Question 1

Many businesses hold inventories since

Accepted Answer

A)  inventories are needed to meet future demand
B)  it is often less costly to order materials in large quantities
C)  inventories are often an unavoidable part of the production process
D)  firms want to be able to smoothen out their production process
E)  all of the above E

Question 2

Which of the following is NOT included as investment in the national income accounts?

Accepted Answer

A)  investment in human capital
B)  investment in new knowledge
C)  government investment in a country's infrastructure
D)  financial investment (the buying of stocks and bonds) 
E)  all of the above E

Question 3

The component of real investment that experiences the highest level of fluctuation is

Accepted Answer

A)  business fixed investment
B)  residential investment
C)  inventory investment
D)  public investment
E)  financial investment C

Question 4

If all changes in inventories were intended,

Accepted Answer

A)  there would be no business cycle
B)  the business cycle would be less extreme
C)  the business cycle would be more extreme
D)  there would be no relation between the business cycle and inventory investment
E)  sales expectations would no longer influence inventory investment

Question 5

What is the approximate monthly payment for a 30-year fixed rate mortgage for a home valued at $100,000, if the mortgage interest rate is 8 percent?

Accepted Answer

A)  $460
B)  $550
C)  $770
D)  $890
E)  $1,260

Question 6

Assume a Cobb-Douglas production function in which the share of capital is a = 0.25 and the share of labor is b = 0.75.If the rental cost of capital is rc = 10%, the desired capital stock of a cost-minimizing firm should be equal to

Accepted Answer

A)  K* = 0.25Y
B)  K* = 0.75Y
C)  K* = 2.5Y
D)  K* = 3.0Y
E)  K* = 7.5Y

Question 7

In the q-theory of investment, the q stands for

Accepted Answer

A)  the level of investment divided by the level of GDP
B)  the replacement cost of capital divided by the market value of a firm
C)  the market value of a firm divided by the replacement cost of capital
D)  the quantity of stocks outstanding divided by total earnings
E)  the price-earnings ratio

Question 8

In 2011, the ratio of gross investment to GDP in the U.S.was

Accepted Answer

A)  higher than that of China
B)  roughly the same as that of China
C)  roughly the same as that of Canada
D)  higher than that of Canada
E)  lower than that of Canada

Question 9

Which of the following happened in the U.S.in 2008?

Accepted Answer

A)  businesses decreased their inventories but final sales dropped even faster
B)  final sales dropped but business inventories dropped even faster
C)  the ratio of business inventories to final sales dropped sharply
D)  businesses increased their inventories before lending dried up
E)  none of the above

Question 10

Which of the following is FALSE?

Accepted Answer

A)  in the long run, investment is one of the most important determinants of aggregate supply
B)  aggregate supply depends on net investment
C)  gross investment is a volatile part of aggregate demand
D)  investment in human capital is not part of aggregate demand
E)  the flow of investment is fairly small compared to the existing capital stock

Question 11

The notion of permanent output is important for investment since

Accepted Answer

A)  the demand for capital depends on a normal or permanent level of output
B)  firms always try to keep their level of investment spending fairly constant
C)  firms expect current output to always be equal to permanent output
D)  the difference between permanent output and current output is equal to inventory accumulation
E)  current consumption depends on permanent income, and more consumption always leads to more investment

Question 12

Which of the following statements accurately compares the three components of investment spending?

Accepted Answer

A)  inventory investment is much smaller than the other two
B)  residential investment is less interest sensitive than the other two
C)  business fixed investment is more volatile than the other two
D)  inventory investment is less volatile than the other two
E)  none of the above

Question 13

Assume an investment promises to yield $4,400 after the first year, $4,840 after the second year, and $3,993 after the third year.If the market interest rate is i = 10% and is not expected to change over the next three years, what is the present discounted value of this investment?

Accepted Answer

A)  $13,200
B)  $12,900
C)  $12,030
D)  $11,200
E)  $11,000

Question 14

Which policy mix serves best to encourage an increase in business fixed investment?

Accepted Answer

A)  high government spending and low corporate income taxes
B)  high government spending and restrictive monetary policy
C)  high government spending and removal of investment tax credits
D)  low government spending and expansionary monetary policy
E)  income tax cuts and restrictive monetary policy

Question 15

A firm will keep investing until the value of the marginal product of capital is equal to

Accepted Answer

A)  the rental cost of capital
B)  the value of the marginal product of labor
C)  the rate of depreciation minus the real interest rate
D)  the market interest rate minus the rate of depreciation
E)  total output divided by the capital stock

Question 16

Credit rationing implies that

Accepted Answer

A)  some firms cannot borrow even though they are willing to do so at high interest rates
B)  investment spending is affected not only by interest rates but also by the volume of profits and retained earnings
C)  the central bank can affect the economy not just by changing interest rates but also by imposing credit controls
D)  restrictive monetary policy by a central bank is reinforced by commercial banks' reluctance to extend loans for risky ventures
E)  all of the above

Question 17

If the marginal product of capital is above the rental cost of capital, then a firm should

Accepted Answer

A)  increase investment spending to increase the capital stock
B)  decrease investment spending since any new investment projects will be unprofitable
C)  leave investment spending at the current level since any additions to the existing capital stock will not be profitable
D)  undertake only replacement investments since any additions to the capital stock will not be profitable
E)  lower the actual capital stock by not replacing machines that have broken down in the production process

Question 18

If the government were to give investment tax credits in recessions and take them away again in booms, then the economy would

Accepted Answer

A)  operate at a permanently higher level of output
B)  never experience any business cycles
C)  be less stable since businesses would hold back on investments early in recessions in anticipation of higher tax credits later
D)  always operate at less than capacity
E)  be more stable since long policy lags would no longer exist

Question 19

If Tobin's q is greater than 1, then a firm should

Accepted Answer

A)  lower its desired capital stock
B)  issue more stocks to finance new capital investment
C)  pay out more dividends to stockholders
D)  borrow more funds from banks to finance new capital investment
E)  lower its level of investment spending

Question 20

It is important to understand the factors that influence investment spending since

Accepted Answer

A)  investment is important in determining a nation's capital stock
B)  investment behavior is of particular interest in the study of economic cycles
C)  a nation's productive capacity is dependent on how much investment takes place
D)  fiscal and monetary policies both significantly affect investment but often with a lag
E)  all of the above

Exam 15: Investment spending