Capital, Investment, and Economic Growth: Practice Questions and Solutions

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 66. Which of these is a possible way of formulating the cost of capital?

(a) Cost of capital = depreciation + replenishment costs
(b) Cost of capital = depreciation + opportunity costs
(c) Cost of capital = market rate of interest + risk premium
(d) Cost of capital = depreciation + risk premium
(e) Cost of capital = market rate of interest + opportunity costs

Solution 66. A possible way of formulating the cost of capital is
(b): Cost of capital = depreciation + opportunity costs

Problem 67. What is a possible way of formulating the opportunity costs of capital?

(a) Opportunity costs = maintenance costs + replenishment costs
(b) Opportunity costs = market rate of interest
(c) Opportunity costs = market rate of interest + risk premium
(d) Opportunity costs = depreciation + risk premium
(e) Opportunity costs = market rate of interest + depreciation

Solution 67. A possible way of formulating the opportunity costs of capital is
(c): Opportunity costs = market rate of interest + risk premium

Problem 68. Which of these statements about capital and interest rates are correct?
(a) In a market without institutional barriers and information asymmetries, the costs of internal finance to a company should be the same as the costs of external finance.
(b) Labor is the factor which most accurately explains differences in output among the countries of the world.
(c) Lower interest rates correspond with high levels of investment in capital.
(d) Higher interest rates correspond with lower levels of savings.
(e) In the long run and at the aggregated level, savings S can be expected to be equal to investment I.

Solution 68. The following statements are correct:
(a): In a market without institutional barriers and information asymmetries, the costs of internal finance to a company should be the same as the costs of external finance.
(c): Lower interest rates correspond with high levels of investment in capital.
(e): In the long run and at the aggregated level, savings S can be expected to be equal to investment I.