Question 1

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 (r+δ-p) where r is the interest rate, δ is the depreciation rate, and p is the expected capital appreciation rate. An increase in δ will increase the user cost of capital. Changes in Πt and Πet (profits and expected profits) do not directly affect the user cost of capital.

Question 2

For this question,assume that firms experience an increase in sales.We would expect that this increase in sales will cause

Accepted Answer

An increase in sales will lead to an increase in revenue, which in turn can increase profit per unit of capital if the cost of production stays the same. This is because fixed costs are spread over a larger number of units, resulting in a decrease in the average cost per unit and therefore an increase in profit per unit of capital.

Question 3

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

Accepted Answer

An increase in the ratio of total sales to the capital stock means that the company is generating more sales per unit of capital invested. This will lead to a higher profit per unit of capital.

Question 4

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 the formula (r + δ − Π) / (1 − Πe). An increase in rt (the real interest rate) would increase the numerator of the formula, leading to an increase in the user cost of capital. Increases in Πt (the rate of inflation) and Πet (expected inflation) would decrease the denominator of the formula, leading to an increase in the user cost of capital. However, the question asks for which variable would cause an increase in the user cost of capital, so only A is the correct answer.

Question 5

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 6

As of 2005,some analysts were concerned that there was a "bubble" in the U.S.housing market.Suppose there is a reduction in real estate prices.This reduction in real estate prices would have the most direct effect on which of the following types of wealth?

Accepted Answer

Reduction in real estate prices would directly affect the housing wealth of individuals who own property, as the value of their homes would decrease. Financial wealth refers to assets such as stocks, bonds, and cash, which would not be directly affected by changes in real estate prices. Human wealth refers to an individual's future earning potential, which would also not be directly affected by changes in real estate prices.

Question 7

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 their non-steel activities more than other firms when the price of steel drops suggests that they prioritize cash flow when making investment decisions. This supports the idea that cash flow matters for investment, as companies are more likely to reduce investments in areas where they are experiencing lower profits or tighter cash flow constraints.

Question 8

Which of the following individuals is responsible for developing the permanent income theory of consumption?

Accepted Answer

The permanent income theory of consumption was developed by Milton Friedman. This theory suggests that an individual's consumption at a point in time is determined not just by their current income but by their longer-term income expectations.

Question 9

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

Accepted Answer

When the capital stock falls, the remaining capital becomes more scarce and potentially more valuable for production, leading to an increase in profit per unit of capital as firms may be willing to pay more for the use of the now scarcer capital resources.

Question 10

Suppose current sales increase by $100 million.Investment theory suggests that current investment must

Accepted Answer

The answer of Suppose current sales increase by $100 million.Investment...

Question 11

Suppose there is an increase in income.This increase in income would have a direct effect on which of the following?

Accepted Answer

An increase in income would directly affect human wealth, which refers to the value of human capital, skills, and education. It is not directly linked to financial or housing wealth, which are more dependent on the stock market and housing market.

Question 12

The reduction in stock prices will have the most direct effect on which of the following types of wealth?

Accepted Answer

The reduction in stock prices will directly impact financial wealth as it pertains to ownership of stocks and  investments in the stock market.

Question 13

Which of the following individuals is responsible for developing the life cycle theory of consumption?

Accepted Answer

Franco Modigliani is responsible for developing the life cycle theory of consumption in economics. The theory suggests that individuals save during their working years to finance their consumption during retirement.

Question 14

Suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent.Economic theory suggests that this individual's current consumption will

Accepted Answer

According to the permanent income hypothesis, individuals base their consumption decisions on their expected lifetime income rather than on their current income. Therefore, a permanent $20,000 increase in income will result in an increase in consumption of at most $20,000, as the individual will save some of the increase to smooth consumption over the remaining years of their life.

Question 15

Which of the following statements is true?

Accepted Answer

A change in sales should have more impact on current investment if it is expected to be permanent rather than temporary, because a permanent change in sales will have a more significant impact on the company's future cash flows and, therefore, on its investment decisions.

Question 16

Human wealth is a function (i.e.,affected by changes in)of which of the following variables?

Accepted Answer

Human wealth is affected by future expected income, as it is the basis for the accumulation of wealth. It is also affected by future expected taxes, as higher taxes can reduce disposable income and, therefore, available funds for wealth accumulation. Additionally, current interest rates affect the ability to generate returns on savings and investments, which in turn affect wealth accumulation. Therefore, all of the above variables can have an impact on human wealth.

Question 17

Suppose you are given a rare antique by a long-lost relative.The value of this rare antique would be included in which of the following types of wealth?

Accepted Answer

The value of the rare antique would be considered a financial asset and would therefore be included in financial wealth. Housing wealth typically includes the value of real estate and human wealth includes the skills, knowledge, and abilities of individuals.

Question 18

Suppose there is a tax cut.This tax cut would have a direct effect on which of the following?

Accepted Answer

The answer of Suppose there is a tax cut.This tax...

Question 19

A reduction in sales will generally cause

Accepted Answer

A reduction in sales will decrease the amount of revenue generated, which in turn will reduce the amount of profit generated. This will cause a decrease in profit per unit of capital.

Question 20

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...

Quiz 16: Expectations,consumption,and Investment

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

For this question,assume that firms experience an increase in sales.We would expect that this increase in sales will cause

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

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

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

As of 2005,some analysts were concerned that there was a "bubble" in the U.S.housing market.Suppose there is a reduction in real estate prices.This reduction in real estate prices would have the most direct effect on which of the following types of wealth?

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

Which of the following individuals is responsible for developing the permanent income theory of consumption?

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

Suppose current sales increase by $100 million.Investment theory suggests that current investment must

Suppose there is an increase in income.This increase in income would have a direct effect on which of the following?

The reduction in stock prices will have the most direct effect on which of the following types of wealth?

Which of the following individuals is responsible for developing the life cycle theory of consumption?

Suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent.Economic theory suggests that this individual's current consumption will

Which of the following statements is true?

Human wealth is a function (i.e.,affected by changes in) of which of the following variables?

Suppose you are given a rare antique by a long-lost relative.The value of this rare antique would be included in which of the following types of wealth?

Suppose there is a tax cut.This tax cut would have a direct effect on which of the following?

A reduction in sales will generally cause

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