Question 1

Generally speaking, investment does ________ when aggregate output does ________.

Accepted Answer

Investment typically does well when aggregate output is also doing well because higher output usually indicates a stronger economy, which encourages more investment.

Question 2

If a firm is able to produce the same amount of output even after reducing its labor workforce, this implies that the firm has

Accepted Answer

The firm's ability to maintain output levels with fewer workers indicates that it previously had more labor than was necessary for its production processes, hence the term "excess labor."

Question 3

The Unique Toy Company rents space by the square foot in a warehouse to store its inventory. The owner of the warehouse just doubled the rent he charges the Unique Toy Company. Everything else equal, the rent increase is likely to ________ Unique's optimal level of inventory.

Accepted Answer

When rent increases, the cost of holding inventory also increases, making it more expensive to keep inventory in the warehouse. As a result, it is likely that Unique will reduce its optimal level of inventory to offset the increased costs associated with the rent increase. Therefore, the rent increase is likely to decrease Unique's optimal level of inventory.

Question 4

An unexpected increase in inventories has

Accepted Answer

An unexpected increase in inventories indicates that current production has exceeded demand, which means that future production will need to slow down in order to clear out the excess inventory. This implies that there will be a negative effect on future production.

Question 5

If a firm's sales turn out to be more than expected, inventories will be

Accepted Answer

When sales exceed expectations, inventories decrease because more products are sold than anticipated. This reduction in inventory typically prompts the firm to increase production to replenish stock and meet ongoing demand.

Question 6

Which of the following statements is true?

Accepted Answer

It is expected that production will fluctuate somewhat over time, but not as much as sales fluctuates over time. This is because production levels can be adjusted to anticipate changes in demand, whereas sales are more unpredictable and can vary significantly based on consumer behavior and external factors. Therefore, while both production and sales may experience some level of fluctuation, sales will generally experience greater variability over time.

Question 7

The unemployment rate does not tend to fall as soon as the economy pulls out of a recession. Which of the following best explains this?

Accepted Answer

Firms are hesitant to immediately hire new workers as they may still have excess labor on hand from the recession when they were forced to lay off workers. As the economy slowly improves, firms may still have sufficient labor to meet their production needs.

Question 8

The two channels through which monetary policy can influence behavior in the goods market are

Accepted Answer

Monetary policy can influence behavior in the goods market through investment and consumption. Lower interest rates can encourage businesses to borrow and invest in new capital goods, which can stimulate economic growth. Lower interest rates can also make borrowing for consumption more attractive, encouraging households to spend more, which can increase demand for goods and services.

Question 9

Which of the following types of investments is the most volatile?

Accepted Answer

Inventory investment is considered the most volatile among the options given because it directly reflects changes in business expectations and can quickly adjust to changes in demand, making it more susceptible to economic fluctuations compared to plant, housing, or equipment investments.

Question 10

Productivity fluctuates along a business cycle because

Accepted Answer

The answer of Productivity fluctuates along a business cycle because
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Question 11

Which of the following relationships is correct?

Accepted Answer

The change in the stock of inventories for a period is equal to the beginning stock plus production minus sales. Therefore, the correct relationship is: Stock of Inventories (End of Period) = Stock of Inventories (Beginning of Period) + Production - Sales. Option A and Option D add the production to the beginning stock but do not account for sales, so they are incorrect. Option B subtracts both production and sales from the beginning stock, which is incorrect.

Question 12

Provided that firms have sufficient capital and labor to support an output increase, monetary and fiscal policy are likely to be the most effective when

Accepted Answer

Monetary and fiscal policies are most effective in stimulating the economy when output is low and inventory stocks are low. This is because low output indicates underutilization of resources, and low inventory levels suggest businesses might respond to increased demand (stimulated by policy measures) by ramping up production, thus boosting economic activity.

Question 13

At the beginning of 2017, the Shades of Gray Company has 8,000 pairs of sunglasses in stock. During 2017, the company produces 120,000 pairs of sunglasses and sells 112,000 pairs of sunglasses. The Shades of Gray Company's stock of inventory at the end of 2017 is ________ pairs of sunglasses.

Accepted Answer

The company started with 8,000 pairs, produced 120,000 pairs, totaling 128,000 pairs. After selling 112,000 pairs, 16,000 pairs remain in stock.

Question 14

Due to an increase in the birthrate, the Solid Wood Furniture Company expects an increase in the sale of its cribs over the next few years. The Solid Wood Furniture Company will most likely

Accepted Answer

An increase in demand for cribs suggests that the Solid Wood Furniture Company will need to increase its production to meet this demand. Therefore, it is most likely that the company will increase current production.

Question 15

The desired level of inventories is the level at which the extra cost (in lost sales) from lowering inventories by a small amount is

Accepted Answer

The desired level of inventories is achieved when the extra cost from lowering inventories (in terms of lost sales) is just equal to the extra gain from lower inventories (in terms of interest revenue and decreased storage costs). This balance ensures that the inventory level is optimized for cost efficiency without sacrificing sales.

Question 16

Which of the following types of expenditures is more volatile than plant and equipment investment?

Accepted Answer

Housing investment is more volatile than plant and equipment investment because it is highly sensitive to interest rates and economic cycles, leading to significant fluctuations in investment levels.

Question 17

There is an increase in aggregate demand, and firms do not have sufficient capital and labor to support an output increase. In this case, inventory stocks will

Accepted Answer

When aggregate demand increases but firms cannot increase output due to insufficient capital and labor, they will deplete their inventory stocks to meet demand. This situation, combined with the inability to increase supply, leads to higher prices, hence a large increase in the price level.

Question 18

If inventory stocks are low and firms have enough capital and labor to support an output increase,

Accepted Answer

When inventory stocks are low and firms have the capacity to increase output, both monetary and fiscal policy can stimulate demand effectively, leading to increased production to replenish inventories.

Question 19

A firm is less likely to invest in new capital if

Accepted Answer

If a firm does not expect future sales to grow, it is less likely to invest in new capital as the additional capital will not be utilized efficiently. A firm may only invest in new capital if it is expanding into new markets if it expects future growth in those markets. The option of having high productivity of existing capital or having no excess capital does not necessarily affect the firm's decision to invest in new capital.

Question 20

If firms believe that a downturn in sales and output is temporary and that increased output will be needed in the future, they may choose to

Accepted Answer

If firms believe that the downturn in sales and output is temporary, then firing all their workers, selling off the plant or closing it permanently would not be a wise decision as it would lead to significant costs and disruption when demand increases again. The best choice in this scenario would be to reassign their workers to different jobs or departments within the firm, which would allow the firm to retain its skilled workers and maintain its production capabilities.

Quiz 15: Household and Firm Behavior in the Macroeconomy: a Further Look

Generally speaking, investment does when aggregate output does .