Question 1

The production-smoothing motive for holding inventories suggests that:

Accepted Answer

The production-smoothing motive for holding inventories suggests that firms produce more than they sell during periods of low sales and put the extra goods in inventories. This is done to avoid sharp fluctuations in production levels and to maintain a steady output over time. By smoothing out production, firms can better respond to changes in demand and reduce the risk of stockouts or overproduction. Therefore, the correct answer is B.

Question 2

Inventory investment is the ______ component of aggregate spending and is very ______.

Accepted Answer

Inventory investment is the smallest component of aggregate spending in most economies and is known for its volatility, as it can change significantly from one period to the next based on business expectations and actual sales.

Question 3

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

Accepted Answer

The stock-out avoidance motive for holding inventories suggests that firms hold inventories to avoid losing sales. This means that firms want to ensure that they have enough inventory on hand to meet customer demand and fulfill orders, rather than running out of stock and potentially losing sales to competitors.

Question 4

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

Accepted Answer

The inventories as a factor of production motive suggests that firms hold inventories in order to produce more output. This is because holding inventories allows firms to maintain a continuous production process and avoid interruptions in the event of supply chain disruptions or unpredictable variations in demand.

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

Inventory investment, at least in theory, should:

Accepted Answer

According to the theory of inventory investment, when the real interest rate rises, the cost of holding inventories increases, leading to a lower incentive for businesses to hold inventories. As a result, businesses may reduce their inventories, leading to a reduction in inventory investment. Therefore, inventory investment should fall when the real interest rate rises, other things being equal.

Question 7

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 holding of inventories to avoid stock-outs is a common motive for businesses. In this scenario, the manufacturer is holding inventories in anticipation of demand during the Christmas season, and not to smooth out production or maintain a continuous flow of work in process.

Question 8

Holding other factors constant, a fall in the interest rate will ______ inventory investment.

Accepted Answer

When interest rates fall, the cost of borrowing decreases, making it easier and cheaper for firms to obtain financing for inventory investment. This leads to an increase in inventory investment.

Question 9

Economic booms should stimulate investment spending because during booms:

Accepted Answer

During economic booms, higher levels of employment increase the marginal product of capital, leading to an increase in investment spending. The other options are incorrect as during economic booms, the real interest rate may increase or decrease depending on various factors, corporate tax rates may or may not increase, and the purchase price of capital may or may not increase.

Question 10

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 11

The real interest rate should be inversely related to investment in:

Accepted Answer

The real interest rate is inversely related to investment in plant and equipment, home building, and inventories because higher real interest rates increase the cost of borrowing, which discourages investment in these areas.

Question 12

The investment demand function would shift for all of the following reasons except:

Accepted Answer

An increase in government spending should not raise the real interest rate, but rather increase the demand for investment goods, shifting the investment demand function to the right. The other options are valid reasons for a shift in the investment demand function.

Question 13

Inventory investment includes spending on:

Accepted Answer

Inventory investment refers to the purchase of goods by businesses that are stored and later sold. This can include materials and supplies, work in progress, and finished goods. Option A refers to capital investment in equipment and structures, while option C refers to sales to other businesses, which is not the same as inventory investment. Option D refers to the net investment in capital equipment, and does not necessarily include spending on inventory.

Question 14

Adding to the stock of spare parts that a manufacturer keeps on hand to replace worn out or broken parts is an example of:

Accepted Answer

The process of adding to the stock of spare parts is known as inventory investment. It involves holding a certain quantity of goods or raw material to meet future demand, and is necessary for businesses to prevent stockouts and ensure they are able to meet customer needs. Option A (efficient markets hypothesis) is unrelated to this concept, Option B (precautionary saving) refers to individuals saving money to protect against unexpected events such as job loss, illness or emergency expenses, and Option D (reserve requirements) refers to the regulations that require banks to keep a certain percentage of their deposits in reserve.

Question 15

The opportunity cost of holding inventories is the:

Accepted Answer

The opportunity cost of holding inventories is the real interest rate because it represents the foregone return on investment that could have been earned if the funds were invested elsewhere, adjusted for inflation.

Question 16

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

Accepted Answer

Loans made to subprime borrowers in the early 2000s increased housing demand by making it easier for more people to qualify for mortgages. This increased demand, in turn, drove up housing prices.

Question 17

The work in process motive for holding inventories suggests that:

Accepted Answer

The work in process motive for holding inventories refers to the need for companies to maintain parts of their products in various stages of completion within their inventory system. This ensures that production processes can continue smoothly without delays, accounting for items that are not yet fully manufactured but are in the process of being completed.

Question 18

During recessions, investment spending usually decreases because:

Accepted Answer

During recessions, firms experience lower profits, which makes it more difficult to secure financing for investment projects. As a result, many firms face financing constraints and are unable to invest as much as they would during periods of economic growth. The other options are not generally associated with decreases in investment spending during recessions.

Question 19

Inventory investment will decrease when interest rates _____ and credit conditions are _____.

Accepted Answer

Inventory investment tends to decrease when interest rates increase because the cost of borrowing money to finance inventory becomes more expensive. Additionally, when credit conditions are tight, it is harder for businesses to obtain financing, further discouraging inventory investment.

Question 20

Use the following to answer questions : Exhibit: Residential Investment -(Exhibit: Residential Investment) Based on the graph, if the capital market is initially in equilibrium at A with the relative price of housing equal to P_H3/P and the stock of housing capital equal to K_H2, then holding other factors constant, if a massive earthquake destroys a significant portion of the stock of housing capital, house prices will move to ______ and the flow of residential housing will move to______.

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Quiz 17: The Theory of Investment