Question 1

The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.The Tobin's q value for the Vuvuza Corporation is
A) 0.14.
B) 1.7.
C) 6.
D) 7.

Accepted Answer

The answer of The Vuvuza Corporation currently has 10 million...

Question 2

Temporary tax breaks such as the increase in depreciation will tend to
A) increase investment expenditures because the tax breaks will entice firms to leave other countries and invest in Canada.
B) have little impact on current investment expenditures since the tax breaks are temporary.
C) increase investment expenditures in both the short run and the long run, since investment is irreversible.
D) increase investment expenditures in the short run but also increase the uncertainty and volatility of investment since the tax breaks are temporary.

Accepted Answer

Temporary tax breaks such as the increase in depreciation will increase investment expenditures in the short run, but their temporary nature will increase uncertainty and volatility of investment. Firms may be hesitant to invest in long-term projects if they are unsure if the tax breaks will continue in the future. Therefore, the impact of temporary tax breaks on investment is generally short-lived.

Question 3

For each of the following changes,explain what will happen to the expected marginal product of capital curve or the user cost of capital curve,and what will happen to the desired capital stock:
a. The real price of capital goods increases.
b. The depreciation rate increases.
c. The corporate income tax rate decreases.
d. The real interest rate decreases.
e. Expected future output decreases.

Accepted Answer

The answer of For each of the following changes,explain what...

Question 4

Suppose the government decides to decrease the amount of investment spending that firms are allowed to depreciate for tax purposes from 50% to 25%,effective next year.What effect should this change have on the desired capital stock and the level of investment spending next year? Use a graph to explain your answer.

Accepted Answer

The answer of Suppose the government decides to decrease the...

Question 5

Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,the desired capital stock will ________ and investment spending will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

When the depreciation allowance returns to its original amount, the cost of capital increases, leading to a decrease in the desired capital stock and a subsequent decrease in investment spending.

Question 6

Explain why asymmetric information can cause the real interest rate to increase,and why increases in the real interest rate can actually make lending more risky for financial institutions.

Accepted Answer

The answer of Explain why asymmetric information can cause the...

Question 7

Explain how changes in corporate taxes affect the investment decisions of firms.

Accepted Answer

The answer of Explain how changes in corporate taxes affect...

Question 8

Tobin's q is the ratio of the
A) dividend payments of a firm to the current stock price of the firm.
B) market value of a firm to the replacement cost of its capital.
C) current stock price of a firm to the number of outstanding shares of stock in the firm.
D) current stock price of a firm to the total earnings of the firm.

Accepted Answer

Tobin's q is the ratio of the market value of a firm to the replacement cost of its capital. It is used as a measure of a firm's investment opportunities and is often used in financial analysis to determine if a company is overvalued or undervalued.

Question 9

The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.Based on the Tobin's q value for the Vuvuza Corporation,we would expect Vuvuza to
A) increase its capital stock.
B) depreciate more of its assets.
C) issue more shares of stock to be able to afford to finance investment expenditures.
D) cut back on current production.

Accepted Answer

Tobin's q value measures the ratio of market value of a firm to its replacement cost. A q value greater than 1 suggests that the market values the firm's future investment opportunities, while a q value less than 1 suggests that the market values the the firm's existing assets more than its growth opportunities. In this case, the q value is not provided, but since the stock is trading for $42 per share and the stock of capital goods is valued at $70 million, it suggests that the market is valuing the existing assets of the firm more than its investment opportunities. Therefore, to increase the q value and signal to the market that it has promising investment opportunities, Vuvuza should increase its capital stock to finance new investments and grow the company.

Question 10

What is meant by the statement that investment projects are irreversible? How does the idea that investment projects are irreversible affect the volatility of investment in capital goods?

Accepted Answer

The answer of What is meant by the statement that...

Question 11

During recessions,the value of collateral decreases and corporate profits decrease,so firms do not have cash to finance new investment projects.Therefore,credit rationing depends on the state of the economy.This situation is known as the
A) risk acceptance cost.
B) lender's dilemma.
C) default premium.
D) financial accelerator.

Accepted Answer

The situation described in the question is known as the financial accelerator, where the state of the economy affects credit rationing, with decreased collateral values and corporate profits leading to firms not having enough cash to finance new investments. This situation can lead to a cycle of economic downturn as credit contraction increases the severity of the recession.

Question 12

Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,this should cause the
A) uc curve to shift down.
B) uc curve to shift up.
C) MPKᵉ curve to shift to the right.
D) MPKᵉ curve to shift to the left.

Accepted Answer

When the government changes the depreciation allowance back to its original amount, the user cost of capital (uc) increases, causing the uc curve to shift up.

Question 13

Credit rationing and the financial accelerator are responsible,in part,for
A) the significant volatility of gross private investment.
B) the significant volatility of real personal consumption.
C) smoothing gross private investment during severe recessions.
D) smoothing real personal consumption during expansions.

Accepted Answer

Credit rationing and the financial accelerator can lead to significant volatility in gross private investment, as firms may struggle to obtain the necessary financing to invest in new projects or expand their operations during economic downturns. This can exacerbate the severity of recessions and lead to a more volatile economic environment.

Question 14

Figure 16.1 -Refer to Figure 16.1.An increase in the corporate tax rate is best represented by a movement from A) point A to point B. B) point B to point A. C) point A to point C. D) point C to point A.

Accepted Answer

The answer of Figure 16.1 -Refer to Figure 16.1.An increase...

Quiz 16: Consumption and Investment

The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.The Tobin's q value for the Vuvuza Corporation is

Temporary tax breaks such as the increase in depreciation will tend to

Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,the desired capital stock will and investment spending will .

Explain why asymmetric information can cause the real interest rate to increase,and why increases in the real interest rate can actually make lending more risky for financial institutions.

Explain how changes in corporate taxes affect the investment decisions of firms.

Tobin's q is the ratio of the

The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.Based on the Tobin's q value for the Vuvuza Corporation,we would expect Vuvuza to

What is meant by the statement that investment projects are irreversible? How does the idea that investment projects are irreversible affect the volatility of investment in capital goods?

During recessions,the value of collateral decreases and corporate profits decrease,so firms do not have cash to finance new investment projects.Therefore,credit rationing depends on the state of the economy.This situation is known as the

Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,this should cause the

Credit rationing and the financial accelerator are responsible,in part,for

Figure 16.1 -Refer to Figure 16.1.An increase in the corporate tax rate is best represented by a movement from