Deck 11: Input Demand: The Capital Market and the Investment Decision

Question 1

An example of tangible capital is

A) a restaurant's unsold, unopened cans of soda.
B) an idea for a new business.
C) the goodwill a firm has established through advertising.
D) knowledge of how to program a computer.

Answer 1

a restaurant's unsold, unopened cans of soda.

Question 2

Firms that offer to pay for college tuition for their employees are investing in ________ capital.

A) tangible
B) productive
C) social
D) human

Answer 2

human

Question 3

A firm's capital is measured as a ________ while investment in new capital is measured as a ________.

A) flow; stock
B) stock; flow
C) stock; change
D) physical amount; dollar value

Answer 3

stock; flow

Question 4

A university requires that all entering first-year students learn how to use word processing and spreadsheet software. This is an investment in what type of capital?

A) tangible
B) financial
C) human
D) productive

Question 5

A capital asset will depreciate because

A) it wears out physically.
B) a similar product becomes available.
C) of an increase in the tax on profits.
D) All of the above are correct.

Question 6

Which of the following would constitute an act of investment by a household, as economists use the term?

A) building a new construction vacation home
B) purchasing 100 shares of Microsoft stock
C) buying a corporate bond
D) borrowing money from the bank to pay for a vacation cruise

Question 7

Depreciation is

A) the sum of gross and net investment.
B) new additions to a firm's stock of intangible capital.
C) the decline in the economic value of an asset over time.
D) the decrease in the general price level.

Question 8

Related to the Economics in Practice on page 228: In 2010, Tesla Motors decided to become a public company by offering shares of stock to the public on a stock exchange. Like most other firms, Tesla relied on ________ to manage the sales of stock from its Initial public offering.

A) inside management
B) investment banks
C) its board of directors
D) the Federal Reserve

Question 9

You take a class that improves your critical thinking skills. This represents an investment in your

A) human capital.
B) social capital.
C) tangible capital.
D) financial capital.

Question 10

Capital goods yield benefits

A) as soon as the investment decision is made.
B) before they are put to use.
C) over their life span.
D) in the present only.

Question 11

"Goodwill" is an example of

A) physical capital.
B) intangible capital.
C) financial capital.
D) a public service industry.

Question 12

As the inventory of a firm falls

A) there is no change in its capital.
B) its intangible capital decreases.
C) its tangible capital decreases.
D) its social capital increases.

Question 13

A clothing manufacturer produced 5,000 sweaters, but sold only 4,000 of them. The remaining 1,000 sweaters would be classified as

A) a loss to the firm.
B) part of the firm's tangible capital.
C) part of the firm's intangible capital.
D) a factor of production.

Question 14

Which of the following would not be considered an act of investing in capital?

A) a father paying for his daughter's college education
B) a firm buying a new energy-saving machine
C) the state government building a new road
D) the Postal Service delivering the mail

Question 15

The measure of a firm's ________ is the current market value of its plant, equipment, inventories, and intangible assets.

A) investment
B) depreciation
C) capital stock
D) capital flow

Question 16

Goods produced by the economic system that are used as inputs in the production of future goods and services are

A) consumable goods.
B) capital goods.
C) tangible goods.
D) depreciation goods.

Question 17

An example of intangible capital is

A) a vacation house.
B) a flower garden.
C) a book.
D) a trained apprenticeship program.

Question 18

In the capital market, households ________ supply the financial resources to firms that allow them to purchase ________.

A) indirectly; capital
B) directly; capital
C) indirectly; land
D) indirectly; labor

Question 19

The term investment as it is used by an economist refers to

A) the creation of new capital.
B) the act of buying a share of stock or a bond.
C) a household's savings.
D) the net worth of a company's financial assets.

Question 20

Which of the following would constitute depreciation, as economists use the term?

A) using some of your savings to buy a car
B) a GM shareholder selling some of her stock
C) inventories of firms decreasing due to an increase in sales
D) All new software requires Windows 8, and not Windows 7, as an operating system.

Question 21

We would not consider ________ an act of capital investment.

A) a son paying for his mother to go back to college
B) a company purchasing solar panels for its headquarters
C) a city government building a new fire station
D) a florist delivering roses on Valentine's Day.

Question 22

As the inventory of a firm rises

A) there is no change in its capital.
B) its intangible capital increases.
C) its tangible capital increases.
D) its social capital decreases.

Question 23

Nonresidential structures, durable equipment, residential structures, and inventories are the major categories of

A) intangible capital.
B) human capital.
C) tangible capital.
D) social capital.

Question 24

A firm's ________ is measured as a stock while ________ is measured as a flow.

A) investment in new capital; capital
B) capital; investment in new capital
C) current labor force; current inventory
D) planned inventory; current inventory

Question 25

As economists use the term, building a new construction pool cabana in back of a residential home is an example of

A) household investment.
B) business depreciation.
C) infrastructure investment.
D) social capital investment.

Question 26

________ is an example of tangible capital.

A) A pet store's unsold, unopened bags of dog food
B) An idea for a new business
C) The goodwill a firm has established through charitable giving
D) Knowledge of how to operate a forklift

Question 27

________ will depreciate because it wears out physically.

A) Intangible capital
B) Human capital
C) A capital asset
D) All of the above are correct.

Question 28

A motorcycle manufacturer produced 8,000 motorcycles, but sold only 6,500 of them. We would classify the remaining 1,500 motorcycles as

A) a loss to the firm.
B) part of the firmʹs tangible capital.
C) part of the firmʹs intangible capital.
D) a factor of production.

Question 29

Infrastructure, such as public works and public services, is also referred to as

A) tangible capital.
B) intangible capital.
C) social capital.
D) human capital.

Question 30

A company requires that all new employees become certified in using Microsoft Office. This investment is in ________ capital.

A) tangible
B) financial
C) human
D) productive

Question 31

An example of ________ is an internship program.

A) tangible capital
B) social capital
C) infrastructure
D) intangible capital

Question 32

Firms that offer to pay for professional development for their employees are investing in ________ capital.

A) human
B) productive
C) social
D) None of the above are correct.

Question 33

Related to the Economics in Practice on page 228: In 2010, Tesla Motors decided to become a public company by offering shares of stock to the public on a stock exchange. The process of doing this is called

A) a stock split.
B) capital gains.
C) an intangible capital investment.
D) an initial public offering.

Question 34

Economists use the term ________ to refer to the creation of new capital.

A) investment
B) entrepreneurship
C) depreciation
D) finance

Question 35

As economists use the term, depreciation is

A) cashing in a Treasury bond to purchase a sailboat.
B) selling your Microsoft stock so you can purchase Google stock.
C) a firm increasing inventory prior to the holiday season.
D) a CPA's knowledge of the 2015 tax code in the years after 2015.

Question 36

Participating in a seminar that helps to improve your performance at work represents an investment in your ________ capital.

A) human
B) social
C) tangible
D) financial

Question 37

In which of the following examples does the firm acquire financial capital from households through a financial intermediary?

A) A firm sells a bond to John Doe.
B) The firm sells a bond to an employee pension fund.
C) The firm uses retained earnings to purchase shares of its stocks owned by individuals.
D) The firm uses retained earnings to purchase shares of its stock owned by a mutual fund company.

Question 38

________ is an example of intangible capital.

A) Inventory
B) "Goodwill"
C) Computer software
D) A public library

Question 39

The decline in the economic value of an asset over time is called

A) disinvestment.
B) a financial loss.
C) depreciation.
D) intangible capital.

Question 40

The measure of a firm's capital stock is the ________ its plant, equipment, inventories, and intangible assets.

A) value it paid for
B) depreciable value of
C) current market value of
D) quantity of

Question 41

Residential structures and inventories are examples of tangible capital.

Question 42

One of the most important forms of capital income is

A) rents.
B) investments.
C) dividends.
D) interest.

Question 43

The value of capital is as great as the services it produces over time.

Question 44

Capital is defined as the current market value of a firm's productive assets.

Question 45

As economists use the word, investment refers only to an increase in capital.

Question 46

A worker's skills and knowledge are types of social capital.

Question 47

The funds that firms use to buy capital come directly or indirectly from households.

Question 48

Nonresidential structures are examples of physical capital.

Question 49

Capital stock is the current market value of all of the shares of stock a company has.

Question 50

Human capital is a type of social capital.

Question 51

Physical capital refers to material things used as inputs in the production of future goods and services.

Question 52

Capital stock is defined as the retail value that was paid for a firm's productive assets.

Question 53

The stock market, banks, and savings and loans are three examples of institutions that economists would classify as belonging to the financial

A) savings markets.
B) investment market.
C) capital market.
D) labor market.

Question 54

Goodwill is a type of tangible capital.

Question 55

Infrastructure is capital that provides services to the public.

Question 56

Capital stock increases with investment and decreases with depreciation.

Question 57

When a household lends money directly to a firm, the firm gives the household a

A) share of stock.
B) certificate of investment.
C) bond.
D) dividend.

Question 58

For a capital asset to depreciate, it must physically wear out.

Question 59

The market in which households supply their savings to firms that demand funds in order to buy capital goods is the ________ market.

A) money
B) savings
C) investment
D) capital

Question 60

Those goods produced by the economic system that are used as inputs in the production of future goods and services are known as capital.

Question 61

You use $50,000 of your own money to start a catering business. During the first year you earn a 5% return on that investment. If the current interest rate is 8%, you earn an economic profit of

A) -$4,000.
B) -$2,500.
C) -$1,500.
D) $4,000.

Question 62

You will agree to lend your sister's grandma's daughter $2,000 for a year, if at the end of the year she pays you $2,200. The interest rate you are charging her is

A) 1.1%.
B) 9.09%.
C) 10%.
D) 20%.

Question 63

You are asked to lend a friend $10,000 for a year. At the end of the year your friend agrees to pay you $10,500. The interest rate on this loan is

A) 0.05%.
B) 5.0%
C) 105%.
D) indeterminate from this information.

Question 64

You agree to lend ________ to a friend for a year at an annual interest rate of 10%. At the end of the year your friend pays you $500 in interest.

A) $50
B) $550
C) $5,000
D) $5,500

Question 65

You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic profit if

A) the return on your investment is between 0 and 5%.
B) the return on your investment is 5%.
C) the return on your investment is greater than 5%.
D) the return on your investment is 10% or greater.

Question 66

Assume that the current interest rate is 6%. You invest $10,000 of your own money in a restaurant that you own and operate. The normal return on this investment is

A) $0, as you used your own money.
B) $600, as that is the interest forgone by not lending the money to someone else at a 6% interest rate.
C) $10,000, as that is the amount invested in the restaurant.
D) $10,600, the amount invested plus the interest charge on the investment.

Question 67

As a holder of a share of common stock, you are

A) entitled to a portion of the firm's revenues.
B) entitled to a portion of the firm's profits.
C) entitled to a standard percentage return on your investment.
D) responsible for the liabilities of the corporation.

Question 68

You use $5,000 of your own money to start a dog-walking business. During the first year you earn a 6% return on your investment. If the current interest rate is 8%, you earn an economic profit of

A) -$60.
B) -$100.
C) $200.
D) $300.

Question 69

You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic loss if

A) the return on your investment is less than 5%.
B) the return on your investment is exactly 5%.
C) the return on your investment is greater than 5%.
D) indeterminate from given information.

Question 70

You use $45,000 of your own money to start an espresso stand. During the first year you earn a 10% return on that investment. If the current interest rate is 8%, you earn an economic profit of

A) -$900.
B) $100.
C) $500.
D) $900.

Question 71

A software company writes a better operating system for personal computers and earns very large profits on this operating system. Which of the following is true?

A) The profits this firm earns are a return for an innovation.
B) The profits this firm earns aren't deserved, as the firm did not take any risks.
C) This firm must not be in a competitive market if it was able to earn a profit.
D) The firm must be a monopoly.

Question 72

You agree to lend a friend $15,000 for a year at an annual interest rate of 20%. At the end of the year your friend must pay you ________ in interest.

A) $133
B) $750
C) $1,500
D) $3,000

Question 73

A fund that takes household savings and puts them into high-risk ventures in exchange for a share of the profits if the new business succeeds is a(n)

A) business capital fund.
B) innovation capital fund.
C) risk capital fund.
D) venture capital fund.

Question 74

Households' ________ limit(s) firms' ability to invest in capital.

A) investment in stock
B) savings decisions
C) supply of land
D) tax liability

Question 75

You use $2,000 of your own money to start a dog-sitting service. During the first year you earn a 10% return on your investment. If the current interest rate is 7%, you earn an economic profit of

A) $60.
B) $140.
C) $200.
D) $340.

Question 76

You are asked to lend a friend $20,000 for a year. At the end of the year your friend agrees to pay you $21,000. The interest rate on this loan is

A) 4.50%
B) 5.00%.
C) 5.50%.
D) indeterminate from this information.

Question 77

When you use your own savings to start a business, you make a profit

A) after the first dollar you earn, because you borrowed no funds to start the business.
B) after you earn an amount equal to the savings you used to start the business.
C) only after you cover the opportunity cost of using your savings to start your business.
D) only after you earn double the amount of money you invested.

Question 78

You agree to lend a friend $20,000 for a year at an annual interest rate of 45%. At the end of the year your friend must pay you ________ in interest.

A) $133
B) $750
C) $1,900
D) $9,000

Question 79

Capital income includes all of the following except

A) rents.
B) interest.
C) profit.
D) salary.

Question 80

A firm's retaining of earnings is really equivalent to the firm

A) lending money to households.
B) borrowing money from households.
C) decreasing the net worth of households.
D) decreasing its own net worth.