1.
When evaluation a business decision, an economist will often resort to the use of present value because
Correct Answer
B. The investment occurs in one time period and the profits in another
Explanation
When evaluating a business decision, an economist will often resort to the use of present value because the investment occurs in one time period and the profits in another. This is because the value of money changes over time due to factors such as inflation and interest rates. By using present value calculations, economists can adjust future profits to their equivalent value in the current time period, allowing for a more accurate analysis of the decision's potential profitability.
2.
In the market for loanable dollars, an increase in the profitability of investments overall will be revealed in
Correct Answer
B. An increase in the demand of loanable dollars
Explanation
An increase in the profitability of investments overall will lead to an increase in the demand for loanable dollars. When investments become more profitable, individuals and businesses will seek to borrow more money to finance these investments. This increased demand for loanable dollars will result in an upward shift in the demand curve in the market for loanable dollars. As a result, the equilibrium interest rate will rise, and the quantity of loanable dollars supplied will increase to meet the higher demand.
3.
When evaluating whether or not to make an investment, one should focus on the ____ because doing so take into account anticipated inflation.
Correct Answer
B. Real interest rate
Explanation
When evaluating whether or not to make an investment, one should focus on the real interest rate because it takes into account anticipated inflation. The real interest rate is the nominal interest rate adjusted for inflation, meaning it reflects the purchasing power of the investment. By considering the real interest rate, an investor can better assess the true return on their investment and make more informed decisions.
4.
To increase a given present value, the discount rate should be adjusted
Correct Answer
B. Downward
Explanation
To increase a given present value, the discount rate should be adjusted downward. This is because the discount rate is used to calculate the present value of future cash flows. A lower discount rate means that future cash flows are being discounted at a lower rate, resulting in a higher present value. Therefore, by decreasing the discount rate, the present value of a given amount will increase.
5.
Present value is defined as
Correct Answer
A. Future cash flows discounted to the present at an appropriate discount rate
Explanation
The correct answer is "Future cash flows discounted to the present at an appropriate discount rate." This definition accurately describes the concept of present value. Present value is a financial calculation that determines the current worth of future cash flows by discounting them at a specified rate. By discounting future cash flows, we can determine their value in today's terms, taking into account factors such as the time value of money and the risk associated with the cash flows. This allows for better decision-making in terms of investment analysis and financial planning.
6.
Which of the following statements is true?
Correct Answer
C. Both A and B are true
Explanation
Both statement A and B are true because the present value of an annuity is always greater than the present value of an equivalent annuity for a given interest rate, and the future value of an annuity factor is always greater than the future value of an equivalent annuity at the same interest rate. This is due to the time value of money, where money received earlier is worth more than money received later. Therefore, the present value and future value of annuities will always be higher than their equivalent annuities.
7.
As the interest rate increases, the present value of a future payment
Correct Answer
C. Decreases.
Explanation
When the interest rate increases, the present value of a future payment decreases. This is because a higher interest rate means that the value of money in the future is worth less in today's terms. Therefore, to compensate for this decrease in value, the present value of the future payment decreases.
8.
The current real interest rate is 3%, and the nominal interest rate is 7%. the expected rate of inflation is
Correct Answer
D. 4%
Explanation
The expected rate of inflation can be calculated by subtracting the real interest rate from the nominal interest rate. In this case, the nominal interest rate is 7% and the real interest rate is 3%, so the expected rate of inflation is 4%. This is because the nominal interest rate includes the expected rate of inflation, so by subtracting the real interest rate (which does not include inflation), we can determine the expected rate of inflation.
9.
John takes out a one-year CD at 4%. During the year inflation rate is 5%. what is the real interest rate?
Correct Answer
B. -1%
Explanation
The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 4% and the inflation rate is 5%. Therefore, the real interest rate would be -1%, indicating that the purchasing power of John's money has decreased by 1% due to inflation.
10.
Which of the following formulas express the correct relationship between the nominal interest rate and the real interest rate?
Correct Answer
A. Real interest rate = nominal interest rate - expected inflation rate
Explanation
The correct relationship between the nominal interest rate and the real interest rate is expressed by the formula "real interest rate = nominal interest rate - expected inflation rate." This formula indicates that the real interest rate is obtained by subtracting the expected inflation rate from the nominal interest rate. This relationship is logical because inflation erodes the purchasing power of money, so the real interest rate adjusts for this by subtracting the expected inflation rate from the nominal interest rate.