Question 1

The price of housing relative to the price of other goods is determined in the short run by the:

Accepted Answer

In the short run, the price of housing is determined by the supply and demand for the existing stock of homes. This is because construction of new homes takes time and therefore cannot quickly adjust to changes in demand. Additionally, the supply of existing homes is influenced by factors such as mortgage rates, availability of credit, and individual preferences for home ownership. Demand for the services of homes, such as shelter, and cost of construction may affect the long-run price of housing but not in the short run.

Question 2

A toy manufacturer accumulates inventories because of the uncertainty of the demand for their product at Christmas and the desire not to lose any potential sales. This is an example of the motive for holding inventories.

Accepted Answer

The motive for holding inventories in this scenario is stock-out avoidance, which means the manufacturer wants to ensure they have enough inventory to meet demand and avoid potential lost sales. Production smoothing involves maintaining a consistent level of production over a given period, work in progress refers to products that are in the process of being manufactured, and inventories as a factor of production refers to the role of inventory in the production process.

Question 3

The stock-out avoidance motive for holding inventories suggests that:

Accepted Answer

The stock-out avoidance motive suggests that firms hold inventories to avoid losing sales. This means that a firm will keep a certain level of inventory to be able to fulfill customer demand in the event of unexpected increases in demand or delays in production or delivery. By avoiding stock-outs, firms can maintain customer satisfaction and retain their customer base.

Question 4

Holding other factors constant, an increase in population due to a large increase in immigrants will the price of housing and the flow of residential housing investment.

Accepted Answer

With an increase in population due to a large increase in immigrants, the demand for housing will increase, leading to an increase in the price of housing. Additionally, an increase in population will also increase the demand for residential housing investment, leading to an increase in the flow of investment.

Question 5

The inventories of a company that manufactures snow blowers increase in the summer and decline in the winter. This example is most consistent with which of the following explanations for holding inventories?

Accepted Answer

Production smoothing

Question 6

In the mortgage market, a rise in the real interest rate:

Accepted Answer

A rise in the real interest rate causes mortgage costs to increase, making it more expensive for individuals to borrow money to purchase homes. Therefore, this decrease in affordability lowers housing demand, housing prices, and residential investment.

Question 7

The construction of a new apartment building is an example of:

Accepted Answer

The construction of a new apartment building falls under residential investment as it involves the creation of new housing units for individuals to live in. Business fixed investment refers to the investment made by businesses in fixed assets like machinery and equipment, inventory investment refers to the investment in goods or products that are held for resale, and financial investment refers to the investment made in securities like stocks and bonds.

Question 8

Residential investment equals the:

Accepted Answer

Residential investment refers to the construction of new housing units, which is a flow concept. It does not include the stock of existing housing (choice A) or the demand for housing (choice C). Imputed rent from housing (choice D) is a measure of the value of housing services flowing to households who own their homes and is not related to residential investment.

Question 9

Holding other factors constant, a decline in the real interest rate will the price of housing and the flow of residential housing investment.

Accepted Answer

A decline in the real interest rate reduces the cost of borrowing, which tends to increase the demand for housing, raising housing prices. Additionally, lower interest rates make financing new residential investments more attractive, leading to an increase in housing investment.

Question 10

Inventory investment includes spending on:

Accepted Answer

Inventory investment refers to the amount spent on goods that businesses put aside in storage, including materials and supplies, work in progress, and finished goods. Therefore, choice B is the correct answer. Choices A, C, and D refer to different types of spending but not specifically inventory investment.

Question 11

Holding other factors constant, the decline in aggregate income during a recession will the price of housing and the flow of residential housing investment.

Accepted Answer

During a recession, aggregate income declines, which means there is less money available for residential housing investment. This decrease in demand for housing will lead to a decrease in the price of housing. Therefore, the price of housing and the flow of residential housing investment both tend to decrease during a recession.

Question 12

The production-smoothing motive for holding inventories suggests that:

Accepted Answer

The production-smoothing motive implies that firms hold inventories to smooth out fluctuations in production caused by fluctuations in demand. When sales are low, firms produce more than they sell and put the extra goods in inventories. When sales pick up, the firms can draw down inventories rather than having to rapidly increase production, which can lead to costly adjustments in worker hours and other input factors.

Question 13

In a typical recession, more than half the fall in spending comes from a decline in:

Accepted Answer

The answer of In a typical recession, more than half...

Question 14

Inventory investment is the component of aggregate spending and very .

Accepted Answer

Inventory investment is the smallest component of aggregate spending and also a volatile one, as businesses may increase or decrease their inventory levels depending on various factors such as demand, production costs, and expectations about future economic conditions.

Question 15

The demand for housing is brought into equilibrium with the existing stock of housing by changes in the:

Accepted Answer

Changes in the price of housing will affect demand for housing, as higher prices will decrease demand and lower prices will increase demand. When the price of housing is in equilibrium with the existing stock of housing, there is neither excess demand nor excess supply. Changes in real interest rates, nominal interest rates, and the price level may affect demand for housing, but they do not directly bring supply and demand into equilibrium.

Question 16

Residential investment spending includes spending on:

Accepted Answer

Residential investment spending includes both new housing that people buy to live in (homeownership) and housing that landlords buy to rent out (rental properties). Therefore, option A is the correct answer. Option B includes both new and existing housing, which is true but not comprehensive enough. Option C is incorrect because it only considers the value of mortgages used to finance houses, rather than the total spending on residential investment. Option D limits the scope of residential investment spending to only rental properties purchased by landlords, which is too narrow.

Question 17

The inventories as a factor of production motive for holding inventories suggests that:

Accepted Answer

The inventories as a factor of production motive for holding inventories suggests that firms hold inventories in order to produce more output. This is because holding inventories allows firms to have the necessary inputs on hand to continue production without interruption, even if there are disruptions in their supply chain. By holding inventories, firms can keep their production lines running and meet customer demand, which ultimately helps to increase their output.

Question 18

During a banking crisis and credit crunch, the curve shifts leftward, resulting in a(n) in aggregate demand, production, and employment.

Accepted Answer

During a banking crisis and credit crunch, there is a decrease in the money supply and an increase in interest rates, which leads to a leftward shift of the IS curve. This shift results in a decrease in aggregate demand, production, and employment.

Question 19

In the long run, credit crunches:

Accepted Answer

Credit crunches misallocate national saving by reducing the availability of credit, which in turn reduces investment and consumption. This reduction in economic activity decreases potential output, which has lasting economic effects. While periods of credit ease may offset the immediate impact of a credit crunch, the long-term effects still persist. Therefore, option D is the best choice.

Question 20

Loans made to subprime borrowers in the early 2000s had the immediate impact of housing demand and
Housing prices.

Accepted Answer

Subprime loans increased the number of people who could buy homes, thus increasing housing demand and prices.

Quiz 18: Open-Economy Macroeconomics: Basic Concepts