Question 1

If the marginal product of capital is above the rental cost of capital, then a firm should

Accepted Answer

If the marginal product of capital is above the rental cost of capital, it means that the firm can generate more revenue by investing in additional capital. This implies that the firm should increase investment spending to increase the capital stock, which will boost productivity and profits.

Question 2

Which of the following statements is FALSE?

Accepted Answer

C

Question 3

Leaving taxes aside, a firm will calculate its rental cost of capital as

Accepted Answer

The rental cost of capital for a firm, leaving taxes aside, is calculated as the real interest rate plus the rate of depreciation. This accounts for both the cost of borrowing money (real interest rate) and the loss in value of the capital over time (depreciation).

Question 4

Assume a Cobb-Douglas production function in which the share of capital is a = 0.25 and the share of labor is b = 0.75.If the rental cost of capital is rc = 10%, the desired capital stock of a cost-minimizing firm should be equal to

Accepted Answer

The cost-minimizing firm chooses the amount of capital such that the marginal product of capital equals the rental cost of capital.

The marginal product of capital is the partial derivative of the production function with respect to capital:

MPK = aY/K

Setting this equal to the rental cost of capital:

rc = 0.1 = MPK

Substituting in the given values of a and b:

0.1 = 0.25Y/K

K = 2.5Y

Therefore, the optimal choice for the desired capital stock is K* = 2.5Y.

Question 5

A firm will keep investing until the value of the marginal product of capital is equal to

Accepted Answer

The value of the marginal product of capital represents the additional output the firm gets by adding one unit of capital. The rental cost of capital represents the cost the firm incurs to use one unit of capital. In order to maximize profits, the firm will stop investing in capital when the additional output gained is equal to the cost of using one more unit of capital. Therefore, the correct answer is A) the rental cost of capital.

Question 6

Which of the following is NOT included as investment in the national income accounts?

Accepted Answer

All of the above options are included as investment in the national income accounts. Investment in human capital and new knowledge are considered intangible investments, while government investment in infrastructure and financial investment are tangible investments.

Question 7

The rental cost of capital will fall if

Accepted Answer

The answer of The rental cost of capital will fall...

Question 8

Which policy mix serves best to encourage an increase in business fixed investment?

Accepted Answer

Low government spending can reduce the crowding out effect, where government borrowing competes with corporate borrowing, potentially lowering interest rates and making it cheaper for businesses to invest. Expansionary monetary policy, which often involves lowering interest rates, further reduces the cost of borrowing, encouraging businesses to invest in fixed assets.

Question 9

Assume the nominal interest rate is i = 10%, the real interest rate is r = 7%, and the rate of depreciation d = 6%.What is the rental cost of capital?

Accepted Answer

The rental cost of capital is calculated as the sum of the real interest rate (r) and the depreciation rate (d). Therefore, the rental cost of capital = r + d = 7% + 6% = 13%.

Question 10

The theory of investment contains aspects of dynamic behavior since

Accepted Answer

The fact that firms generally close only a portion of the gap between their actual and desired capital stock in each period implies that the adjustment to the desired capital stock is a dynamic process that takes place gradually over time. This behavior is a key characteristic of dynamic systems, where variables interact over time and changes in the present affect future outcomes. None of the other options mention aspects of dynamic behavior in investment theory.

Question 11

Assume a Cobb-Douglas production function in which the share of capital is a = 1/4 and the share of labor is b = 3/4.In this case, the marginal product of capital is

Accepted Answer

The marginal product of capital in a Cobb-Douglas production function is given by $a\frac{Y}{K}$, where $a$ is the share of capital, $Y$ is the total output, and $K$ is the capital input. Given $a = 1/4$, the marginal product of capital is $\frac{1}{4}\frac{Y}{K}$ or $Y/4K$.

Question 12

In which of the following cases would you expect to observe the highest level of desired capital stock?

Accepted Answer

When the rental cost of capital is low and the level of output is high, it is more profitable for firms to invest in more capital which increases the desired capital stock. This is because with higher output levels, the returns to capital are higher and so the firms would want to invest more in capital to increase their returns.

Question 13

Assume the rental cost of capital is rc = 10%, the nominal interest rate is i = 13%, and the rate of depreciation is d = 4%.What is the real interest rate?

Accepted Answer

The answer of Assume the rental cost of capital is...

Question 14

Which of the following is FALSE?

Accepted Answer

Investment in human capital is actually a part of aggregate demand as it contributes to the production of goods and services.

Question 15

The increase in real output produced by using one additional unit of capital in production is called

Accepted Answer

The increase in real output produced by using one additional unit of capital in production is referred to as the marginal product of capital. The marginal product of capital measures the firm's productivity and efficiency in utilizing capital inputs in the production process.

Question 16

Which of the following will decrease the rental cost of capital?

Accepted Answer

An increase in the expected rate of inflation decreases the real interest rate (the nominal interest rate adjusted for inflation), which can lower the rental cost of capital. This is because the future nominal payments for renting capital become less valuable in real terms, effectively reducing the cost.

Question 17

It is important to understand the factors that influence investment spending since

Accepted Answer

All of the above statements are true. Investment spending is crucial for determining a nation's capital stock, and therefore, its productive capacity. It is also closely studied for its impact on economic cycles. Fiscal and monetary policies both influence investment, but their effect may not be immediate or may have a time lag. Therefore, understanding the factors that influence investment spending is essential for policymakers and economists alike.

Question 18

According to the neoclassical theory of business fixed investment, which of the following is true?

Accepted Answer

Neoclassical theory suggests that investment spending is influenced by factors such as the cost of capital, output expectations, and technological changes, rather than the discrepancy between desired and actual interest rates. It acknowledges that monetary and fiscal policies can affect investment, but these effects may not be immediate due to various lags in the economy's response to policy changes.

Question 19

In the 1930s, investment as a share of GDP was very low because

Accepted Answer

During the 1930s, particularly in the Great Depression era, businesses had very low sales expectations due to the overall economic downturn, which significantly reduced consumer spending and investment. This lack of confidence in future economic conditions led to reduced investment as a share of GDP.

Question 20

Investment spending

Accepted Answer

Investment spending is crucial for economic fluctuations, is sensitive to interest rates (linking it to monetary policy effects), doesn't significantly affect short-term aggregate supply, and contributes to capital stock growth, influencing long-term economic progress.

Quiz 15: Investment spending