Deck 43: Investment Spending and Profit

Question 1

Whats defention of terms:
-depreciation

Answer 1

the dollar value of worn-out plants and equipment

Question 2

Whats defention of terms:
-gross investment

Answer 2

the total value of all capital goods produced in a year

Question 3

Whats defention of terms:
-net investment

Answer 3

gross investment minus depreciation

Question 4

Whats defention of terms:
-new investment

Question 5

Whats defention of terms:
-replacement investment

Question 6

Compare and contrast investment and consumption spending.
-Define net investment, replacement investment, new investment and gross investment.

Question 7

Compare and contrast investment and consumption spending.
-How do investment and consumption behave over the business cycle?

Question 8

Explain why businesses invest and why investment spending fluctuates with profits.
-Give two reasons why investment is strongly influenced by profits.

Question 9

Explain why businesses invest and why investment spending fluctuates with profits.
-Where do business owners get funds to invest?

Question 10

Discuss how investment fluctuations are a direct cause of business cycles.
-Give several reasons why investment does not immediately follow profits but occurs only after a time lag.

Question 11

Describe general movement of stock market and the business cycle.
-Why do individuals invest in the stock market?

Question 12

Describe general movement of stock market and the business cycle.
-According to the movement of S&P 500 and the business cycle, when should investors sell? Buy? Explain.

Question 13

What is gross investment?

A) investment in additional buildings and equipment to expand the capital beyond the present level.
B) investment in capital goods that have worn out or become obsolete.
C) the dollar value of worn-out plants and equipment.
D) the total value of all capital goods produced in a year.

Question 14

What is net investment?

A) investment in additional buildings and equipment to expand the capital beyond the present level.
B) investment in capital goods that have worn out or become obsolete.
C) the dollar value of worn-out plants and equipment.
D) the total value of all capital goods produced in a year.

Question 15

What is replacement investment?

A) investment in additional buildings and equipment to expand the capital beyond the present level.
B) investment in capital goods that have worn out or become obsolete.
C) the dollar value of worn-out plants and equipment.
D) the total value of all capital goods produced in a year.

Question 16

What 2 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.

Question 17

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 18

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 19

Assume that gross investment is $1.6 trillion, and depreciation is $2.1 trillion. How much is new net investment?

A) $0.4 trillion.
B) - $ 0.4 trillion.
C) $3.7 trillion.
D) $1.6 trillion.

Question 20

Over the business cycle, investment spending tracks closely with

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

Question 21

If the objective is to buy a stock at a low price and sell it at a high price, when should a savvy investor buy and sell?

A) buy at the top of the economic expansion and sell at the bottom of the recession.
B) buy at the bottom of the recession and sell at the top of the expansion.
C) buy at the bottom of the recession and sell at the bottom of the next recession.
D) buy at the top of the economic expansion and sell at the top of the next expansion.

Question 22

Investing in the stock market

A) is safe and involves little risk.
B) is more risky if one buys stock in only 1 corporation.
C) is more risky if one buys a diverse set of stocks.
D) is safe as long as one sells out during a recession.