Question 1

Firms will invest in new equipment whenever:
A)the expected cost of the equipment exceeds the expected benefit.
B)the expected cost of the equipment is less than the expected benefit.
C)the expected cost of the equipment is greater than the value of the marginal product of the equipment.
D)public saving is greater than private saving.

Accepted Answer

Firms do a cost-benefit comparison before they buy new equipment. If the benefits exceed the costs, firms invest in new equipment.

Question 2

The marginal product of new capital depends on ________ and ________.
A)productivity of capital; relative price of the firm's output
B)price of new capital goods; real interest rate
C)relative price of the firm's output; real interest rate
D)productivity of new capital; real interest rate

Accepted Answer

When a firm considers new investments, they evaluate how much the investment increases output and how much new output can be sold for.

Question 3

Holding other factors constant, a technological improvement that increases the marginal product of capital will:
A)increase national saving.
B)decrease national saving.
C)increase investment.
D)decrease investment.

Accepted Answer

As capital productivity increases, investors are more inclined to invest.

Question 4

If government spending increases by $1 million while net taxes are unchanged, then:
A)public saving increases.
B)public saving decreases.
C)public saving does not change.
D)private saving increases.

Accepted Answer

In this case government spending increased with no change in tax revenue, so public savings decreases.

Question 5

The value of the marginal product of new capital increases when the:
A)price of new capital goods increases.
B)real interest rate increases.
C)the price of the good the firm produces decreases.
D)productivity of new capital increases.

Accepted Answer

When capital productivity increases, the value of the marginal product of capital increases because the new capital can produce more goods or services for a firm.

Question 6

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs)of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should:
A)purchase the truck if the real interest rate is less than 15 percent.
B)not purchase the truck if the real interest rate is greater than 1 percent.
C)purchase the truck if the real interest rate is greater than 5 percent.
D)purchase the truck if the real interest rate is less than 5 percent.

Accepted Answer

If Joe purchases the delivery truck, he will earn $4,000. To be equally well off working for somebody else (his opportunity cost), he would have to earn $3,000 per year and still be able to cover the real interest for the van. With earnings of $4,000 and an opportunity cost of his time of $3,000 his borrowing costs must only be $1,000. $1,000/$20,000 = 0.05 = 5 percent.

Question 7

The data below describe the economy of Econland:  Public saving in Econland equals:
A)-5
B)5
C)16
D)17

Accepted Answer

Public saving is determined by the government surplus or deficit. In this case, net taxes are 30 (tax collections minus transfers and interest payments)while government purchases are 25, so there is a government surplus of 5.

Question 8

By international standards, the household saving rate of the United States:
A)has not ever really been high.
B)was extremely high until the 1980s.
C)has always been very high.
D)was low through the 1970s and 1980s, but increased throughout the 1990s to become one of the highest.

Accepted Answer

The U.S. savings rate, compared to other countries, is always on the lower end of the distribution.

Question 9

The expected benefit of investment equals:
A)private saving.
B)the value of the marginal product of capital.
C)the real interest rate.
D)the price of the capital good.

Accepted Answer

Firms investments are based on the marginal contribution to output and the price for which that output sells, which is known as the value of the marginal product of capital.

Question 10

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ________ and public saving ________.
A)increases; increases
B)increases; decreases
C)does not change; increases
D)does not change; decreases

Accepted Answer

Private saving consists of household and business savings. In this case, the decrease in household saving was offset by an equal increase in business saving. Public saving depends on the budget surplus. In this case, the government reduced its deficit by $4 million, so public saving increased.

Question 11

The real rate of interest measures the ________ of capital investment.
A)value of the marginal product
B)opportunity cost
C)marginal benefit
D)relative price

Accepted Answer

The real rate of interest, which is adjusted for inflation, measures the value of other opportunities that are given up when funds are used for capital investment.

Question 12

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs)of $2,000 per year. He has no other opportunities. He should:
A)purchase the truck only if the real interest rate is less than 2 percent.
B)not purchase the truck if the real interest rate is greater than 2 percent.
C)purchase the truck if the real interest rate is greater than 10 percent.
D)purchase the truck if the real interest rate is less than 10 percent.

Accepted Answer

If Joe purchases the delivery truck, he will earn 10 percent per year, i.e., $2,000/$20,000 = 0.10. If he can borrow money at a rate less than 10 percent, he will gain from buying the truck.

Question 13

The opportunity cost of capital investment is the:
A)value of the marginal product of capital.
B)value of the marginal product of labor.
C)real interest rate.
D)price of new capital goods.

Accepted Answer

When a firm makes capital investments, it faces an opportunity cost because the money invested cannot be lent out to others.

Question 14

The costs of investment depend on the ________ and the ________.
A)marginal product of capital; relative price of the firm's output
B)price of new capital goods; real interest rate
C)relative price of the firm's output; real interest rate
D)taxes levied on the revenue generated; relative price of the firm's output

Accepted Answer

When firms consider new investments, they evaluate the cost or price of the new capital and the rate of interest on the loan taken to fund the capital investment.

Question 15

If in the economy, business saving equals $240 billion, household saving equals $15 billion and government saving equals -$150 billion, what is the value of national saving?
A)$415 billion
B)$265 billion
C)$250 billion
D)$105 billion

Accepted Answer

National saving adds up private and public saving. Private saving consists of business and household savings, which in this case equals $255 billion. Public savings is -$150 billion, so national savings is $105 billion ($255 billion - $150 billion).

Question 16

If consumption spending increases by $10 million with no changes in net taxes, then:
A)public saving increases.
B)public saving decreases.
C)private saving increases.
D)private saving decreases.

Accepted Answer

Household saving is a sub-category of private saving. If consumption spending goes up with income constant, then household saving must go down. In this case, private saving goes down by $10 million.

Question 17

Holding other factors constant, a decline in the price of new capital goods will:
A)increase national saving.
B)decrease national saving.
C)increase investment.
D)decrease investment.

Accepted Answer

When new capital goods prices decline, investors are more inclined to invest. This is the same idea as when prices decline in consumer goods markets.

Question 18

From a macroeconomic perspective, the problem of low household saving has probably been overstated because:
A)household saving is not related at all to an economy's ability to accumulate new capital.
B)household saving has been increasing steadily over the last three decades.
C)it is national saving, not household saving, that allows an economy to accumulate new capital.
D)household saving represents a smaller share of national saving than does public saving.

Accepted Answer

U.S. household savings rates have fallen in the past 20 years. But if government or business saving picks up the slack, the national saving rate could be unaffected by falling household saving.

Question 19

In the United States from 1960 to today, the largest positive contribution to national saving was from:
A)the public sector.
B)the government budget deficit.
C)business saving.
D)household saving.

Accepted Answer

Business saving has played a major role in national saving since 1960.

Question 20

Investment is a(n)________ that changes the ________ of capital.
A)flow; stock
B)stock; flow
C)asset; liability
D)liability; asset

Accepted Answer

Investment is a "flow" of productive inputs because investments are made over time. After investment occurs, the "stock" of capital is changed.

Quiz 21: Saving and Capital Formation

Firms will invest in new equipment whenever:

The marginal product of new capital depends on and .

Holding other factors constant, a technological improvement that increases the marginal product of capital will:

If government spending increases by $1 million while net taxes are unchanged, then:

The value of the marginal product of new capital increases when the:

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should:

The data below describe the economy of Econland: Public saving in Econland equals:

By international standards, the household saving rate of the United States:

The expected benefit of investment equals:

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving and public saving .

The real rate of interest measures the ________ of capital investment.

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $2,000 per year. He has no other opportunities. He should:

The opportunity cost of capital investment is the:

The costs of investment depend on the and the .

If in the economy, business saving equals $240 billion, household saving equals $15 billion and government saving equals -$150 billion, what is the value of national saving?

If consumption spending increases by $10 million with no changes in net taxes, then:

Holding other factors constant, a decline in the price of new capital goods will:

From a macroeconomic perspective, the problem of low household saving has probably been overstated because:

In the United States from 1960 to today, the largest positive contribution to national saving was from:

Investment is a(n) that changes the of capital.