Question 1

In economics &#34;investment&#34; refers to:&#10;A) Savings by households&#10;B) Money spent buying in shares&#10;C) Money spent buying machinery&#10;D) Money in the bank

Accepted Answer

In economics, "investment" refers to the expenditure on capital goods including machinery, equipment, and buildings that are used to produce goods and services in the future. This does not include savings, buying shares, or money held in the bank, as those do not directly contribute to production capacity.

Question 2

What does MEC stand for in relation to investment?&#10;A) The marginal efficiency of consumption&#10;B) The marginal effective consumption&#10;C) The marginal external capital&#10;D) The marginal efficiency of capital

Accepted Answer

MEC stands for the Marginal Efficiency of Capital, which is a concept in investment that refers to the rate of return on an investment project.

Question 3

Firms will invest up to the point where:&#10;A) The return on investment is zero.&#10;B) The cost of borrowing is zero.&#10;C) The return on investment equals the cost of borrowing.&#10;D) The difference between the return on investment and the cost of borrowing is maximized.

Accepted Answer

Firms typically invest up to the point where the return on investment (ROI) equals the cost of borrowing. This is because investing beyond this point would mean the cost of borrowing exceeds the return, making additional investments unprofitable.

Question 4

The accelerator shows the relationship between:&#10;A) Gross investment and output&#10;B) Net investment and consumption&#10;C) New investment and exports&#10;D) Net investment and the rate of change of output

Accepted Answer

The accelerator theory suggests that net investment is related to the rate of change of output, as firms invest more when they expect higher future demand.

Question 5

An improvement in business expectations will:&#10;A) Lead to a movement along the MEC.&#10;B) Increase interest rates.&#10;C) Increase exports.&#10;D) Shift the MEC outwards.

Accepted Answer

An improvement in business expectations makes investment projects appear more profitable, which increases the Marginal Efficiency of Capital (MEC), leading to an outward shift in the MEC curve. This reflects increased demand for investment at each interest rate level, not a movement along the existing curve or direct effects on interest rates or exports.

Question 6

The increase in national income relative to an initial increase in investment is measured by what?&#10;A) The accelerator&#10;B) The multiplier&#10;C) The coefficient&#10;D) The deflationary gap

Accepted Answer

The multiplier effect describes how an initial increase in spending (such as investment) leads to an increase in national income greater than the initial amount spent.

Question 7

If a consumer spends &#163;80 out of an extra &#163;200:&#10;A) The average propensity to consume is 0.8.&#10;B) The marginal propensity to consume is 0.4.&#10;C) The multiplier is 10.&#10;D) The deflationary gap is &#163;120.

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption (£80) by the change in income (£200), which equals 0.4.

Question 8

Investment is a withdrawal from the circular flow.

Accepted Answer

Investment is considered an injection into the circular flow of income because it adds to the total expenditures in the economy, stimulating economic activity.

Question 9

According to the accelerator an increase in national income will automatically lead to an increase in net investment

Accepted Answer

The accelerator theory suggests that an increase in national income can lead to an increase in net investment, but it is not automatic. Other factors such as business expectations, capacity utilization, and economic conditions also play a role.

Question 10

To find net investment from gross investment ____________ must be deducted.

Accepted Answer

The answer of To find net investment from gross investment...

Question 11

Which of the following is an example of working capital?&#10;A) Factory&#10;B) Stocks&#10;C) Machinery&#10;D) None of the above

Accepted Answer

The answer of Which of the following is an example...

Question 12

The total amount of investment in an economy in a given period is referred to as:&#10;A) Current investment&#10;B) Super investment&#10;C) Gross investment&#10;D) Fixed investment

Accepted Answer

The answer of The total amount of investment in an...

Question 13

Which of the following is an opportunity cost of investment?&#10;A) Lower current consumption&#10;B) Increased depreciation&#10;C) Higher future expected benefits&#10;D) None of the above

Accepted Answer

The answer of Which of the following is an opportunity...

Question 14

Fixed capital is capital that:&#10;A) Has a fixed price.&#10;B) Is used for a relatively long period of time.&#10;C) Cannot be physically moved.&#10;D) All of the above.

Accepted Answer

The answer of Fixed capital is capital that:&#10;A) Has a...

Deck 22: Influences on Aggregate Demand: Investment