pound to depreciate against the U.S. dollar. a. True b. False

Q: The manufacturers of information products typicallyA) have low fixed costs. B) have high marginal costs.C) have high fixed costs. D) have zero fixed costs.

Q: The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate. a. True b. False

Q: In a monopolistically competitive market if the additional revenue generated from advertising equals the additional cost of advertising, the firm shouldA) advertise more to increase sales.B) advertise more to lower marginal costs.C) maintain its current amount of advertising. D) advertise less to decrease costs.

Q: The term structure is defined as the relationship between interest rates and maturities of similar securities. a. True b. False

Q: Using a graph, show why marginal revenue is always less than price.

Q: Long-term interest rates reflect expectations about future inflation. Inflation has varied significantly from year to year in the past, and as a result, long-term rates can be expected to fluctuate more than short-term rates. a. True b. False

Q: In the long run when a perfectly competitive firm experiences positive economic profits,A) firms exit the industry, the market supply curve shifts rightward, and the market price alls.B) firms enter the industry, the market supply curve shifts rightward, and the market price falls.C) firms exit the industry, the market supply curve shifts leftward, and the market price rises.D) firms enter the industry, the market supply curve shifts rightward, and the market price rises.

Q: In the textbook, the nominal interest rate is defined as being equal to the real risk-free rate, plus an inflation premium, plus a default risk premium, plus a liquidity premium, plus a maturity risk premium. a. True b. False

Q: The demand curve for a perfectly competitive industry isA) perfectly elastic. B) downward sloping.C) perfectly inelastic. D) unit elastic.

Q: If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. a. True b. False

Q: Fixed costs areA) costs that never change.B) costs that a firm incurs even when output is zero.C) not actually costs since they do not affect the decisions of a firm. D) costs that increase at a constant rate when output increases.

Q: The ____ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time. a. inflation risk b. maturity risk c. liquidity risk d. default risk

Q: A legal claim against a firm that usually entitles the owner of the claim to receive a fixed annual coupon payment, plus a lump-sum payment at some future date, is known asA) a bond. B) a share of common stock.C) a share of preferred stock. D) a reinvestment coupon.

Q: As the demand for funds increase, the demand curve will shift to the ____ resulting in ____ market clearing interest rate. a. right; higher b. left; higher c. right; lower d. left; lower

Q: Single-owner proprietorships often unintentionally exaggerate their profits because they A) forget their explicit losses. B) look at after-tax instead of pre-tax costs. C) pay their bills late and therefore incur large interest charges. D) neglect to consider the opportunity cost of the ownerʹs labor.

Q: The diamond-water paradox is an example that shows thatA) necessities like water should have a higher price.B) marginal utility rather than total utility determines what people are willing to pay for a good.C) there are exceptions to the law of diminishing marginal utility. D) marginal utility can initially increase and then decrease.

Q: Default risk premiums a. are unrelated to the issuer of the security. b. are higher for U.S. Treasury securities than for most corporate securities. c. are higher for AAA bonds than for CCC bonds. d. vary somewhat over time.

Q: During recessions the demand for funds typically ____. a. increases b. stays the same c. decreases d. doubles

Q: Total satisfaction is maximized whenA) marginal utility is positive. B) marginal utility is negative.C) marginal utility is zero. D) marginal utility is equal to total utility.

Q: The fundamental factors that affect the cost of money include a. production opportunities b. inflation c. risk d. time preference for consumption e. all of the above

Q: If the price elasticity of demand (Ep) equals one in the short run, then, other things being equal, in the long run Ep will be A) one. B) less than one. C) greater than one. D) indeterminate without more information.

Q: Assume that the expectations theory of term structure holds. If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%, what is the expected rate on a one-year Treasury bond in year three? a. 8% b. 7% c. 6% d. 5% e. 4%

Q: When a polluter has to bear the full social cost of their actions, they willA) weigh the costs and benefits of each potential action and might decide to not stop polluting by paying a fine.B) go out of business since pollution abatement is expensive.C) will always decide to reduce the amount of pollution by reducing the quantity they produce.D) increase the price of the product and the quantity produced to pay for the additional costs.

Q: Which of the following assets is the most liquid? a. Stock b. Treasury bills c. Corporate bonds d. Cash

Q: If you believe that a worker should be paid on the basis of what he or she produced, you believe inA) the egalitarian principle. B) the productivity standard.C) the benefits standard. D) the comparative worth principle.

Q: Most experts think that in the United States the real risk-free rate fluctuates between a. one to two percent. b. two to four percent. c. four to seven percent d. eight to twelve percent

Q: Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00According to the above table, the marginal factor cost of the eighth worker isA) $27.00. B) $48.00. C) $168.00. D) $216.00.

Q: Which of the following is not one of the fundamental factors that affect the cost of money? a. Production opportunities b. Time preferences for consumption c. Exchange rates d. Risk e. Inflation

Q: A perfectly competitive firm discovers that its MRPL divided by the wage equals 1.25. The firm shouldA) check the MRP of the other inputs and divide them by their prices. If they are all equal to 1.25 it is maximizing profits. B) hire more labor.C) purchase more capital.D) try to pay a lower wage rate.

Q: What is the yield on a one-year corporate bond with a $1,000 face value that pays a 12% annual dividend if it was purchased for $950 and held until maturity? a. 12.0% b. 12.6% c. 17.0% d. 17.9%

Q: A decrease in the marginal factor cost of labor willA) lead to an decrease in the quantity demanded of labor. B) induce a firm to hire fewer workers.C) induce a firm to hire more workers.D) cause the value of the marginal product of labor to decrease.

Q: Assume investors demand a real rate of return equal to 3 percent and that there is no maturity risk premium associated with Treasury securities. According to the Wall Street Journal, the average nominal yields on risk-free Treasury securities with different maturities are: Type of security Yield 1-year 4.5% 2-year 4.6 3-year 4.8 4-year 5.0 What is the one-year nominal interest rate and the inflation premium that is expected in Year 4? a. 5.0%; 2.0% b. 4.5%; 1.5% c. 3.0%; 1.8% d. 5.6%; 2.6% e. There is not enough information to answer this question.

Q: According to the text, the federal government spends the most taxpayer -provided funds regulating which area of the economy?A) The environment B) Finance and bankingC) Consumer safety and health D) Transportation

Q: Assume that the real risk-free rate, r*, is 4 percent, and that inflation is expected to be 9% in Year 1, 6% in Year 2, and 4% thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12%, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5− MRP2? a. 2.1% b. 1.8% c. 5.0% d. 3.0% e. 2.5%

Q: If five firms of similar sizes join to form a cartel, then it is most likely that A) they will charge a common, lower market price. B) they will collectively produce less than before. C) all five firms will earn the same profits as before. D) all five firms as a group will have falling profits, but increased output.

Q: Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.) a. 12.0% b. 16.0% c. 13.5% d. 10.5% e. 14.0%

Q: If a monopolistically competitive firm selling an information product engages in marginal cost pricing, it willA) earn additional profits.B) fail to earn sufficient revenues to cover its fixed costs.C) lower costs. D) break even.

Q: The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and run at 6 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 3-year, risk-free securities today? a. 18% b. 12% c. 6% d. 8% e. 10%

Q: In a monopolistically competitive market, a firm should advertise to the point at which A) it is selling the most units it can possibly sell. B) the extra revenue from an additional dollar spent on advertising just equals the marginal cost of producing one more unit of the good. C) the additional revenue generated by one more dollar of advertising just equals the extra dollar cost of advertising. D) it can raise price to the highest level possible.

Q: You read in The Wall Street Journal that 30-day T-bills currently are yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium 5% Liquidity premium 1% Maturity risk premium 2% Default risk premium 2% Based on these data, the real risk-free rate of return is a. 0% b. 1% c. 2% d. 3% e. 4%

Q: What does the demand curve facing a monopoly look like? Why?

Q: You are given the following data: r* = real risk-free rate = 4% Constant inflation premium = 7% Maturity risk premium = 1% Default risk premium for AAA bonds = 3% Liquidity premium for long-term T-bonds = 2% Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is ____, and the rate on long-term Treasury bonds is ____. a. 4%; 14% b. 4%; 15% c. 11%; 14% d. 11%; 15% e. 11%; 17%

Q: What is the shape of the long -run supply curve in a decreasing-cost industry?A) Horizontal B) IncreasingC) Downward sloping D) Upward sloping

Q: Suppose that the annual expected rates of inflation over each of the next five years are 5 percent, 6 percent, 9 percent, 13 percent, and 12 percent, respectively. What is the average expected rate of inflation over the 5-year period? a. 6% b. 7% c. 8% d. 9% e. 10%

Q: The demand curve faced by a perfectly competitive industryA) slopes upward. B) slopes downward. C) has no slope. D) is perfectly inelastic.

Q: Assume that expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 6 percent, respectively. What is the average expected inflation rate over this 5-year period? a. 6.5% b. 7.5% c. 8.0% d. 6.0% e. 7.0%

Q: Costs that do not vary with output areA) total costs. B) variable costs. C) fixed costs. D) marginal costs.

Q: Given the following data, find the expected rate of inflation during the next year. r* = real risk-free rate = 3%. Maturity risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linear relationship exists. Default risk premium on 10-year, A-rated bonds = 1.5%. Liquidity premium = 0%. Going interest rate on 1-year T-bonds = 8.5%. a. 3.5% b. 4.5% c. 5.5% d. 6.5% e. 7.5%

Q: If you want a say in the management of a corporation, you should buyA) common stock. B) preferred stock.C) bonds. D) either bonds or preferred stock.

Q: Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 10.5 percent and the rate on a 1-year Treasury bond is 12 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now? a. 9.0% b. 9.5% c. 10.0% d. 10.5% e. 11.0%

Q: Suppose the best investment you could make with $100,000 in cash is to purchase a government bond that pays 14 percent interest per year. If you decide to invest the money in your own business instead of buying the government bond, the opportunity cost of this financial capital isA) $1,400 per year.B) $100,000 per year. C) $14,000 per year.D) zero, because you already had the $100,000.

Q: Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1%(t − 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest? a. 0.25% b. 0.50% c. 1.00% d. 1.75% e. 2.50%

Q: To derive the law of demand, we assume thatA) prices are constant. B) real prices are constant.C) marginal utility is constant. D) tastes are constant.

Q: Which of the following statements is correct? a. If different markets existed for long-term and short-term bonds, but lenders and borrowers could move freely between markets, (1) the market segmentation theory could not really be an important determinant of the yield curve, and (2) maturity risk premiums could not be significant. b. Because the default risk premium (DRP) and the liquidity premium (LP) are both essentially zero for U.S. Treasury securities, the Treasury yield curve is influenced more heavily by expected inflation than corporate bonds' yield curves, i.e., we can be sure that a given amount of expected inflation will have more effect on the slope of the Treasury yield curve than on the corporate yield curve. c. According to the market segmentation theory, investors prefer to buy debt with short maturities. Therefore, the fundamental conclusion from this theory is that the yield curve normally should slope upwards. d. It is theoretically possible for the yield curve to have a downward slope, and there have been times when such a slope existed. That situation was probably caused by investors' liquidity preferences, i.e., by the factors which underlie the liquidity preference theory. e. Yield curves for government and corporate bonds can be constructed from data that exist in the marketplace. If the yield curves for several companies were plotted on a graph, along with the yield curve for U.S. Treasury securities, the company with the largest total of DRP plus LP would have the highest yield curve.

Q: At the point at which total utility is at a maximum,A) marginal utility is at a minimum. B) marginal utility is negative.C) marginal utility is zero. D) marginal utility is equal to total utility.

Q: Which of the following statements is correct? a. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. b. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. c. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slope downward. d. The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and that as a result, the yield curve normally is upward sloping. e. If the maturity risk premium was zero and the rate of inflation was expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

Q: Compared to the short -run price elasticity of demand, the long -run price elasticity of demand isA) smaller. B) the same. C) greater.D) either greater than or less, depending on the number of substitutes the good has.

Q: Assume that the current yield curve is upward sloping, or normal. This implies that a. Short-term interest rates are more volatile than long-term rates. b. Inflation is expected to subside in the future. c. The economy is at the peak of a business cycle. d. Long-term bonds are a better buy than short-term bonds. e. None of the above statements is necessarily implied by the yield curve given.

Q: The most efficient way to get firms to reduce pollution is toA) set uniform emission standards and require all firms to meet the standards. B) make the worst polluters shut down and go out of business.C) make them pay for the social costs of production and let them decide how to respond to the higher costs.D) provide firms and consumers with the information about the effects of their actions and encourage them to behave responsibly.

Q: In a recent year, interest rates on long-term government and corporate bonds were as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 18% The differences in rates among these issues were caused primarily by a. Tax effects. b. Default risk differences. c. Maturity risk differences. d. Inflation differences. e. Answers b and d are both correct.

Q: Which of the following is NOT a normative standard for income distribution? A) the productivity standard B) the egalitarian principle C) rewarding people according to merit D) All of the above are normative standards.

Q: If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates? a. Prices and interest rates will both rise. b. Prices will rise and interest rates will decline. c. Prices and interest rates will both decline. d. Prices will decline and interest rates will rise. e. There will be no changes in either prices or interest rates.

Q: Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00According to the above table, the marginal factor cost of the fifth worker isA) $30.00. B) $45.00. C) $60.00. D) $90.00.

Q: Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7%, respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is most correct? a. The maturity risk premium is positive. b. Interest rates are expected to rise over the next two years. c. The market expects one-year rates to be 5.5% one year from today. d. Answers a, b, and c are all correct. e. Only answers b and c are correct.

Q: If a firm uses only capital and labor as inputs, then what should the firm do at a given rate of production if the marginal physical product of labor per last dollar spent is lower than the marginal physical product of capital per last dollar spent?A) The firm should increase both the quantity of capital and the quantity of labor.B) The firm should decrease both the quantity of capital and the quantity of labor. C) The firm should increase the quantity of capital and reduce the quantity of labor. D) The firm should decrease the quantity of capital and increase the quantity of labor.

Q: Which of the following statements is most correct? a. The more highly developed a nation's financial system is, the more likely funds are to flow from savers to borrowers by direct transfers as opposed to through financial intermediaries. b. If people in the aggregate have a strong time preference for current consumption as opposed to future consumption, this factor will cause interest rates to be lower than if preferences were more toward future consumption. c. If investors expect the rate of inflation to increase in the future, this would tend to cause the current short-term interest rate to be higher than current long-term rates. d. The existence of maturity risk premiums is due to the fact that a change in interest rates has more effect on the prices of short-term than long-term bonds. e. If a 1-year Treasury bond has a yield of 5 percent, if the expected rate of inflation during the coming year is 3 percent, and if the maturity risk and liquidity premiums on 1-year bonds are zero, then the real risk-free rate r* must be 2 percent.

Q: An increase in the marginal factor cost of labor willA) lead to an increase in the quantity demanded of labor. B) induce a firm to hire fewer workers.C) lead to an increase in the value of an additional worker.D) cause the value of the marginal product of labor to increase.