Question 1

For a firm facing financing constraints on its investment spending, the most important determinant of how much it invests is the:

Accepted Answer

A)  firm's expected future profitability. 
B)  firm's current profitability. 
C)  interest rate. 
D)  firm's cost of capital. 
A)  firm's expected future profitability. 
B)  firm's current profitability. 
C)  interest rate. 
D)  firm's cost of capital.

Question 2

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

Accepted Answer

A)  raises the cost of capital. 
B)  lowers the marginal product of capital. 
C)  lowers the real rental price of capital. 
D)  slows down the speed at which net investment responds to the incentive to invest. 
A)  raises the cost of capital. 
B)  lowers the marginal product of capital. 
C)  lowers the real rental price of capital. 
D)  slows down the speed at which net investment responds to the incentive to invest.

Question 3

Holding other factors constant, an increase in population due to a large increase in immigrants will ______ the price of housing and ______ the flow of residential housing investment.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 4

During recessions, investment spending usually decreases because:

Accepted Answer

A)  the real interest rate falls. 
B)  lower profits mean more firms face financing constraints. 
C)  the purchase price of capital decreases. 
D)  corporate tax rates usually decrease. 
A)  the real interest rate falls. 
B)  lower profits mean more firms face financing constraints. 
C)  the purchase price of capital decreases. 
D)  corporate tax rates usually decrease.

Question 5

Tobin's q equals the:

Accepted Answer

A)  cost of buying and renting out one unit of capital measured in units of the economy's output. 
B)  marginal product of capital minus the cost of capital. 
C)  ratio of the replacement value of installed capital to the market value of installed capital. 
D)  ratio of the market value of installed capital to the replacement cost of installed capital. 
A)  cost of buying and renting out one unit of capital measured in units of the economy's output. 
B)  marginal product of capital minus the cost of capital. 
C)  ratio of the replacement value of installed capital to the market value of installed capital. 
D)  ratio of the market value of installed capital to the replacement cost of installed capital.

Question 6

Use the neoclassical model of business fixed investment to illustrate graphically how a hurricane that destroys a large amount of capital (holding other factors constant) would change the rental price of capital. If other factors remained unchanged, how would this change the quantity of investment spending in the economy?

Accepted Answer

@#IMG-DLM& The quantity of business fixe

Question 7

Holding other factors constant, the decline in aggregate income during a recession will ______ the price of housing and ______ the flow of residential housing investment.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 8

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

Accepted Answer

a. Increases in the real interest rate i

Question 9

Assume that the following model of the economy applies:
C = a + b(Y - T)
Ifixed = c + dY
Iinventories = g + hY
Y = C + Ifixed + Iinventories + G
Write an expression for equilibrium Y in this model. If b = 0.5, d = 0.2, and h = 0.2, what are the multipliers for G and T?

Accepted Answer

The expression is:
Y = (a + c

Question 10

Business fixed investment includes:

Accepted Answer

A)  rental housing that landlords buy to rent out. 
B)  goods that businesses put aside in fixed storage facilities, including materials and supplies. 
C)  the fixed cost of borrowing that businesses pay for new equipment. 
D)  equipment and structures that businesses buy to use in production. 
A)  rental housing that landlords buy to rent out. 
B)  goods that businesses put aside in fixed storage facilities, including materials and supplies. 
C)  the fixed cost of borrowing that businesses pay for new equipment. 
D)  equipment and structures that businesses buy to use in production.

Question 11

The theory behind Tobin's q indicates that:

Accepted Answer

A)  the stock market may be expected to predict every turning point in real GDP. 
B)  the stock market may be expected to be closely tied to fluctuations in output and employment. 
C)  every time investment goes up we would expect the stock market to go down. 
D)  the stock market and the economy are basically independent of each other. 
A)  the stock market may be expected to predict every turning point in real GDP. 
B)  the stock market may be expected to be closely tied to fluctuations in output and employment. 
C)  every time investment goes up we would expect the stock market to go down. 
D)  the stock market and the economy are basically independent of each other.

Question 12

The corporate income tax is a tax on the:

Accepted Answer

A)  earnings of employees of a corporation. 
B)  dividends paid to the shareholders of a corporation. 
C)  earnings of the managers of a corporation. 
D)  profits of a corporation. 
A)  earnings of employees of a corporation. 
B)  dividends paid to the shareholders of a corporation. 
C)  earnings of the managers of a corporation. 
D)  profits of a corporation.

Question 13

Inventory investment includes spending on:

Accepted Answer

A)  equipment and structures that businesses buy to use in production. 
B)  goods that businesses put aside in storage, including materials and supplies, work in progress, and finished goods. 
C)  goods that businesses produce to sell to other businesses. 
D)  capital equipment less depreciation expense. 
A)  equipment and structures that businesses buy to use in production. 
B)  goods that businesses put aside in storage, including materials and supplies, work in progress, and finished goods. 
C)  goods that businesses produce to sell to other businesses. 
D)  capital equipment less depreciation expense.

Question 14

The investment tax credit:

Accepted Answer

A)  enables a firm to deduct a certain proportion of each dollar spent on capital goods from its profits. 
B)  enables a firm to deduct a certain proportion of each dollar spent on capital goods from its tax bill. 
C)  reduces the corporate tax rate in proportion to each dollar spent on capital goods. 
D)  allows a firm to count a certain proportion of each dollar spent on capital goods as depreciation expense. 
A)  enables a firm to deduct a certain proportion of each dollar spent on capital goods from its profits. 
B)  enables a firm to deduct a certain proportion of each dollar spent on capital goods from its tax bill. 
C)  reduces the corporate tax rate in proportion to each dollar spent on capital goods. 
D)  allows a firm to count a certain proportion of each dollar spent on capital goods as depreciation expense.

Question 15

If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should:

Accepted Answer

A)  add to its capital stock. 
B)  let its capital stock shrink. 
C)  keep its capital stock unchanged. 
D)  reduce the real rental price of capital. 
A)  add to its capital stock. 
B)  let its capital stock shrink. 
C)  keep its capital stock unchanged. 
D)  reduce the real rental price of capital.

Question 16

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

Accepted Answer

A)  plant and equipment, home building, and inventories. 
B)  plant and equipment and home building, but not inventories. 
C)  plant and equipment and inventories, but not home building. 
D)  inventories and home building, but not plant and equipment. 
A)  plant and equipment, home building, and inventories. 
B)  plant and equipment and home building, but not inventories. 
C)  plant and equipment and inventories, but not home building. 
D)  inventories and home building, but not plant and equipment.

Question 17

A capital rental firm makes a profit if the ______ is ______ the cost of capital.

Accepted Answer

A)  real rental price of capital; less than 
B)  equilibrium marginal product of capital; less than 
C)  equilibrium marginal product of capital; equal to 
D)  equilibrium marginal product of capital; greater than 
A)  real rental price of capital; less than 
B)  equilibrium marginal product of capital; less than 
C)  equilibrium marginal product of capital; equal to 
D)  equilibrium marginal product of capital; greater than

Question 18

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.

Accepted Answer

A)  encourages 
B)  discourages 
C)  does not affect 
D)  promotes excessive 
A)  encourages 
B)  discourages 
C)  does not affect 
D)  promotes excessive

Question 19

Briefly explain the neoclassical model of investment.

Accepted Answer

The neoclassical model examines the bene

Question 20

Investment spending is:

Accepted Answer

A)  generally countercyclical. 
B)  generally procyclical. 
C)  unrelated to the business cycle. 
D)  generally procyclical for some components and generally countercyclical for others. 
A)  generally countercyclical. 
B)  generally procyclical. 
C)  unrelated to the business cycle. 
D)  generally procyclical for some components and generally countercyclical for others.

For a firm facing financing constraints on its investment spending, the most important determinant of how much it invests is the:

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

Holding other factors constant, an increase in population due to a large increase in immigrants will the price of housing and the flow of residential housing investment.

During recessions, investment spending usually decreases because:

Tobin's q equals the:

Holding other factors constant, the decline in aggregate income during a recession will the price of housing and the flow of residential housing investment.

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

Assume that the following model of the economy applies: C = a + b(Y - T) I_fixed = c + dY I_inventories = g + hY Y = C + I_fixed + I_inventories + G Write an expression for equilibrium Y in this model. If b = 0.5, d = 0.2, and h = 0.2, what are the multipliers for G and T?

Business fixed investment includes:

The theory behind Tobin's q indicates that:

The corporate income tax is a tax on the:

Inventory investment includes spending on:

The investment tax credit:

If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should:

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

A capital rental firm makes a profit if the is the cost of capital.

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.

Briefly explain the neoclassical model of investment.

Investment spending is:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Exam 17: The Theory of Investment

For a firm facing financing constraints on its investment spending, the most important determinant of how much it invests is the:

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

Holding other factors constant, an increase in population due to a large increase in immigrants will ______ the price of housing and ______ the flow of residential housing investment.

During recessions, investment spending usually decreases because:

Tobin's q equals the:

Holding other factors constant, the decline in aggregate income during a recession will ______ the price of housing and ______ the flow of residential housing investment.

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

Assume that the following model of the economy applies: C = a + b(Y - T) Ifixed = c + dY Iinventories = g + hY Y = C + Ifixed + Iinventories + G Write an expression for equilibrium Y in this model. If b = 0.5, d = 0.2, and h = 0.2, what are the multipliers for G and T?

Business fixed investment includes:

The theory behind Tobin's q indicates that:

The corporate income tax is a tax on the:

Inventory investment includes spending on:

The investment tax credit:

If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should:

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

A capital rental firm makes a profit if the ______ is ______ the cost of capital.

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.

Briefly explain the neoclassical model of investment.

Investment spending is:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Holding other factors constant, an increase in population due to a large increase in immigrants will the price of housing and the flow of residential housing investment.

Holding other factors constant, the decline in aggregate income during a recession will the price of housing and the flow of residential housing investment.

Assume that the following model of the economy applies: C = a + b(Y - T) I_fixed = c + dY I_inventories = g + hY Y = C + I_fixed + I_inventories + G Write an expression for equilibrium Y in this model. If b = 0.5, d = 0.2, and h = 0.2, what are the multipliers for G and T?

A capital rental firm makes a profit if the is the cost of capital.