Exam 18: Open-Economy Macroeconomics: Basic Concepts

Suppose it is an election year and the economy is in a recession. The opposition candidate proposes an investment tax credit to take effect next year after he takes office. If the public believes the opposition candidate has a good chance of winning, the effect of this promise will likely be to:

The construction of a new apartment building is an example of:

The existence of financing constraints makes investment:

Explain how tight credit markets (credit crunches) affect: a.business fixed investment, b.residential investment, and c.inventory investment.

Business fixed investment includes:

The work in process motive for holding inventories suggests that:

The production-smoothing motive for holding inventories suggests that:

Because corporate income tax laws do not define profit to be the same as economic profit, many economists believe that the corporate income tax investment.

The price of housing relative to the price of other goods is determined in the short run by the:

Other things being equal, the ratio of Tobin's q will rise if:

In the long run, credit crunches:

If real interest rates increase, what will happen to: a. business fixed investment? b. residential investment? c. inventory investment?

is a share of ownership in a corporation, and the market is the market where these shares are traded.

Assume that the production function for an economy is given by Y = AKaHbL1 - a - b, where H is the stock of inventories. Then the marginal product of inventories (MPH) is given by MPH = bAKaL1 - a - bHb - 1. If the stock of inventories does not depreciate, the price of inventories is the same as the price of output, and taxes are ignored, then the real "cost of capital" for inventories is just the interest rate r. a. Derive an expression for the "desired equilibrium stock of inventories" (H*) as a function of r and output Y by equating the cost of capital to MPH. (Hint: First substitute the production function into the expression for MPH to get MPH = bY/H.) If r = 0.1, b = 0.05, and Y = 5,000, what is the desired stock of inventories? b. If r rose to 0.12, how would the desired stock of inventories change?

The neoclassical model of investment says investment depends negatively on the real interest rate because an increase in the real interest rate:

According to Keynes, movements in stock prices:

If a great wave of immigration increased employment in the United States, this wave would:

If stock prices follow a random walk, then:

James Tobin reasoned that:

During a credit crunch, financing constraints become prevalent and investment spending .