Deck 8: Investment and Profit, and the Multiplier

Question 1

Over the business cycle, investment spending tracks closely with

A) consumption
B) profit
C) corporate debt
D) unemployment

Answer 1

B

Question 2

The most important factor determining division of the product between wages and profits is

A) the level of technology.
B) the amount of labor required to produce the product.
C) the bargaining power between employees and employers.
D) federal minimum wages.

Answer 2

C

Question 3

What two things does the decision to invest require?

A) Funds necessary to make the investment; the ability to claim depreciation for new plant and equipment.
B) Funds necessary to make the investment; the motivation to make the investment.
C) Funds necessary to make the investment; a low interest rate to obtain these funds.
D) Low capital gains tax; low interest rate.

Answer 3

B

Question 4

What are the three sources of funds available to corporations for investment?

A) Retained profits, borrowing from financial institutions, individual investors.
B) Dividends, retained profits, individual investors.
C) Borrowing from financial institutions, borrowing from the government, borrowing from other firms.
D) Borrowing from consumers, borrowing from financial institutions, borrowing from the government.

Question 5

Which of the following would provide funds for investment for Acme Corporation?

A) Sam receives 1000 shares of stock in Acme Corporation from his Aunt Lulu.
B) Acme Corporation issues 100,000 shares of new stock on July 1, 2008. Sam buys 1000 shares.
C) Donald Bigg, a major investor, buys 10,000 shares of stock from Leona Small, another investor, who uses the funds to buy a retirement condo in Florida.
D) Acme Corporation declares a dividend of $1.25 per share.

Question 6

What are "retained earnings?"

A) The amount of a paycheck that a worker gets to keep.
B) The amount of personal income that is saved.
C) The amount of profits paid to shareholders in the form of dividends.
D) The amount of profits not distributed to shareholders.

Question 7

Assume that the marginal propensity to consume in the United States is currently 99%. What is the marginal propensity to save?

A) 10%
B) 1%
C) 9%
D) )01%

Question 8

In an economic expansion, the average ratio of consumption to income (APC)

A) increases
B) decreases.
C) stays the same.
D) could either increase or decrease.

Question 9

The multiplier effect

A) measures how much a price increase for one good will affect the exchange rate.
B) measures how much a price increase for one good will affect the overall rate of inflation.
C) measures how much a new injection of spending will affect overall GDP.
D) measures how much a new injection of spending will affect the overall rate of inflation.

Question 10

What is the government multiplier?

A) It measures how much total national income is increased by an increase in government spending.
B) It measures how much government spending is increased each year.
C) It measures how much government collects in tax revenues each year.
D) It measures how much government budgets are affected by the rate of inflation.

Question 11

Assume that government spending increases by $1 billion and national income increases by $10 billion. What is the government multiplier?

A) 0.10
B) 1.0
C) 10
D) 100

Question 12

Assume that Sam's marginal propensity to consumer is 90%. How much will his consumption increase this year when he receives his raise of $1000?

A) $90
B) $900
C) $1000
D) $100

Question 13

Assume that the marginal propensity to consume in the United States is currently 95%. If the government increases spending by $1 billion, how much will national income increase?

A) $95 million.
B) $95 billion.
C) $5 billion.
D) $20 billion