Choosing A Discount Rate Exam Prep Chapter 8

Chapter 8 Multiple Choice Questions

1. The Social Rate of Time Preference is

a. the preferred time for society to make an investment

b. the rate at which society’s income grows, changing their preferences

c. the rate at which society is willing to trade present for future consumption

d. the length of time society is willing to wait for a program’s benefits to outweigh costs

[Insert Figure 8-5]

2. In Figure 8-5 what is the level of savings prior to taxes?

a. I₁

b. I₀

c. r

d. r₁

3. Which of the following is NOT a source of inefficiently low savings?

a. shortsightedness of the current population

b. too high of an interest rate

c. risk aversion among investors

d. government taxation/borrowing

4. A lower discount rate tends to lead to

a. more public projects

b. fewer public projects

c. no change in public projects because markets adjust to the discount rate used

d. no change in public projects because political actions don’t take the discount rate into consideration

5. The shadow price of a good is

a. the annualized price of the good over a given time period

b. the price for that item on the black market

c. the price of an item after discounting future benefits

d. the maximum willingness to pay for that item

6. When finding the weighted discount rate one should

a. average the highest and lowest estimated social discount rate

b. find the annualized present value of a project using the social discount rate

c. subtract the social discount rate from the return on capital

d. find the fraction of a projects costs that comes from displaces consumption and displaced investment

7. Substitution bias in inflation measures refers to

a. the willingness of society to substitute future consumption with more present

consumption than is optimal

b. the tendency for consumers to substitute away from goods whose price rise more than

average

c. individuals substitution better quality goods for poor quality goods as their income

rises

d. the bias against certain students from a substitute teacher

8. Taking into account intergeneration equity usually requires

a. a higher discount rate

b. a lower discount rate

c. a declining discount rate

d. b or c

9. Rawls’ Just Savings principle states that

a. wealthier future generations should be ignored because only the poorest generations should be considered

b. investment should only go towards projects that help the least well off in the future

c. there is a moral requirement to save and grow until adequate justice is reached

d. society should save just enough to maintain current levels of consumption for future generations