Question 1

The Q-theory of investment

Accepted Answer

A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends positively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes. 
A)  suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. 
B)  links investment spending to stock prices. 
C)  emphasizes that current investment spending depends positively on the expected future growth of GDP. 
D)  emphasizes the role of real interest rates and taxes.

Question 2

If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent.

Accepted Answer

A) True 
 B)False

Question 3

Scenario 12.1: Jennifer has decided to give up her pack-a-day smoking habit and invest the money she would have spent on cigarettes in a retirement account. At $6.00 a pack, Jennifer is currently spending $2,190 per year on cigarettes. Jennifer is 25 years old and plans to retire in 35 years, at age 60. She has chosen a retirement account that will earn a long-term average return of 5 percent per year. Jennifer is currently earning $40,000 annually. Assume that the average annual inflation rate will be 5 percent per year, that the cost of cigarettes will increase with inflation, and that Jennifer's income will also rise with the inflation rate.
-Refer to Scenario 12.1 At the assumed annual inflation rate of 5 percent, approximately how much will the $6.00 pack of cigarettes cost in 30 years, when Jennifer reaches the retirement age of 60?

Accepted Answer

A)  $16 
B)  $21 
C)  $33 
D)  $47 
A)  $16 
B)  $21 
C)  $33 
D)  $47

Question 4

What is the accelerator theory of investment spending?

Accepted Answer

The accelerator theory of inve

Question 5

The multiplier-accelerator model was developed by

Accepted Answer

A)  John Maynard Keynes. 
B)  Paul Samuelson. 
C)  classical economists. 
D)  Walter Heller. 
A)  John Maynard Keynes. 
B)  Paul Samuelson. 
C)  classical economists. 
D)  Walter Heller.

Question 6

If the real interest rate is 7 percent and the inflation rate is 7 percent, then the nominal interest rate is

Accepted Answer

A)  0 percent. 
B)  3.5 percent. 
C)  7 percent. 
D)  14 percent. 
A)  0 percent. 
B)  3.5 percent. 
C)  7 percent. 
D)  14 percent.

Question 7

Financial intermediaries are

Accepted Answer

A)  salespersons who collect money from customers purchasing goods and services. 
B)  firms that receive funds from savers and channel them to investors. 
C)  firms that receive funds from investors and channel them to savers. 
D)  persons that advise households on investment decisions. 
A)  salespersons who collect money from customers purchasing goods and services. 
B)  firms that receive funds from savers and channel them to investors. 
C)  firms that receive funds from investors and channel them to savers. 
D)  persons that advise households on investment decisions.

Question 8

Investment spending tends to be

Accepted Answer

A)  procyclical. 
B)  anticyclical. 
C)  unrelated to GDP. 
D)  a periodic variable. 
A)  procyclical. 
B)  anticyclical. 
C)  unrelated to GDP. 
D)  a periodic variable.

Question 9

If you invest $4,000 in a savings account paying 3 percent interest, how much will your investment be worth in 25 years?

Accepted Answer

($4,000)(1

Question 10

How do financial intermediaries reduce risk?

Accepted Answer

Financial intermediaries reduc

Question 11

Procyclical variables ________ during expansions and ________ during recessions.

Accepted Answer

A)  fall; fall 
B)  rise; rise 
C)  fall; rise 
D)  rise; fall 
A)  fall; fall 
B)  rise; rise 
C)  fall; rise 
D)  rise; fall

Question 12

From 1997 to 2003, stock prices based on the Standard and Poor's index and the share of investment spending as a component of GDP tended to

Accepted Answer

A)  move in opposite directions. 
B)  move in the same direction. 
C)  both remain relatively unchanged. 
D)  be unrelated to each other. 
A)  move in opposite directions. 
B)  move in the same direction. 
C)  both remain relatively unchanged. 
D)  be unrelated to each other.

Question 13

Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should

Accepted Answer

A)  invest in the project because the opportunity cost is less than the return on the investment. 
B)  invest in the project because the opportunity cost is greater than the return on the investment. 
C)  invest in the project because the opportunity cost is the same as the return on the investment. 
D)  not invest in the project because the opportunity cost is greater than the return on the investment. 
A)  invest in the project because the opportunity cost is less than the return on the investment. 
B)  invest in the project because the opportunity cost is greater than the return on the investment. 
C)  invest in the project because the opportunity cost is the same as the return on the investment. 
D)  not invest in the project because the opportunity cost is greater than the return on the investment.

Question 14

Table 12.1
Expected Real Rates of Interest for Five Countries
   
Source: Trading Economics, September, 2010
-Refer to Table 12.1. The expected real rate of interest for Australia is

Accepted Answer

A)  -1.4%. 
B)  1.4%. 
C)  6.9%. 
D)  cannot be determined from the information provided. 
A)  -1.4%. 
B)  1.4%. 
C)  6.9%. 
D)  cannot be determined from the information provided.

Question 15

Real interest rates are the

Accepted Answer

A)  interest rates quoted in the market minus the inflation rate. 
B)  interest rates quoted in the market plus the expected inflation rate. 
C)  interest rates quoted in the market. 
D)  nominal interest rates plus the inflation rate. 
A)  interest rates quoted in the market minus the inflation rate. 
B)  interest rates quoted in the market plus the expected inflation rate. 
C)  interest rates quoted in the market. 
D)  nominal interest rates plus the inflation rate.

Question 16

Table 12.2
Returns on Investment
  
-If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 10 percent and there is no inflation, what will be the level of investment in the economy?

Accepted Answer

A)  $0 
B)  $200 
C)  $300 
D)  $500 
A)  $0 
B)  $200 
C)  $300 
D)  $500

Question 17

Investment, a key component of aggregate demand, can cause recessions and booms based on fluctuations in its levels.

Accepted Answer

A) True 
 B)False

Question 18

Ceteris paribus, as real GDP expected growth ________, investment spending ________.

Accepted Answer

A)  increases; decreases 
B)  increases; increases 
C)  decreases; increases 
D)  changes; does not usually change 
A)  increases; decreases 
B)  increases; increases 
C)  decreases; increases 
D)  changes; does not usually change

Question 19

Recall the Application about opting for a lump sum of $500,000 for your retirement or $35,000 per year for the rest of your life to answer the following question(s).
-If the interest rate is 4 percent, how much interest would the retiree earn the first year if she opted for the lump sum payment, and chose to invest the entire payment at this interest rate?

Accepted Answer

A)  $1,400 
B)  $20,000 
C)  $55,000 
D)  $235,000 
A)  $1,400 
B)  $20,000 
C)  $55,000 
D)  $235,000

Question 20

Financial intermediaries reduce individual risk because they pool the funds of savers.

Accepted Answer

A) True 
 B)False

The Q-theory of investment

If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent.

What is the accelerator theory of investment spending?

The multiplier-accelerator model was developed by

If the real interest rate is 7 percent and the inflation rate is 7 percent, then the nominal interest rate is

Financial intermediaries are

Investment spending tends to be

If you invest $4,000 in a savings account paying 3 percent interest, how much will your investment be worth in 25 years?

How do financial intermediaries reduce risk?

Procyclical variables during expansions and during recessions.

From 1997 to 2003, stock prices based on the Standard and Poor's index and the share of investment spending as a component of GDP tended to

Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. The expected real rate of interest for Australia is

Real interest rates are the

Table 12.2 Returns on Investment -If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 10 percent and there is no inflation, what will be the level of investment in the economy?

Investment, a key component of aggregate demand, can cause recessions and booms based on fluctuations in its levels.

Ceteris paribus, as real GDP expected growth , investment spending .

Financial intermediaries reduce individual risk because they pool the funds of savers.

Introduction: What Is Economics?

The Key Principles of Economics

Exchange and Markets

Demand, Supply, and Market Equilibrium

Measuring a Nation's Production and Income

Unemployment and Inflation

The Economy at Full Employment

Why Do Economies Grow?

Aggregate Demand and Aggregate Supply

Fiscal Policy

The Income-Expenditure Model

Money and the Banking System

The Federal Reserve and Monetary Policy

Modern Macroeconomics: From the Short Run to the Long Run

The Dynamics of Inflation and Unemployment

Macroeconomic Policy Debates

International Trade and Public Policy

The World of International Finance

Filters

Exam 12: Investment and Financial Markets

The Q-theory of investment

If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent.

What is the accelerator theory of investment spending?

The multiplier-accelerator model was developed by

If the real interest rate is 7 percent and the inflation rate is 7 percent, then the nominal interest rate is

Financial intermediaries are

Investment spending tends to be

If you invest $4,000 in a savings account paying 3 percent interest, how much will your investment be worth in 25 years?

How do financial intermediaries reduce risk?

Procyclical variables ________ during expansions and ________ during recessions.

From 1997 to 2003, stock prices based on the Standard and Poor's index and the share of investment spending as a component of GDP tended to

Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. The expected real rate of interest for Australia is

Real interest rates are the

Table 12.2 Returns on Investment -If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 10 percent and there is no inflation, what will be the level of investment in the economy?

Investment, a key component of aggregate demand, can cause recessions and booms based on fluctuations in its levels.

Ceteris paribus, as real GDP expected growth ________, investment spending ________.

Financial intermediaries reduce individual risk because they pool the funds of savers.

Introduction: What Is Economics?

The Key Principles of Economics

Exchange and Markets

Demand, Supply, and Market Equilibrium

Measuring a Nation's Production and Income

Unemployment and Inflation

The Economy at Full Employment

Why Do Economies Grow?

Aggregate Demand and Aggregate Supply

Fiscal Policy

The Income-Expenditure Model

Money and the Banking System

The Federal Reserve and Monetary Policy

Modern Macroeconomics: From the Short Run to the Long Run

The Dynamics of Inflation and Unemployment

Macroeconomic Policy Debates

International Trade and Public Policy

The World of International Finance

Filters

Procyclical variables during expansions and during recessions.

Ceteris paribus, as real GDP expected growth , investment spending .