Question 1

The funds used to buy physical capital are

Accepted Answer

Financial capital refers to the funds that are used to purchase physical capital, such as machinery, buildings, and equipment.

Question 2

Capital is

Accepted Answer

Capital refers to the tools, instruments, machines, buildings, and other items that have been produced in the past and are being used today to produce goods and services. It is a factor of production that is distinct from labor and natural resources. Financial wealth, investment and government expenditure are related to capital but not the same thing as capital. Net and gross investment are specific measures of the change in a country's capital stock over a period of time.

Question 3

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

Accepted Answer

Your wealth at the end of the year is calculated by subtracting your expenditures (consumption) from your income: 
$80,000 - $90,000 = -$10,000 
Since your ending wealth is negative, none of the answer choices with positive values can be correct. This leaves only answer choice B as a possibility, indicating that your ending wealth is $0.

Question 4

In 2011, Tim's Gyms needs to finance the building of a new gym. Suppose Tim secures this financing from a bank, and the bank receives ownership if Tim fails to make payments. This type of funding is

Accepted Answer

The type of financing described in the scenario is a mortgage obtained in the loan market. This is where a borrower, in this case, Tim's Gyms, secures a loan and pledges an asset, in this case, the new gym, as collateral to the lender, in this case, the bank. If Tim fails to make payments, the bank can claim ownership of the gym as a way of recouping their losses.

Question 5

The Acme Stereo Company had capital of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Its

Accepted Answer

The net investment is calculated as the change in capital stock for the year, which is -$4 million (decrease of $4 million from $24 million to $20 million). Therefore, choice D is the correct answer.

Question 6

Which of the following is FALSE?

Accepted Answer

Saving equals income minus consumption expenditure, not wealth minus consumption expenditure. Wealth refers to the total value of assets owned, while saving refers to a portion of income that is not consumed.

Question 7

Capital stock increases when

Accepted Answer

Capital stock increases when net investment is positive, meaning that the amount of investment in new capital goods is greater than the amount of depreciation of existing capital goods. Gross investment refers to the total amount spent on new capital goods, including replacement of old ones, while net investment subtracts the depreciation from the gross investment to get the actual increase in the capital stock. Therefore, option D is the correct answer.

Question 8

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year is

Accepted Answer

Gross investment refers to the total number of new machines purchased, which is 3.

Question 9

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year is

Accepted Answer

Tom scrapped 2 old machines and purchased 3 new machines, so his net investment is 3 - 2 = 1 machine.

Question 10

Net investment equals

Accepted Answer

Net investment is the difference between gross investment (the total amount spent on new capital goods) and depreciation (the amount by which existing capital goods have declined in value due to wear and tear). Therefore, net investment equals gross investment minus depreciation. Choice A is incorrect because capital refers to all productive resources, not just physical capital. Choice C is incorrect because it describes the total stock of capital, not the change in the stock due to investment. Choice D is incorrect because it divides gross investment by depreciation, which would yield the depreciation rate, not net investment. Choice E is incorrect because it equates two unrelated concepts.

Question 11

The total amount spent on new capital is

Accepted Answer

The total amount spent on new capital is called gross investment. This includes purchases of new equipment or buildings, and any expenditures made to improve or expand existing capital. It does not include the value of any capital that has been depreciated or worn out.

Question 12

This year Pizza Hut spent $1.3 billion on new capital in its stores. Depreciation during the year was $300 million. Pizza Hut's gross investment was ________ and its net investment was ________.

Accepted Answer

Gross investment = new capital expenditure = $1.3 billion
Net investment = gross investment - depreciation = $1.3 billion - $0.3 billion = $1.0 billion. Therefore, the correct answer is C.

Question 13

The increase in the value of capital is

Accepted Answer

The increase in the value of capital refers to net investment, which is the difference between gross investment (the total amount of investment made in the economy) and depreciation (the decrease in the value of capital due to wear and tear). Therefore, option C is the correct answer.

Question 14

Gross investment

Accepted Answer

Gross investment refers to the total amount spent on new capital, including investments in machinery, equipment, buildings, and other fixed assets. This measure does not include replacement investments, which are made to replace worn-out or outdated capital. Gross investment represents an important measure of economic activity and is a key factor in determining the rate of economic growth over time.

Question 15

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2014, Tim spent $200,000 on new machines. During 2014, Tim's net investment was

Accepted Answer

The market value of the machines decreased by 10 percent, which means the current market value of the machines is $900,000. Tim purchased new machines worth $200,000. Therefore, the net investment in machines during 2014 was $200,000 - $100,000 = $100,000.

Question 16

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2014, Tim's gross investment was

Accepted Answer

Gross investment refers to the total amount spent on new capital, which in this case is $200,000 spent on new machines in 2014.

Question 17

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

Accepted Answer

At the beginning of the year, Tom had 5 machines. After scrapping 2 old machines, he was left with 3 machines. Then he purchased 3 new machines, which brings his total machines to 6 at the end of the year. Therefore, the correct choice is D) 6 machines.

Question 18

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

Accepted Answer

Your wealth at the end of the year is calculated by adding your initial wealth to your income and then subtracting your consumption. So, $10,000 (initial wealth) + $90,000 (income) - $80,000 (consumption) = $20,000.

Question 19

If the economy's capital increases over time,

Accepted Answer

If the economy's capital increases over time, it means that the investment in new capital assets is greater than the depreciation of existing capital assets. This implies that net investment is positive (i.e. gross investment minus depreciation is positive).

Question 20

If the economy's capital decreases over time,

Accepted Answer

Depreciation represents the decrease in the value of capital over time. If the economy's capital decreases over time, it means that depreciation exceeds gross investment. Net investment would then be negative, which is not listed as a choice. Therefore, choice C is the best option.

Quiz 23: Finance, Saving, and Investment