Chapter_6__Questions

Chapter_6__Questions - Chapter 6 Questions(You may skip...

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Chapter 6 Questions (You may skip section 6.6) 1. Briefly explain the four factors that influence the cost of money. a. production opportunities: The investment opportunities in productive (cash- generating) assets. b. time preferences for consumption: The preferences of consumers for current consumption as opposed to saving for future consumption. c. risk: In a financial market context, the chance that an investment will provide a low or negative return. d. inflation: The amount by which prices increase over time. 2. What role do interest rates play in allocating capital to potential borrowers? The firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from inefficient firms and firms whose products are not in demand. Most capital in the US is allocated through the price system, where interest is the price. 3. How does risk affect interest rates? Low-risk will decrease interest rates, and high-risk will increase interest rates. 4.
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This note was uploaded on 03/31/2011 for the course ACT 1111 taught by Professor Asd during the Spring '11 term at Troy.

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Chapter_6__Questions - Chapter 6 Questions(You may skip...

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