Question 1

At which times is credit rationing by banks likely to intensify?

Accepted Answer

A) in periods of rapidly falling interest rates 
B) when the economy starts to enter a recession 
C) when stock market values are rapidly increasing 
D) when the central bank announces a change in monetary policy 
E) none of the above 
A) in periods of rapidly falling interest rates 
B) when the economy starts to enter a recession 
C) when stock market values are rapidly increasing 
D) when the central bank announces a change in monetary policy 
E) none of the above

Question 2

Which of the following is the most important source of financing investments for U.S.firms?

Accepted Answer

A) the bond market 
B) the stock market 
C) retained earnings 
D) short-term bank debt 
E) long-term bank debt 
A) the bond market 
B) the stock market 
C) retained earnings 
D) short-term bank debt 
E) long-term bank debt

Question 3

The accelerator model states that if income growth slows down, net investment will

Accepted Answer

A) decline 
B) increase but at a decreasing rate 
C) be zero since only replacement investment will take place 
D) be equal to the level of gross investment 
E) be negative 
A) decline 
B) increase but at a decreasing rate 
C) be zero since only replacement investment will take place 
D) be equal to the level of gross investment 
E) be negative

Question 4

Leaving taxes aside, a firm will calculate its rental cost of capital as

Accepted Answer

A) the nominal interest rate 
B) the real interest rate 
C) the real interest rate plus the rate of depreciation 
D) the real interest rate minus the rate of depreciation 
E) the nominal interest rate minus the rate of depreciation 
A) the nominal interest rate 
B) the real interest rate 
C) the real interest rate plus the rate of depreciation 
D) the real interest rate minus the rate of depreciation 
E) the nominal interest rate minus the rate of depreciation

Question 5

What is the approximate net present value of a machine that will save you $13,310 in each of the next three years, if the real interest rate stays at i = 10% during that period?

Accepted Answer

A) $39,930 
B) $36,300 
C) $33,100 
D) $30,000 
E) $26,620 
A) $39,930 
B) $36,300 
C) $33,100 
D) $30,000 
E) $26,620

Question 6

The q-theory of investment states that firms should add physical capital whenever

Accepted Answer

A) the value of q is greater than 1 
B) the value of q is less than 1 
C) the value of q is lower than the market interest rate 
D) the replacement cost of capital is equal to the rental cost of capital 
E) the market value of the firm divided by the replacement cost of capital is less than 1 
A) the value of q is greater than 1 
B) the value of q is less than 1 
C) the value of q is lower than the market interest rate 
D) the replacement cost of capital is equal to the rental cost of capital 
E) the market value of the firm divided by the replacement cost of capital is less than 1

Question 7

A booming stock market is good for capital investment since

Accepted Answer

A) whenever stock market values go up the economy is sure to follow 
B) an increase in wealth will increase investment spending 
C) firms have an easier time selling equity to raise funds for new ventures 
D) buying stocks is an important part of investment spending 
E) all of the above 
A) whenever stock market values go up the economy is sure to follow 
B) an increase in wealth will increase investment spending 
C) firms have an easier time selling equity to raise funds for new ventures 
D) buying stocks is an important part of investment spending 
E) all of the above

Question 8

Assume the nominal interest rate is i = 10%, the real interest rate is r = 7%, and the rate of depreciation d = 6%.What is the rental cost of capital?

Accepted Answer

A) 16% 
B) 13% 
C) 9% 
D) 4% 
E) 1% 
A) 16% 
B) 13% 
C) 9% 
D) 4% 
E) 1%

Question 9

In 2011, which of the following countries had the HIGHEST ratio of investment to GDP?

Accepted Answer

A) Canada 
B) China 
C) Japan 
D) Singapore 
E) United States 
A) Canada 
B) China 
C) Japan 
D) Singapore 
E) United States

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) investment is the primary link through which monetary policy affects the economy 
B) faster growing countries often devote a larger share of GDP to investment 
C) inventory and residential investment are relatively volatile but business fixed investment tends to be a fairly constant fraction of GDP 
D) financial investment (buying stocks)is not part of real investment 
E) the swings in investment are proportionally greater than the swings in total output 
A) investment is the primary link through which monetary policy affects the economy 
B) faster growing countries often devote a larger share of GDP to investment 
C) inventory and residential investment are relatively volatile but business fixed investment tends to be a fairly constant fraction of GDP 
D) financial investment (buying stocks)is not part of real investment 
E) the swings in investment are proportionally greater than the swings in total output

Question 11

Residential investment is affected by monetary policy since

Accepted Answer

A) changes in the real interest rate affect the rate of return on residential investment 
B) changes in the nominal interest rate affect the ability of many potential homebuyers to pay for a home or meet monthly mortgage payments 
C) tighter monetary policy may induce mortgage lenders to ration credit 
D) changes in interest rates may affect the ability of housing developers to get financing 
E) all of the above 
A) changes in the real interest rate affect the rate of return on residential investment 
B) changes in the nominal interest rate affect the ability of many potential homebuyers to pay for a home or meet monthly mortgage payments 
C) tighter monetary policy may induce mortgage lenders to ration credit 
D) changes in interest rates may affect the ability of housing developers to get financing 
E) all of the above

Question 12

A computer dealer who expects to sell 50 computers a month normally orders 50 new computers in the middle of each month to restock inventory for the next month.Now sales have fallen to 40 per month for two months in a row (Months 1 and 2), and the dealer decides to reduce inventory to 40 computers.How many computers will the dealer order in the middle of Month 3?

Accepted Answer

A) 40 
B) 30 
C) 20 
D) 10 
E) 0 
A) 40 
B) 30 
C) 20 
D) 10 
E) 0

Question 13

From the accelerator model we learn that

Accepted Answer

A) the level of investment is proportional to the level of output 
B) the change in investment is proportional to the change in output 
C) the change in investment increases as the level of output increases 
D) the level of investment increases as the change in output increases 
E) net investment decreases if the desired capital stock is greater than the actual capital stock 
A) the level of investment is proportional to the level of output 
B) the change in investment is proportional to the change in output 
C) the change in investment increases as the level of output increases 
D) the level of investment increases as the change in output increases 
E) net investment decreases if the desired capital stock is greater than the actual capital stock

Question 14

The rental cost of capital will fall if

Accepted Answer

A) the expected rate of inflation decreases 
B) the rate of depreciation increases 
C) nominal interest rates increase more than the expected rate of inflation 
D) all of the above 
E) none of the above 
A) the expected rate of inflation decreases 
B) the rate of depreciation increases 
C) nominal interest rates increase more than the expected rate of inflation 
D) all of the above 
E) none of the above

Question 15

Which of the following will decrease the rental cost of capital?

Accepted Answer

A) an increase in the nominal interest rate 
B) an increase in the real interest rate 
C) an increase in the rate of depreciation 
D) an increase in the expected rate of inflation 
E) a decrease in the expected rate of inflation 
A) an increase in the nominal interest rate 
B) an increase in the real interest rate 
C) an increase in the rate of depreciation 
D) an increase in the expected rate of inflation 
E) a decrease in the expected rate of inflation

Question 16

If more and more firms adopt just-in-time manufacturing techniques, then we should see

Accepted Answer

A) more fluctuations in the inventory-to-sales ratio 
B) a decline in the inventory-to-sales ratio 
C) an increase in the rental cost of capital 
D) many more unanticipated inventory changes 
E) more economic fluctuations 
A) more fluctuations in the inventory-to-sales ratio 
B) a decline in the inventory-to-sales ratio 
C) an increase in the rental cost of capital 
D) many more unanticipated inventory changes 
E) more economic fluctuations

Question 17

Investment spending

Accepted Answer

A) is responsible for much of the fluctuations in GDP 
B)  is greatly affected by interest rates and is thus the primary link through which monetary policy affects the economy 
C)  has little effect on aggregate supply in the short run 
D) adds to the size of the capital stock and therefore helps to determine economic progress 
E) all of the above 
A) is responsible for much of the fluctuations in GDP 
B)  is greatly affected by interest rates and is thus the primary link through which monetary policy affects the economy 
C)  has little effect on aggregate supply in the short run 
D) adds to the size of the capital stock and therefore helps to determine economic progress 
E) all of the above

Question 18

In the 1930s, investment as a share of GDP was very low because

Accepted Answer

A) businesses had very low sales expectations 
B) the nominal interest rate was very high 
C) the real interest rate was close to zero 
D) expansionary fiscal policy resulted in huge budget deficits, crowding out investment 
E) expansionary monetary policy resulted in high inflation creating uncertainty 
A) businesses had very low sales expectations 
B) the nominal interest rate was very high 
C) the real interest rate was close to zero 
D) expansionary fiscal policy resulted in huge budget deficits, crowding out investment 
E) expansionary monetary policy resulted in high inflation creating uncertainty

Question 19

According to the accelerator model, as GDP declines and the economy enters a recession, we should expect the level of net investment to

Accepted Answer

A) increase at a decreasing rate 
B) decrease but remain positive 
C) become zero 
D) become negative 
E) increase due to undesired inventories 
A) increase at a decreasing rate 
B) decrease but remain positive 
C) become zero 
D) become negative 
E) increase due to undesired inventories

Question 20

The theory of investment contains aspects of dynamic behavior since

Accepted Answer

A) the desired capital stock depends on a firm's estimate of current but not future output 
B) firms generally close only a portion of the gap between their actual and desired capital stock in each period 
C) there is always an immediate response to changes in the variables that affect the desired capital stock 
D) rapid adjustments of the capital stock are cheaper and tend to interfere less with regular production than slow adjustments 
E) none of the above 
A) the desired capital stock depends on a firm's estimate of current but not future output 
B) firms generally close only a portion of the gap between their actual and desired capital stock in each period 
C) there is always an immediate response to changes in the variables that affect the desired capital stock 
D) rapid adjustments of the capital stock are cheaper and tend to interfere less with regular production than slow adjustments 
E) none of the above

Exam 15: Investment spending

At which times is credit rationing by banks likely to intensify?

Which of the following is the most important source of financing investments for U.S.firms?

The accelerator model states that if income growth slows down, net investment will

Leaving taxes aside, a firm will calculate its rental cost of capital as

What is the approximate net present value of a machine that will save you $13,310 in each of the next three years, if the real interest rate stays at i = 10% during that period?

The q-theory of investment states that firms should add physical capital whenever

A booming stock market is good for capital investment since

Assume the nominal interest rate is i = 10%, the real interest rate is r = 7%, and the rate of depreciation d = 6%.What is the rental cost of capital?

In 2011, which of the following countries had the HIGHEST ratio of investment to GDP?

Which of the following statements is FALSE?

Residential investment is affected by monetary policy since

From the accelerator model we learn that

The rental cost of capital will fall if

Which of the following will decrease the rental cost of capital?

If more and more firms adopt just-in-time manufacturing techniques, then we should see

Investment spending

In the 1930s, investment as a share of GDP was very low because

According to the accelerator model, as GDP declines and the economy enters a recession, we should expect the level of net investment to

The theory of investment contains aspects of dynamic behavior since

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

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