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Example 3: Imelda wants to buy a $2,000 sofa. Rather than waiting until she can accumulate $2,000 in savings, Imelda purchases the sofa and makes monthly payments, including interest, for four years. By the time Imelda has paid for the sofa, it has cost her $2,642.27. But Imelda is happy because she has a high rate of time preference. People with a higher rate of time preference will be willing to pay a higher interest rate in order to borrow for current consumption. People with a lower rate of time preference will only borrow for current consumption at lower interest rates. The consumer demand for loanable funds will be inversely related to the interest rate. The lower the interest rate, the greater the quantity of loanable funds demanded by consumers. For more on consumer saving and spending, see the review of the book “Nudge” in the appendix at the end of the chapter. 2. Business firms, which wish to invest in physical capital. Investing in physical capital can increase a business firm’s productivity. The increased productivity can add to a firm’s profits by increasing the firm’s revenue or by decreasing the firm’s production costs. The rate of return from the investment is calculated as the additional annual profits generated by the investment divided by the cost of the investment (see Chapter 6). Investing in physical capital may require the use of loanable funds. Interest is the payment for the use of loanable funds, and ultimately for the use of the physical capital financed by the loanable funds. We learned in Chapter 6 that an investment in physical capital will be made only if the expected rate of return from the investment exceeds the interest rate that must be paid to finance the investment. The investment demand for loanable funds will be inversely related to the interest rate. The lower the interest rate, the greater the quantity of loanable funds demanded by business investors. Both consumer demand and investment demand for loanable funds will be inversely related to the interest rate. Thus, the loanable funds demand curve will be downward sloping, as illustrated on the graph in Example 4 below. The graph also shows the equilibrium interest rate, where the quantity demanded of loanable funds equals the quantity supplied of loanable funds. Example 4: The graph below illustrates equilibrium in the loanable funds market. Interest Rate Quantity of Loanable Funds Investment demand for loanable funds will increase if the expected rates of return from investment in physical capital increase. Investment demand for loanable funds will decrease if the expected rates of return from investment in physical capital decrease. (See further explanation on page 6-3.) FOR REVIEW ONLY - NOT FOR DISTRIBUTION S D Interest, Present Value, Rent, and Profit 26 - 2
An increase in expected rates of return would increase investment demand (shift the loanable funds demand curve to the right). This would result in a new equilibrium at a higher interest rate and a greater quantity of saving and borrowing. See D 2 on the graph in Example 5A below. Example 5A: The graph below illustrates the effect of an increase (D 2 ) in expected rates of return from investment. Interest Rate Quantity of Loanable Funds S D D 1 2 A decrease in expected rates of return would decrease investment demand. This would result in a new equilibrium at a lower interest rate and a lesser quantity of saving and borrowing. See D 3 on the graph in Example 5B below. Example 5B: The graph below illustrates the effect of a decrease (D 3 ) in expected rates of return from investment. Interest Rate Quantity of Loanable Funds S D D3 1 FOR REVIEW ONLY - NOT FOR DISTRIBUTION 26 - 3 Interest, Present Value, Rent, and Profit
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Appendix: Think Like an Economist -
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Answer questions 8. and 9. based on
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___ 25. The extension of unemployme
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Chapter 5 Measuring Total Output: G
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5. Leisure. Leisure time is by defi
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The U.S. is a high per capita GDP c
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Example 17: In “An International
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The simple circular flow diagram be
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___ 3. Which of the following would
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2. Explain what nonproduction trans
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Chapter 6 The Aggregate Market The
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Example 2C: Assume the same facts a
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Example 5B: The price of crude oil
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Price Level Real GDP SRAS AD 2 AD 1
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Appendix: Why the Aggregate Demand
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___ 3. DEF Company can invest in ne
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2. List and explain the two factors
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Chapter 7 Classical Economic Theory
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Notice that the investment demand c
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Long-Run Equilibrium If Real GDP is
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Example 6B: When the economy is in
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Laissez-faire If the economy is sel
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___ 5. According to Say’s Law: a.
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3. On the graph below, draw an aggr
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Chapter 8 Keynesian Economic Theory
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Example 2B: The graph below illustr
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Example 5: Assume that the table be
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Notice on the graph on the previous
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According to Keynesian theory, a ch
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“The General Theory” also inclu
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___ 8. If the consumption function
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3. If the MPC is .667, and investme
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Chapter 9 Fiscal Policy The basic e
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Keynesian Fiscal Policy Theory and
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Example 5A: The federal government
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The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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___ 4. A decrease in government exp
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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___ 6. Federal excise taxes: a. are
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Example 25: In Brazil, about half t
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Study Guide for Chapter 15 Chapter
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___ 13. Among the counterproductive
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4. List four ways that governments
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Chapter 16 International Trade The
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Other Benefits of Free Internationa
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Example 6: The graph below illustra
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competitive disadvantage. But dumpi
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is only 25% as productive as before
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Smith was skeptical of government a
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___ 4. For Country X, what is the o
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___ 18. Frédéric Bastiat’s “P
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4. On the graph below: (1) What is
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Chapter 17 Elasticity We are often
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Example 4A: What is price elasticit
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Example 5A: Gertie’s Gas and Go i
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Example 10A: When the price of Good
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Example 13B: On the graph below, su
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$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -
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In the long run, would the deadweig
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___ 7. The factors that determine w
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3. a. Which price (or prices) from
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Chapter 18 Utility The basic econom
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Nonetheless, society generally assu
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Example 9: Capital City operates a
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Marginal rate of substitution - the
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The diamond-water paradox is the ob
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Complete the table below to answer
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4. The graph below shows indifferen
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Chapter 19 The Firm The basic econo
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than contributing to team productio
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1. Difficulty in raising large amou
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Corporations also use self-financin
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Example 24: A blacksmith who produc
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For financing needs, proprietorship
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___ 13. Corporations: a. are comple
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5. List two things that the absence
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Chapter 20 Production and Costs The
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In Example 5B, Birdwell finds that
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variable cost initially decreases,
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Quantity TC MC AFC AVC ATC 0 240 X
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If the scale of operation is increa
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average total cost. Average fixed c
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___ 11. Concerning the cost curves:
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5. Complete the following cost tabl
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Chapter 21 Perfect Competition The
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Even though a perfect competitor ca
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Example 6C: This example builds on
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At what price will there be neither
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Appendix: Perfect Competition in th
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Multiple Choice: ___ 1. A perfect c
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___ 17. Perfect competition: a. req
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Answers for Chapter 21 Fill-in-the-
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Chapter 22 Monopoly Of the four mar
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3. Exclusive ownership of an essent
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maximizing quantity (4 units) creat
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$22 - 20 - 18 - 16 - 14 - Deadweigh
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2. Negotiating, beginning at a high
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Legal barriers are created by gover
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___ 8. The slope of the demand curv
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Page 377 and 378: Chapter 23 Monopolistic Competition
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Page 381 and 382: Example 7A: The graph below represe
Page 383 and 384: Example 9: The Organization of the
Page 385 and 386: Example 12 illustrates the dilemma
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Page 389 and 390: ___ 14. Game theory: a. is a method
Page 391 and 392: Answers for Chapter 23 Fill-in-the-
Page 393 and 394: Chapter 24 Factor Markets The basic
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Page 397 and 398: Since producers will attempt to equ
Page 399 and 400: 2. Differences in nonmoney aspects
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Page 403 and 404: ___ 3. To maximize profits, a produ
Page 405 and 406: ___ 19. According to the book, “M
Page 407 and 408: Multiple Choice: 1. a. 8. c. 15. d.
Page 409 and 410: Chapter 25 Labor Unions The primary
Page 411 and 412: The elasticity of demand for union
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Page 415 and 416: Notice from the graph in Example 6
Page 417 and 418: Wage Factory A Quantity of Labor S
Page 419 and 420: As a cartel, a labor union faces a
Page 421 and 422: ___ 10. For a monopsony: a. there i
Page 423 and 424: 3. The graph below represents a lab
Page 425: Chapter 26 Interest, Present Value,
Page 429 and 430: An asset is valuable because we exp
Page 431 and 432: Example 13B: General Ordnance prove
Page 433 and 434: Appendix: Present Value Table One f
Page 435 and 436: ___ 4. An increase in expected rate
Page 437 and 438: Problems: 1. List and explain the t
Page 439 and 440: Chapter 27 Market Failure The basic
Page 441 and 442: External Benefit If a market genera
Page 443 and 444: Example 2: To encourage the consump
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Page 447 and 448: A common good is nonexcludable. Non
Page 449 and 450: Study Guide for Chapter 27 Chapter
Page 451 and 452: ___ 5. What government policy would
Page 453 and 454: 4. Based on the information on the
Page 455 and 456: Chapter 28 Public Choice and Govern
Page 457 and 458: Candidates and the Median Voter Mod
Page 459 and 460: Example 8: According to State and F
Page 461 and 462: Example 10: When Elvis Presley was
Page 463 and 464: 4. Pessimistic bias. This is the te
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Page 467 and 468: 2. If a certain policy will yield s
Page 469 and 470: Chapter 29 Government Regulation of
Page 471 and 472: underproduction is the amount that
Page 473 and 474: micromanagement results in business
Page 475 and 476: market. They may agree with their c
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Questions for Chapter 29 Fill-in-th
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___ 10. The public interest theory
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4. List the four types of costs imp
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Study Guide for Chapter 30 Chapter
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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