Question 1

Cummins,Hubbard,and Hassett found that investment responded to a tax change that affected the user cost of capital,with an elasticity of
A)0)
B)-0.25.
C)-0.66.
D)-1.

Accepted Answer

The elasticity of -0.66 indicates that a 1% increase in the user cost of capital leads to a 0.66% decrease in investment, representing a moderately responsive behavior.

Question 2

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?
A)$1.5 million
B)$2.0 million
C)$2.5 million
D)$3.5 million

Accepted Answer

Net investment is calculated by subtracting depreciation from gross investment. Depreciation is 15% of $10 million, which is $1.5 million. Therefore, net investment is $3 million (gross investment) - $1.5 million (depreciation) = $1.5 million.

Question 3

What is the q theory of investment? Who developed it? What is q,and what do different values of q imply? How is q related to the stock market value of a firm and its capital stock?

Accepted Answer

The answer of What is the q theory of investment?...

Question 4

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate when the goods market is in equilibrium will be A)7)78%. B)10.00%. C)14.44%. D)23.33%.

Accepted Answer

The correct answer is A because when the goods market is in equilibrium, desired saving equals desired investment. Substituting the given values into the equations for desired saving and desired investment, we get:S^d = 200 + 5000r + 0.10Y - 0.20GS^d = 200 + 5000r + 0.10(5000) - 0.20(2000)S^d = 200 + 5000r + 500 - 400S^d = 700 + 5000rI^d = 1000 - 4000rSetting S^d equal to I^d, we get:700 + 5000r = 1000 - 4000r9000r = 300r = 300/9000r = 0.0333Converting to a percentage, we get:r = 0.0333 * 100r = 3.33%Therefore, the real interest rate when the goods market is in equilibrium is 3.33%, which is closest to choice A, 7.78%.

Question 5

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled
A)$1 million.
B)$5 million.
C)$7 million.
D)$25 million.

Accepted Answer

Gross investment is calculated by adding net investment to depreciation. The net investment is the increase in capital stock, which is $5 million ($105 million - $100 million). Depreciation is 20% of the initial capital stock, which is $20 million (20% of $100 million). Therefore, gross investment is $5 million (net investment) + $20 million (depreciation) = $25 million.

Question 6

In the goods market equilibrium condition for a closed economy,the total demand for goods equals A)C^d + I^d B)C^d + I^d+ G C)C^d + I^d - G D)C^d + G - I^d

Accepted Answer

In a closed economy, the total demand for goods is equal to the sum of consumption demand (C^d), investment demand (I^d), and government demand (G). Therefore, the correct option is B, which includes all three components of demand.

Question 7

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by
A)seeing if investment spending is correlated with taxes on investment.
B)examining what happened to investment when major tax reforms took place.
C)raising tax rates on certain businesses and testing their reaction.
D)raising tax rates on equipment and reducing tax rates on structures.

Accepted Answer

The study conducted by Cummins, Hubbard, and Hassett examined what happened to investment when major tax reforms took place. This method allowed them to observe the actual response of investors to the changes in tax policies, instead of just looking at correlation or artificially manipulating tax rates on certain businesses or equipment.

Question 8

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the level of investment when the goods market is in equilibrium will be A)66.8. B)422.4. C)600.0. D)688.9.

Accepted Answer

The answer of An economy has government purchases of 2000.Desired...

Question 9

A firm's output (Y)depends on how much capital (K)it has,according to the equation: Y = 20K - K².The real interest rate is 6% per year,the depreciation rate of capital is 14% per year and the price of a unit of capital is $80,and each unit of output sells for $1. (a)For capital levels of 0 to 6,how much is output? (b)For capital levels from 1 to 6,calculate the marginal product of capital. (c)How many units of capital does the firm desire? (d)If the real interest rate was 1% per year,how many units of capital would the firm desire?

Accepted Answer

The answer of A firm's output (Y)depends on how much...

Question 10

When desired national saving equals desired national investment (in a closed economy),what market is in equilibrium?
A)The goods market
B)The money market
C)The foreign exchange market
D)The stock market

Accepted Answer

When desired national saving equals desired national investment, there is no excess supply or demand of goods or services, which implies that the goods market is in equilibrium. In contrast, the money market may still face excess supply or demand of money, the foreign exchange market may still experience imbalances in currency flows, and the stock market may still exhibit fluctuations in asset prices that are unrelated to saving and investment decisions at the national level.

Question 11

A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N,and marginal productivity of labor given by MPN = 50 - 2N + K.The price of capital is $5000,the real interest rate is 10%,and capital depreciates at a 15% rate.The real wage rate is $15.
(a)Calculate the user cost of capital.
(b)Find the firm's optimal amount of employment and the size of the capital stock.

Accepted Answer

The answer of A firm has current and future marginal...

Question 12

Draw a diagram showing the determination of a firm's optimal capital stock,showing the relationship between the user cost of capital and the future marginal product of capital.Suppose the real interest rate declines.Show what happens to the firm's optimal capital stock.What happens to the firm's desired investment?

Accepted Answer

The answer of Draw a diagram showing the determination of...

Question 13

An economy has government purchases of 1000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be A)1)11%. B)5)56%. C)16.67%. D)21.11%.

Accepted Answer

The answer of An economy has government purchases of 1000.Desired...

Question 14

How would the desired capital stock be affected by a decline in the user cost of capital?

Accepted Answer

The answer of How would the desired capital stock be...

Question 15

One way of writing the goods-market equilibrium condition for a closed economy is A)Y = C + G + S B)Y = C^d + G^d + S C)S^d = I^d D)Y - C^d - G - S^d = I^d

Accepted Answer

The goods-market equilibrium condition for a closed economy can be represented by the equation S^d = I^d, which means that at equilibrium, savings (S) will be equal to investment (I) in the economy.

Question 16

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled
A)$3 million.
B)$4 million.
C)$5 million.
D)$7 million.

Accepted Answer

The change in capital stock from the start to the end of the year is:
$15 million - $10 million = $5 million

We know that the average depreciation rate on the capital stock is 20%, so the depreciation expense for the year would be:
20% x $10 million = $2 million

Net investment would then be the change in capital stock minus depreciation expense:
$5 million - $2 million = $3 million

Therefore, the correct answer is C) $5 million.

Question 17

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d= 3000 - 2000r + 0.10Y I^d= 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to A)1)25%. B)2)50%. C)8)33%. D)25.00%.

Accepted Answer

The answer of An economy has full-employment output of 5000.Government...

Question 18

What is the difference between gross investment and net investment?
A)Net investment = gross investment minus taxes
B)Net investment = gross investment minus net factor payments
C)Net investment = gross investment minus inventory accumulation
D)Net investment = gross investment minus depreciation

Accepted Answer

Gross investment refers to the total amount of investment in an economy. Net investment, on the other hand, refers to the increase in the country's stock of capital. This means that net investment takes into account the depreciation of existing capital stock. Therefore, net investment is calculated by subtracting depreciation from gross investment. Thus, D is the correct option as it says Net investment = gross investment minus depreciation.

Question 19

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to
A)the right and increase the real interest rate.
B)the right and decrease the real interest rate.
C)the left and increase the real interest rate.
D)the left and decrease the real interest rate.

Accepted Answer

When desired national saving increases for a given real interest rate, the desired national saving curve shifts to the right. This increase in saving supply for loanable funds tends to lower the real interest rate because more funds are available for investment at any given rate.

Question 20

You have just purchased a home that cost $250,000.The nominal mortgage interest rate is 8% per annum,mortgage interest payments are tax deductible,and you are in a 30% tax bracket.The expected inflation rate is 4%.Maintenance and other expenses are 8% of the initial value of the house.What is the real user cost of your house?
A)$20,000
B)$24,000
C)$27,000
D)$30,000

Accepted Answer

Real user cost of the house = (mortgage payment + maintenance and other expenses - tax benefits) / (1+inflation rate) 
= [250,000*(0.08/12)*(1-0.3) + (0.08*250,000*0.08) - (0.3*(0.08*250,000*0.08))] / (1+0.04) 
= $23,966.67 (rounded to the nearest dollar)

Therefore, the real user cost of the house is closest to $24,000, which is option B.

Quiz 4: Consumption, saving, and Investment

Cummins,Hubbard,and Hassett found that investment responded to a tax change that affected the user cost of capital,with an elasticity of

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?

What is the q theory of investment? Who developed it? What is q,and what do different values of q imply? How is q related to the stock market value of a firm and its capital stock?

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate when the goods market is in equilibrium will be

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled

In the goods market equilibrium condition for a closed economy,the total demand for goods equals

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the level of investment when the goods market is in equilibrium will be

When desired national saving equals desired national investment (in a closed economy) ,what market is in equilibrium?

An economy has government purchases of 1000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

How would the desired capital stock be affected by a decline in the user cost of capital?

One way of writing the goods-market equilibrium condition for a closed economy is

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d= 3000 - 2000r + 0.10Y I^d= 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

What is the difference between gross investment and net investment?

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

Quiz 4: Consumption, saving, and Investment

Cummins,Hubbard,and Hassett found that investment responded to a tax change that affected the user cost of capital,with an elasticity of

Your firm has capital stock of $10 million and a depreciation rate of 15%.Gross investment is $3 million.How much is net investment?

What is the q theory of investment? Who developed it? What is q,and what do different values of q imply? How is q related to the stock market value of a firm and its capital stock?

An economy has government purchases of 2000.Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G Id = 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate when the goods market is in equilibrium will be

At the start of the year,your firm's capital stock equaled $100 million,and at the end of the year it equaled $105 million.The average depreciation rate on your capital stock is 20%.Gross investment during the year equaled

In the goods market equilibrium condition for a closed economy,the total demand for goods equals

Cummins,Hubbard,and Hassett studied the effects of taxes on investment by

An economy has government purchases of 2000.Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G Id = 1000 - 4000r When the full-employment level of output equals 5000,then the level of investment when the goods market is in equilibrium will be

When desired national saving equals desired national investment (in a closed economy) ,what market is in equilibrium?

An economy has government purchases of 1000.Desired national saving and desired investment are given by Sd = 200 + 5000r + 0.10Y - 0.20G Id = 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

How would the desired capital stock be affected by a decline in the user cost of capital?

One way of writing the goods-market equilibrium condition for a closed economy is

At the start of the year,your firm's capital stock equaled $10 million,and at the end of the year it equaled $15 million.The average depreciation rate on your capital stock is 20%.Net investment during the year equaled

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y Id = 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

What is the difference between gross investment and net investment?

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate when the goods market is in equilibrium will be

An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the level of investment when the goods market is in equilibrium will be

An economy has government purchases of 1000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G I^d= 1000 - 4000r When the full-employment level of output equals 5000,then the real interest rate that clears the goods market will be

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d= 3000 - 2000r + 0.10Y I^d= 1000 - 4000r Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to