Deck 19: Investment

Question 1

An increase in the rate of depreciation is associated with ________.

A) a decrease in the rate of productivity.
B) a decrease in gross investment.
C) a decrease in net investment.
D) an increase in net investment.

Answer 1

a decrease in net investment.

Question 2

Investment spending is a potent force in the macroeconomy, because ________.

A) it is subject to large fluctuations
B) it is larger than other spending categories
C) it is the focus of macroeconomic policies
D) it expresses entrepreneurial talent

Answer 2

it is subject to large fluctuations

Question 3

Which of the following is not a component of investment spending?

A) spending by firms on equipment.
B) the purchase of 1000 shares of corporate stock.
C) residential construction.
D) changes in inventories.

Answer 3

the purchase of 1000 shares of corporate stock.

Question 4

The fraction of capital that wears out every year is known as ________.

A) gross investment.
B) depreciation.
C) net investment.
D) devaluation.

Question 5

The elements of investment spending are ________.

A) calculated only in real terms.
B) equivalent to their corresponding international transactions.
C) consumption, government, exports and imports.
D) highly procyclical.

Question 6

Except during the Great Depression, net investment has always been ________.

A) equal to depreciation.
B) equal to zero.
C) positive.
D) negative.

Question 7

The purchase and sale of financial instruments is not included in calculations of investment spending because ________.

A) not all of these transactions are reported to the federal government.
B) both foreign and domestic economic agents can engage in the described transactions, but only U.S. economic agents can engage in investment.
C) they do not necessarily lead to a change in the amount of output produced in the United States.
D) they are already including in consumption spending.

Question 8

A decline in the desired level of capital and investment will result from ________.

A) a rise in the real price of capital.
B) a decrease in the rate of depreciation.
C) a decrease in the real interest rate.
D) a decrease in the real price of capital.

Question 9

Which of the following is a component part of investment spending?

A) the purchase of a new microwave by a fast food restaurant.
B) the purchase of 500 shares of corporate stock.
C) the sale of 500 shares of corporate stock.
D) all of the above.

Question 10

A machine cost $15,000 to install, and has a resale value one year later of $12,000. If the real interest rate is 10%, then the user cost of capital is ________.

A) $4,500
B) $1,500
C) $3,000
D) $1,200

Question 11

A higher desired level of capital and investment will result from ________.

A) a decrease in productivity.
B) a fall in expected future output.
C) a depressed economy.
D) a booming economy.

Question 12

The expected real cost of using a unit of capital over a given period of time is known as ________.

A) the real rate of interest.
B) the nominal rate of interest.
C) depreciation.
D) the user cost of capital.

Question 13

User cost is equal to ________.

A) interest cost plus the expected rate of change in the real price of capital plus depreciation.
B) interest cost minus the rate of depreciation.
C) interest cost minus the expected rate of change of the real price of capital plus depreciation.
D) interest cost plus depreciation.

Question 14

If the marginal product of capital is greater than the rental cost of capital in terms of goods and services, then ________.

A) the firm should continue to produce using that same amount of capital.
B) the firm should add additional capital.
C) the firm should reduce the amount of capital is is using.
D) diminishing returns have been avoided

Question 15

Once the marginal product of capital is equal to the real rental cost of capital ________.

A) inventories will stabilize.
B) depreciation will equal the marginal rate of substitution.
C) the economy will reach full employment.
D) a profit-seeking firm will stop acquiring capital.

Question 16

Suppose that a machine costs $10,000 in constant dollars and the real rate of interest is 12 percent. If the machine is expected to increase in price by 2 percent and the rate of depreciation is 5 percent, then the user cost of capital for that machine over one year is equal to ________.

A) $150.
B) $1500.
C) $10,000.
D) $102,500.

Question 17

Investment spending in the U.S. ________

A) comprises the majority of total spending.
B) is equal to approximately 15 percent of total spending.
C) is equal to approximately 81 percent of total spending.
D) is the smallest component part of household consumption spending.

Question 18

A firm possesses too much capital if ________.

A) the real rental cost of capital is equal to the marginal product of capital.
B) the real rental cost of capital is less than the marginal product of capital.
C) its investment spending exceeds its consumption outlays.
D) the real rental cost of capital is more than the marginal product of capital.

Question 19

The user cost of capital is negatively related to ________.

A) the real rate of interest.
B) the depreciation rate.
C) the expected rate of change of the real price of capital.
D) the tertiary log of the nominal price of capital.

Question 20

Gross investment is equal to ________.

A) net investment plus depreciation.
B) net investment divided by depreciation.
C) net investment minus depreciation.
D) net investment times depreciation.

Question 21

Holdings of partially finished components involve inventories of ________.

A) Tobin's q.
B) work in process.
C) production smoothing.
D) stock-out components

Question 22

The order of inventories for production as they are needed is known as ________.

A) just-in-time production.
B) production smoothing.
C) work in process
D) stock out avoidance.

Question 23

A rise in the tax rate on businesses leads to ________.

A) a decline the desired level of capital and an increase in investment.
B) a decline in the desired level of capital and a decrease in investment.
C) an increase in the desired level of capital and a decrease in investment.
D) an increase in the desired level of capital and an increase in investment.

Question 24

A car dealer that maintains a large number of automobiles on their lot so that they avoid losing a sale to another dealer who has the make and model a given customer wants is engaged in ________.

A) production smoothing.
B) work in process.
C) stock-out avoidance.
D) first degree price discrimination.

Question 25

Desired Level of the Capital Stock

Consider the two graphs above. Suppose there is an increase in the real interest rate. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 26

Use the neoclassical theory of investment to explain why technological progress that reduces the price of computers (and related information technology) impacts investment differently than technological progress that makes computers more productive.

Question 27

Retail stores that dedicate one or more aisles to "seasonal" items are engaging in ________.

A) just-in-time production.
B) production smoothing.
C) work in process
D) first degree price discrimination

Question 28

Firms that continue to produce when sales are temporarily low in an effort to avoid costly fluctuations in production are engaging in ________.

A) second degree price discrimination.
B) stock out avoidance.
C) work in progress.
D) production smoothing.

Question 29

Desired Level of the Capital Stock

Consider the two graphs above. Suppose producers forecast a decrease in sales. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 30

Should you stay in school beyond the current semester? Describe how you might use the neoclassical theory of investment to help you decide.

Question 31

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that the domestic currency is expected to strengthen. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 32

The most volatile component of total investment spending is ________.

A) construction spending by firms.
B) spending by firms on equipment.
C) residential construction by households.
D) inventory adjustment.

Question 33

One explanation for the sharp decline in inventory adjustment during the 2007-2009 financial crisis was ________.

A) financing constraints.
B) the rise in the level of income.
C) the volatility of interest rates.
D) the increase in total spending and therefore costs.

Question 34

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that financial liberalization enables more businesses to access credit markets. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 35

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that technological progress is expected to reduce the future cost of capital goods. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 36

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that allowable deductions from taxable business income are increased. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 37

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that businesses expect to hire more workers. This would ________ the desired level of the capital stock, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 38

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that firms are able to use inventories as collateral for low-interest loans. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 39

Investment spending is procyclical. In the short run, are changes in investment affected more by changes in the expected marginal product of capital, or by changes in the user cost of capital?

Question 40

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that improvements in storage technology reduce inventory losses. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 41

The stock of residential housing is essentially fixed since ________.

A) few individuals are building homes in the wake of the financial crisis.
B) residential housing takes time to build and wears out slowly.
C) is independent of domestic interest rates.
D) is independent of the value of U.S. exports and imports.

Question 42

In the housing market, the relative price of housing is analogous to ________.

A) implicit rent
B) Tobin's q
C) inventory investment
D) the user cost of capital

Question 43

Use Tobin's q theory and the neoclassical theory of investment to explain why investment rises so rapidly once the economy has passed the trough of a business cycle.

Question 44

Desired Level of the Capital Stock

Consider the two graphs above. Suppose there is increased concentration in the retail sector________. fewer, larger companies. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 45

If the market value of a firm is $6 billion and Tobin's q is equal to 2, then the replacement cost of installed capital must be ________.

A) $2 billion.
B) $3 billion.
C) $ 9 billion.
D) $18 billion.

Question 46

Tobin's q is equal to ________.

A) the market value of a firm times the replacement cost of installed capital.
B) the market value of a firm plus the replacement cost of installed capital.
C) the market value of a firm divided by the replacement cost of installed capital.
D) the market value of a firm minus the replacement cost of installed capital.

Question 47

Desired Level of the Capital Stock

Consider the two graphs above. Suppose rising fuel costs makes it more expensive to move goods to and from warehouses. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 48

Use Tobin's q theory and the neoclassical theory of investment to explain how optimistic scenarios of the "information age" would cause overinvestment in computer-related capital goods, and how that overinvestment would cause a sudden reversal.

Question 49

Fluctuations in Tobin's q are ________, because ________.

A) frequent and substantial; asset prices are volatile
B) frequent and substantial; replacement costs are volatile
C) infrequent and mild; replacement costs are relatively stable
D) infrequent and mild; the marginal product of capital does not change quickly

Question 50

A rise in stock prices leads to ________.

A) an increase in income.
B) an increase in Tobin's q.
C) a decrease in Tobin's q.
D) a decrease in income.

Question 51

Tobin's q theory provides an explanation for ________.

A) housing demand
B) housing supply
C) subprime mortgages
D) residential investment

Question 52

When Tobin's q is greater than one, ________.

A) a unit of a firm's stock (equity) is worth more than a unit of the firm's capital
B) a new unit of capital has more value than a new unit of stock (equity)
C) installed capital is worth less than new capital
D) a unit of capital that a firm owns has more value than a unit it might buy

Question 53

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that improvements in technology enable farmers to produce two or more harvests of the same crop each year. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 54

Tobin's q theory adds to neoclassical theory because it ________.

A) illustrates the important relationship between tax rates and the incentive to labor.
B) emphasizes the role played by asset price fluctuations on investment spending.
C) highlights the impact of a tax increase on business investment.
D) underlines the relationship between financial innovation and the financial crisis of 2007-2009.

Question 55

A decline in Tobin's q can be caused by ________.

A) a rise in the market value of a firm.
B) an increase in stock prices.
C) a decline in stock prices.
D) a decline in the replacement cost of capital.

Question 56

Desired Level of the Capital Stock

Consider the two graphs above. Suppose that final goods are assembled only when ordered and to satisfy the precise preferences of each consumer. This would ________ the desired level of inventories, as depicted in graph ________.

A) increase; B
B) increase; A
C) decrease; B
D) decrease; A

Question 57

Four reasons for firms to hold inventories are given in the text. For each reason, indicate briefly whether and how it helps to explain the high volatility of inventory investment.

Question 58

In many economies, a substantial fraction of investment is by multinational corporations (MNCs) whose stock value is determined on global markets. Based on Tobin's q theory, how might we expect MNC investment to affect the volatility of aggregate investment in an economy?

Question 59

According to Tobin's q theory, the principal objective of investment is ________.

A) to increase eligibility for the investment tax credit
B) to expand production
C) to increase the market value of the firm
D) to lower the replacement cost of installed capital

Question 60

If the market value of a firm is $6 billion and the replacement cost of installed capital is equal to $3 billion, then Tobin's q is equal to

A) 9.
B) 3.
C) 18.
D) 2.

Question 61

A decline in real mortgage rates will lead, other things the same, to ________.

A) lower demand for housing.
B) tighter financing constraints.
C) an increase in residential investment.
D) a lower relative price of housing.

Question 62

The federal government has encouraged home ownership through ________.

A) an increase in home prices.
B) an increase in domestic interest rates.
C) a decrease in the implicit rent on residential housing.
D) allowing mortgage interest to be tax deductible.

Question 63

Applying neoclassical theory to the housing market, an upward shift of the expected marginal product of (housing) capital may be caused by ________.

A) higher expected household income
B) the inability to buy as much housing at a higher price
C) an expected increase in the relative price of housing
D) a decrease in the cost of building new houses

Question 64

An increase in residential investment would be caused by ________.

A) lower expected income.
B) lower than expected appreciation of housing prices.
C) a decrease in real mortgage rates.
D) a lower demand for housing.

Question 65

Through its impact on the demand of housing, higher expected income would lead to ________.

A) an increase in relative housing prices.
B) a decrease in expected house price appreciation
C) a decrease in residential investment.
D) a decrease in subprime borrowers.

Question 66

The provision of funds to the mortgage market through the purchase of mortgage-backed securities and mortgages is performed by ________.

A) Fannie Mae and Freddie Mac.
B) the Federal Housing Administration.
C) the Federal Reserve System.
D) subprime borrowers

Question 67

A person who builds a home, then lives in it, receives ________.

A) explicit rents.
B) dividends.
C) tertiary subsidies.
D) implicit rents.

Question 68

Applying neoclassical theory to the housing market, the downward slope of the demand curve for housing reflects ________.

A) higher expected household income
B) the inability to buy as much housing at a higher price
C) an expected increase in the relative price of housing
D) a decrease in the cost of building new houses

Question 69

The relationship between residential investment and housing prices is ________.

A) implicit.
B) positive.
C) negative.
D) a one-to-one relationship.

Question 70

Home ownership rates are highest in ________.

A) the United States.
B) central European countries, e.g. Germany and Austria.
C) east European states, e.g. Romania and Slovakia.
D) the Benelux countries, i.e. Belgium, the Netherlands and Luxembourg.

Question 71

The relative price of housing is equal to ________.

A) the general price level divided by the rate of inflation.
B) the rate of inflation divided by the nominal price of a house.
C) the nominal price of housing divided by the general price level.
D) the general price level divided by the nominal price of housing.

Question 72

The flow of residential investment illustrates the relationship between the relative price of housing and the ________.

A) construction of new homes.
B) general price level.
C) the rate of depreciation in the housing stock.
D) price of an individual home.

Question 73

Applying neoclassical theory to the housing market, ________ causes a downward shift of the residential investment curve.

A) higher expected household income
B) the inability to buy as much housing at a higher price
C) an expected increase in the relative price of housing
D) a decrease in the cost of building new houses

Question 74

Applying neoclassical theory to the housing market, the idea that "housing is a good investment" refers to ________.

A) higher expected household income
B) the inability to buy as much housing at a higher price
C) an expected increase in the relative price of housing
D) a decrease in the cost of building new houses

Question 75

Applying neoclassical theory to the housing market, ________ causes a decrease in the user cost of housing.

A) higher expected household income
B) the inability to buy as much housing at a higher price
C) an expected increase in the relative price of housing
D) a decrease in the cost of building new houses

Question 76

An increase in residential construction would be caused by ________.

A) a decline in household formation.
B) higher expected future income.
C) a decrease in the expected appreciation of housing.
D) higher real mortgage rates.

Question 77

A higher expected appreciation of housing prices leads to ________.

A) tighter financing constraints.
B) a lower demand for housing.
C) a lower relative price of housing.
D) an increase in residential construction.

Question 78

In price and quantity space, the supply curve for housing is ________.

A) upward-sloping.
B) downward-sloping.
C) horizontal.
D) vertical.

Question 79

Higher demand for housing would be caused by ________.

A) an increase in household formation.
B) higher residential consumption.
C) a decrease in expected future income.
D) an increase in home prices.

Question 80

A decrease in residential construction would be caused by ________.

A) tighter financing constraints.
B) higher expected appreciation of housing prices.
C) a higher relative price of housing.
D) higher expected incomes.