Question 1

A painting is currently worth $100,000,and is expected to maintain its real value for three years.The real interest rate is expected to remain constant at 10%.What is the present value of the painting's expected price at the end of the third year?

Accepted Answer

The present value is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($100,000), r is the real interest rate (0.10), and n is the number of years (3). So, PV = $100,000 / (1.10)^3 = $88,899.

Question 2

Explain how expectations affect consumption.

Accepted Answer

The answer of Explain how expectations affect consumption....

Question 3

Which of the following will occur when the capital stock increases?

Accepted Answer

When the capital stock increases, it typically leads to an increase in supply of goods or services, which can drive down the price or profit per unit of capital due to increased competition or lower marginal productivity of capital.

Question 4

Suppose that,when the price of steel drops,steel companies tend to cut back on investment in their non-steel activities more than other firms in these same non-steel activities.This would support the idea that

Accepted Answer

The fact that steel companies cut back on investment in non-steel activities when the price of steel drops suggests that they are prioritizing their cash flow, which supports the idea that cash flow matters for investment decisions. If cash flow did not matter, these companies would not be changing their investment behavior based on changes in the price of steel.

Question 5

Assume the following: (1)the real cost of a unit of capital is one; (2)the unit of capital is expected to increase a firm's real profit by $10,000 each year,and depreciate by 8% each year (δ = .08); and (3)The real interest rate is 2% (r = .02).What is the "user cost" or "rental cost" of this unit of capital?

Accepted Answer

The user cost of capital is calculated as the sum of the real interest rate and the depreciation rate: r + δ = 0.02 + 0.08 = 0.10.

Question 6

The "depreciation rate" tells us

Accepted Answer

Depreciation rate refers to the rate at which a fixed asset, such as a machine or equipment, loses its value over time due to wear and tear. It is used to calculate the depreciation expense and is important for tax and accounting purposes.

Question 7

The data shows that total profit in the U.S.economy

Accepted Answer

Historical data and economic theory suggest that profit tends to decrease during recessions and increase during expansions. Therefore, option C is the correct choice. Options A, B, D, and E are not supported by evidence or economic theory.

Question 8

Suppose individuals expect future output to be higher and future interest rates to be higher.Given this information,how will individuals alter consumption in the current period? Explain.

Accepted Answer

The answer of Suppose individuals expect future output to be...

Question 9

Which of the following will cause an increase in the rental cost / user cost of capital?

Accepted Answer

The answer of Which of the following will cause an...

Question 10

An increase in which of the following variables will cause an increase in the user cost of capital?

Accepted Answer

The user cost of capital is calculated as (r + δ - Πᵉt) / (1 + r), where r is the interest rate, δ is the depreciation rate, and Πᵉt is the expected rate of inflation. An increase in δ will increase the numerator of this equation, resulting in a higher user cost of capital. Increases in Πt or Πᵉt will decrease the user cost of capital, so choices B and C can be eliminated. Therefore, the correct answer is A.

Question 11

The user cost of capital is represented by which of the following variables?

Accepted Answer

The answer of The user cost of capital is represented...

Question 12

Which of the following statements is true?

Accepted Answer

A change in sales expected to be permanent affects investment more as firms adjust capacity. Investment is more volatile than consumption on a percentage basis due to its sensitivity to economic conditions. In dollar terms, investment is less than consumption but fluctuates more.

Question 13

An increase in which of the following variables should cause an increase in profit per unit of capital?

Accepted Answer

The ratio of total sales to the capital stock is the measure of efficiency of the capital usage. Therefore, an increase in this ratio indicates the increase in profit per unit of capital.

Question 14

Explain why current consumption might change even if current income does not change.

Accepted Answer

The answer of Explain why current consumption might change even...

Question 15

A change in which of the following variables would affect the cash flow for a firm?

Accepted Answer

The answer of A change in which of the following...

Question 16

An increase in which of the following variables will cause an increase in the user cost of capital?

Accepted Answer

The user cost of capital is given by (rt + δ - Πᵉt), where rt is the nominal interest rate, δ is the rate of depreciation, and Πᵉt is the expected rate of inflation. Thus, an increase in rt will directly increase the user cost of capital. An increase in Πt or Πᵉt may indirectly affect the user cost of capital through its impact on the nominal interest rate. However, it is not a direct cause of an increase in the user cost of capital. So, both options B) and C) are not correct. Therefore, the best choice is A) rt.

Question 17

The data for the U.S.show that investment and profits

Accepted Answer

Investment and profits generally have a positive relationship, as higher profits can lead to increased investment, and vice versa, regardless of the economic cycle.

Question 18

Explain why current consumption is likely to respond less than one for one to changes in current income.

Accepted Answer

The answer of Explain why current consumption is likely to...

Question 19

Which of the following will cause the rental cost / user cost of capital to decrease?

Accepted Answer

The answer of Which of the following will cause the...

Question 20

Suppose individuals expect future output to be lower and future interest rates to be lower.Given this information,how will individuals alter consumption in the current period? Explain.

Accepted Answer

The answer of Suppose individuals expect future output to be...

Quiz 15: Expectations, consumption, and Investment

A painting is currently worth $100,000,and is expected to maintain its real value for three years.The real interest rate is expected to remain constant at 10%.What is the present value of the painting's expected price at the end of the third year?

Explain how expectations affect consumption.

Which of the following will occur when the capital stock increases?

Suppose that,when the price of steel drops,steel companies tend to cut back on investment in their non-steel activities more than other firms in these same non-steel activities.This would support the idea that

The "depreciation rate" tells us

The data shows that total profit in the U.S.economy

Suppose individuals expect future output to be higher and future interest rates to be higher.Given this information,how will individuals alter consumption in the current period? Explain.

Which of the following will cause an increase in the rental cost / user cost of capital?

An increase in which of the following variables will cause an increase in the user cost of capital?

The user cost of capital is represented by which of the following variables?

Which of the following statements is true?

An increase in which of the following variables should cause an increase in profit per unit of capital?

Explain why current consumption might change even if current income does not change.

A change in which of the following variables would affect the cash flow for a firm?

An increase in which of the following variables will cause an increase in the user cost of capital?

The data for the U.S.show that investment and profits

Explain why current consumption is likely to respond less than one for one to changes in current income.

Which of the following will cause the rental cost / user cost of capital to decrease?

Suppose individuals expect future output to be lower and future interest rates to be lower.Given this information,how will individuals alter consumption in the current period? Explain.