Deck 14: Investment and Economic Activity

Question 1

Which of the following is considered investment?

A)The individual who is innovative, takes risks, raises capital and organizes production
B)The hiring of a college graduate to work in a firm's "Investment" division
C)$200 million of financial capital owned by Bethlehem Steel
D)A brand new robot purchased for use on an automobile assembly line

Answer 1

D

Question 2

Which of the following is classified as spending on investment?
I.new residential construction
II.business spending on new equipment
III.business spending on structures such as office buildings
IV.purchase of government bonds

A)II and III only
B)II, III, and IV only
C)I, II, and III only
D)I, II, III, and IV

Answer 2

C

Question 3

If gross private domestic investment exceeds depreciation, then

A)net private domestic investment is positive.
B)net private domestic investment is negative.
C)the capital stock is declining.
D)the capital stock is unchanged.

Answer 3

A

Question 4

Which of the following is included in gross private domestic investment?
I.Macy's purchase of new computerized cash registers
II.repairs to and replacements to the carpeting at Macy's
III.your purchase of a new queen-sized mattress from Macy's
IV.changes in Macy's business inventories

A)I only
B)I and II only
C)I, II, and IV only
D)I, II, III, and IV

Question 5

Which of the following is true regarding investment?

A)In the short run it increases aggregate supply but in the long run it increases aggregate demand.
B)In the short run it influences aggregate demand and in the long run it influences the rate at which the economy grows.
C)In the short run it influences aggregate demand but in the long run it retards economic growth since it requires saving.
D)In the short run it reduces aggregate demand because it requires savings but in the long it promotes economic growth.

Question 6

Net investment will be negative if

A)depreciation is less than gross private domestic investment.
B)depreciation is greater than gross private domestic investment.
C)depreciation is positive.
D)depreciation is negative.

Question 7

Gross private domestic investment, the official government measure of investment, includes all of the following except

A)education.
B)new business structures.
C)new residential investment.
D)changes in business inventories.

Question 8

In the recession that began in late 2007 in the United States, which of the following was the first main element of GDP that faltered?

A)Consumption spending
B)New home construction
C)Business spending on new equipment
D)Net exports

Question 9

A nation's capital stock will decrease if

A)a firm purchases used equipment.
B)inventories of intermediate goods (such as lumber for housing construction)decrease.
C)obsolete equipment is not replaced.
D)the stock of existing homes for sale decreases.

Question 10

Which of the following is a component of investment?

A)A travel agency purchases new software to update its reservations process.
B)Karla buys an existing home in Oakland, California.
C)Sharon, a college student, purchases "MathType," a mathematical equation editing software.
D)Wen Kew buys a used delivery truck for his furniture business.

Question 11

Which of the following is not included under gross private domestic investment?

A)Construction of a new office building
B)Purchase of a new computer by an accounting firm
C)Scientific research undertaken by a biomedical engineering firm
D)Construction of a new private suburban home

Question 12

Which of the following items is part of gross private domestic investment?

A)Non-residential structures such a new shopping mall
B)Furniture purchased by a young couple for their new home
C)Purchase of a used automobile
D)Purchase of Oracle's stock

Question 13

Which of the following is classified as investment?
I.existing homes
II.business spending on new equipment
III.purchase of corporate stock
IV.taking out a loan to build an office building

A)II only
B)II and IV only
C)II, III, and IV only
D)I, II, III, and IV

Question 14

Net private investment equals

A)gross private domestic investment plus depreciation.
B)gross private domestic investment minus business taxes.
C)gross private domestic investment minus depreciation.
D)gross private domestic investment minus inventories.

Question 15

The local Subaru dealership has an increase in inventory of 17 cars in 2012.In 2013 it sells all 17 cars.

A)The value of the increased inventory will be counted as part of the investment component of GDP in 2012, and the value of the 17 cars sold in 2013 will reduce the investment component in 2013 GDP.
B)The value of the 17 unsold cars will be deducted from the investment component of GDP in 2012, and the value of the 17 cars sold in 2013 will increase the consumption component in 2013 GDP.
C)The value of the increased inventory will be counted as part of GDP in 2012 and the value of the 17 cars sold in 2013 will cause 2012 GDP to increase.
D)The value of the increased inventory will not affect 2012 GDP, but the sale of the cars in 2013 will cause 2013 GDP to increase.

Question 16

Which of the following is the largest and fastest growing component of gross private domestic investment in the United States between 1995 and 2011?

A)Change in private inventories
B)Residential investment
C)Nonresidential equipment and software
D)Nonresidential structures

Question 17

Suppose a bookstore has 500 copies of a new, unsold Economics textbook.This

A)is treated as an increase in the bookstore's inventories and will decrease the store's gross private domestic investment.
B)is treated as an increase in the bookstore's inventories and will increase the store's gross private domestic investment.
C)is treated as an increase in the "intermediate goods" category of gross private domestic investment.
D)will not affect gross private domestic investment or consumption until the books are sold.

Question 18

Which of the following is not a component of gross private domestic investment spending?

A)An increase in business inventories
B)The extensive renovation of an old factory building
C)A consumer's purchase of a brand new condominium
D)The purchase of stock in the General Electric Company

Question 19

Which of the following statements is true?

A)Investment subtracts from the natural resource base and depreciation adds to it.
B)Investment adds to the natural resource base and depreciation reduces it.
C)Investment and depreciation add to the capital stock.
D)Investment adds to capital stock and depreciation reduces it.

Question 20

If gross private domestic investment exceeds depreciation, then

A)net private domestic investment is zero.
B)net private domestic investment is negative.
C)the capital stock is declining.
D)the capital stock is increasing.

Question 21

Which of the following is true in the United States, based on the experience since 1990?

A)Gross private domestic investment has fallen as a percentage share of GDP.
B)Depreciation is greater than gross private domestic investment.
C)Depreciation is greater than net private domestic investment.
D)Net private domestic investment is greater than gross private domestic investment.

Question 22

Over the past few decades, the bulk of gross private domestic investment has gone toward

A)the purchase of new homes.
B)building new residential structures.
C)the replacement of capital that has depreciated.
D)research and development.

Question 23

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 15%, the last project undertaken is

A)Project Finola.
B)Project Garron.
C)Project Hattrick.
D)Project Kenra.

Question 24

Use the following to answer questions
Exhibit: Investment and Production Possibilities
During the Great Depression, capital stock in the United States was reduced since

A)gross investment was negative.
B)gross investment was above depreciation.
C)gross investment was below depreciation.
D)gross investment was equal to depreciation.

Question 25

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
An increase in investment is illustrated by moving from

A)point m to point n on curve A.
B)point q to point p on curve A.
C)point v on curve C to point s on curve B.
D)point w on curve C to point r on curve B.

Question 26

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
A movement from point s to point t on curve B is likely to cause the economy to shift from

A)curve B to curve A.
B)curve A to curve B.
C)curve B to curve C.
D)curve C to curve A.

Question 27

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
Suppose the economy is operating on curve B and there is positive depreciation to its existing capital stock.The decision to produce at point r is likely to
I.shift the production possibilities curve slowly toward curve C.
II.shift the production possibilities curve slowly toward curve A.
III.reduce the economy's capital stock.
IV.result in a negative net private investment.

A)I and IV only
B)II and III only
C)II and IV only
D)II, III, and IV

Question 28

Use the following to answer questions
Exhibit: Investment and Production Possibilities
A decision to produce more investment goods and fewer consumption goods
I.requires the sacrifice of current and future consumption.
II.allows the production of more of both types of goods in the future.
III.requires an increase in current savings.

A)I, II, and III
B)II and III only
C)II only
D)III only

Question 29

Suppose your firm is considering an investment project that will generate an expected return of 15%.The project costs $200,000.Suppose further that your firm has $100,000 of retained earnings.If the market interest rate is 10%, your firm should

A)loan the retained earnings out at 5%.
B)loan the retained earnings out at 10%.
C)loan the retained earnings out at 15%.
D)invest the $100,000 of retained earnings in the project and borrow the remaining $100,000 at the interest rate of 10%.

Question 30

Suppose your firm is considering an investment project that will generate an expected return of 5%.The project costs $200,000.Suppose further that your firm has $200,000 of retained earnings.If the market interest rate is 10%, your firm should

A)loan the retained earnings out at 5%.
B)loan the retained earnings out at 10%.
C)loan the retained earnings out at 15%.
D)invest the $200,000 of retained earnings in the project.

Question 31

Use the following to answer questions
Exhibit: Investment and Production Possibilities
In the United States, during World War II, massive defense spending

A)resulted in huge increases in gross private domestic investment.
B)resulted in huge cutbacks in gross private domestic investment.
C)added significantly to the nation's capital stock.
D)diverted resources from consumption to gross private domestic investment.

Question 32

The investment demand curve shows

A)the quantity of investment demanded at each interest rate, with all other determinants of investment unchanged.
B)the rate of return on investment at each interest rate, with all other determinants of investment unchanged.
C)the relationship between investment and saving.
D)the relationship between investment and gross domestic product.

Question 33

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
Given that the economy is on curve B, it is most likely to achieve curve C or beyond if it allocates resources to produce at

A)point r.
B)point s.
C)point t.
D)point u.

Question 34

Use the following to answer questions
Exhibit: Investment and Production Possibilities
In the last 80 years, the United States recorded a negative net private domestic investment during three periods.Which of the following are examples of two such periods?

A)during World War II and during the oil crisis in the late 1970s
B)during the Great Depression and during the oil crisis in the late 1970s
C)during the Great Depression and just before the financial crisis of 2007
D)during the Great Depression and during World War II

Question 35

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 11%, the last project undertaken is

A)Project Garron.
B)Project Hattrick.
C)Project Iroda.
D)Project Jemma.

Question 36

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
Suppose the economy is operating at point m on curve A.The decision to move to point p
I.requires a sacrifice of current consumption.
II.requires a sacrifice of future consumption.
III.adds to the economy's capital stock assuming depreciation remains at a level corresponding to point m.
IV.enables the economy to increase both its consumption and investment in the future.

A)I and II only
B)I and III only
C)I, III, and IV only
D)I, II, III, and IV

Question 37

Which of the following statements is true about real gross private domestic investment?

A)Real gross domestic investment (GPDI)is less volatile than consumption and government spending.
B)Real gross domestic investment (GPDI)is more volatile than consumption but less volatile than government spending.
C)Real gross domestic investment (GPDI)is more volatile than government spending but less volatile than consumption.
D)Real gross domestic investment (GPDI)is more volatile than consumption and government spending.

Question 38

Use the following to answer questions
Exhibit: Investment and Production Possibilities
Assume that your firm has a potential investment project which generates a return of 15% and has a cost of $200,000.Assume further that your firm has $200,000 of retained earnings and that the market interest rate is 10%.In this case, your firm should

A)loan the retained earnings out at 5%.
B)loan the retained earnings out at 10%.
C)loan the retained earnings out at 15%.
D)invest the $200,000 of retained earnings in the project.

Question 39

Use the following to answer questions
Exhibit: Investment and Production Possibilities
(Exhibit: Investment and Production Possibilities)
Given that the economy is on curve A, it is most likely to achieve curve C or beyond if it allocates resources to produce at

A)point m.
B)point n.
C)point p.
D)point q.

Question 40

Use the following to answer questions
Exhibit: Investment and Production Possibilities
In the United States, during part of the Great Depression, between 1931 and 1936

A)gross private domestic investment was negative.
B)gross private domestic investment was positive.
C)net private domestic investment was positive.
D)net private domestic investment was negative.

Question 41

Which of the following is not a determinant of investment demand?

A)Expectations about future profitability
B)Changing consumers' tastes and preferences
C)The cost of labor, an alternative factor of production
D)Changes in the rate of corporate profit tax

Question 42

Suppose economic agents expect an increase in the level of economic activity.How will this affect investment demand?

A)The investment demand curve shifts left.
B)There will be a movement up along the investment demand curve.
C)The investment demand curve shifts right.
D)The investment demand curve will not be affected.

Question 43

Which of the following causes a movement along the investment demand?

A)A change in producers' expectations about profitability
B)A change in the interest rate
C)A change in the general price level
D)A stock market crash that reduces household wealth

Question 44

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate declines from 15% to 13%, what happens to the quantity of investment demanded?

A)It decreases by $2,200 because investment is now less profitable.
B)It decreases by $1,000 because investment is now less profitable.
C)It increases by $200 because investment is now more profitable.
D)It increases by $2,200 because investment is now more profitable.

Question 45

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

Which of the following statements is true regarding interest rates and quantity of investment demanded?

A)Higher rates of interest raise the opportunity cost of investment and therefore increase the quantity of investment demanded.
B)Higher rates of interest lower the opportunity cost of investment and therefore reduce the quantity of investment demanded.
C)Higher rates of interest raise the opportunity cost of investment and therefore reduce the quantity of investment demanded.
D)Higher rates of interest lower the opportunity cost of investment and therefore increase the quantity of investment demanded.

Question 46

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

The purchase of a bond is

A)not considered capital.
B)equivalent to adding capital to a firm's capital stock.
C)equivalent to undertaking investment.
D)a more attractive form of investment (compared to capital)when interest rates are high.

Question 47

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 17%, what is the quantity of investment demanded?

A)$200
B)$800
C)$1,000
D)$2,000

Question 48

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate falls from 15% to 11%, what happens to the quantity of investment demanded?

A)It decreases by $2,200 because investment is now less profitable.
B)It decreases by $1,000 because investment is now less profitable.
C)It increases by $200 because investment is now more profitable.
D)It increases by $2,200 because investment is now more profitable.

Question 49

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 13%, what is the amount of planned investment expenditure?

A)$3,500
B)$2,000
C)$2,200
D)$200

Question 50

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 9%, what is the amount of planned investment expenditure?

A)zero
B)$1,500
C)$4,000
D)$5,500

Question 51

Which of the following is not a determinant of investment demand?

A)Producers' expectations about the level of economic activity
B)A decline in consumers' confidence in the economic outlook
C)The quantity of capital stock
D)Household wealth

Question 52

Use the following to answer questions
Exhibit: Investment Projects

(Exhibit: Investment Projects)
If the market interest rate is 13%, what is the quantity of investment demanded?

A)$800
B)$1,000
C)$2,000
D)$4,000

Question 53

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

Higher interest rates

A)lower the opportunity cost of using funds for investment, and they increase investment.
B)increase the opportunity cost of using funds for investment, and they increase investment.
C)increase the opportunity cost of using funds for investment, and they reduce investment.
D)lower the opportunity cost of using funds for investment, and they reduce investment.

Question 54

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

(Exhibit: The Economy's Investment Demand Schedule)
If the interest rate falls from 20% to 15%, what is the change in the amount of investment?

A)Less than $10 billion
B)$10 billion
C)$25 billion
D)$35 billion

Question 55

An increase in the interest rate will

A)shift the investment demand curve to the right.
B)shift the investment demand curve to the left.
C)not shift the investment demand curve.
D)increase the amount of investment undertaken by businesses.

Question 56

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

A decrease in the interest rate will cause a(n)

A)increase in the investment demand curve.
B)decrease in the investment demand curve.
C)movement up along the investment demand curve.
D)movement down along the investment demand curve.

Question 57

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

(Exhibit: The Economy's Investment Demand Schedule)
If the interest rate rises from 10% to 15%, what is the change in the amount of investment?

A)More than $40 billion
B)$40 billion
C)$35 billion
D)$5 billion

Question 58

An increase in interest rate will cause a(n)

A)increase in the investment demand curve.
B)decrease in the investment demand curve.
C)movement up along the investment demand curve.
D)movement down along the investment demand curve.

Question 59

Use the following to answer questions
Exhibit: The Economy's Investment Demand Schedule

There is a _____ relationship between the quantity of investment demanded and the rate of interest.

A)Positive
B)Direct
C)Negative
D)Volatile

Question 60

A decrease in the level of economic activity will generally

A)not change the investment demand curve.
B)shift the investment demand curve to the left.
C)cause a movement up and down the investment demand curve.
D)shift the investment demand curve to the right.

Question 61

Which of the following will not a shift the investment demand curve?

A)Expectations about future profitability
B)The capacity utilization rate of capital
C)The current stock of capital
D)Changes in monetary policy that affect interest rates

Question 62

Which of the following is a reason why a greater capital stock can reduce investment?

A)A greater capital stock is likely to lead to less investment because further increases in the demand for investment tend to raise the cost of capital.
B)Since businesses undertake investment to adjust their stock of capital to its desired level, the amount of investment needed to reach the desired level will be lower when the current capital stock is higher.
C)A greater capital stock is likely to lead to less investment since there will be less old capital to replace.
D)The rate of new technological innovations tends to deter investment in new capital because capital becomes obsolete at a faster rate.

Question 63

All of the following shifts the investment demand curve except

A)an increase in the capital gains tax rate.
B)monetary policy that lowers the interest rate.
C)fiscal policy that affect the cost of holding capital, for example allowing accelerated depreciation.
D)an increase in the capacity utilization rate of capital.

Question 64

An increase in investment demand would most likely be caused by a(n)

A)increase in the market interest rate.
B)increase in the level of economic activity.
C)increase in the cost of new capital goods.
D)decrease in the expected demand for output.

Question 65

How does the quantity of capital already in use affect the level of investment?
I.A greater capital stock is likely to lead to more investment since there will be more capital
To replace.
II.A greater capital stock is likely to lead to less investment because further increases in
The demand for investment raise the cost of capital.
III.For a given desired level of capital stock, the amount of investment needed to reach that
Level will be lower when the current capital stock is higher.
IV.Investment means adding new capital; the existing stock of capital does not influence
Additions to capital.

A)I and II only
B)I and III only
C)I, II, and III only
D)IV only

Question 66

Which of the following will shift the investment demand curve to the right?

A)The imposition of government regulations that reduce the incentive to produce, for example, more stringent environmental regulation
B)A decrease in the capacity utilization rate of capital
C)A decrease in the cost of labor
D)An increase in GDP

Question 67

Which of the following will shift the investment demand curve to the left?

A)An expectation that there will be an upsurge in the level of economic activity
B)An increase in the capital gains tax rate
C)An increase in the market interest rate
D)The government institutes investment tax credits for business undertaking investments

Question 68

A decrease in investment demand would most likely be caused by a

A)decrease in the market interest rate.
B)decrease in corporate income tax rates.
C)decrease in the cost of new capital goods.
D)decrease in the expected demand for output.

Question 69

Which of the following is a reason why a greater capital stock can increase investment?
I.A greater capital stock is likely to lead to more investment because further increases in the
Demand for investment tend to lower the cost of capital.
II.A greater capital stock is likely to lead to more investment since there will be more capital to replace.
III.A higher level of capital stock encourages investment in new capital because capital becomes obsolete at a faster rate.

A)I and II only
B)II and III only
C)II only
D)I, II, and III

Question 70

A decrease in the interest rate will

A)affect the amount of investment undertaken by businesses.
B)decrease the amount of investment undertaken by businesses.
C)shift the investment demand curve to the right.
D)shift the investment demand curve to the left.

Question 71

Which of the following will shift the investment demand curve to the right?

A)The imposition of government regulations that reduce the incentive to produce, for example, more stringent environmental regulation
B)An increase in the rate of new technological innovations.
C)An increase in the cost of new capital goods
D)A decrease in the market interest rate

Question 72

Which of the following will not shift the investment demand curve?

A)An expansionary monetary policy that lowers interest rates
B)A decrease in corporate income tax rates
C)Businesses become more optimistic about the level of economic activity
D)New markets open in Chile and Brazil for U.S.products

Question 73

Which of the following will shift the investment demand curve to the left?

A)An expectation of increased profitability
B)An increase in the rate of new technological innovations
C)An increase in the market interest rate
D)The government repeals investment tax credits

Question 74

Which of the following will shift a firm's investment demand curve to the left?

A)There is an excess demand in the market for skilled labor.
B)The tax code is revised to allow firms to accelerate depreciation on their capital assets.
C)The firm experiences a decrease in the capacity utilization rate of capital.
D)Its current capital stock is way below its desired level.

Question 75

Which of the following will shift the investment demand curve to the right?

A)An increase in the capital gains tax rate
B)A decrease in the market interest rate
C)An increase in the capacity utilization rate of capital
D)The government repeals investment tax credits

Question 76

Consider the following two events: (i)
An increase in the cost of new capital goods; and (ii)
A decrease in corporate income tax rates.How will these events affect the demand for investment?

A)The demand for investment increases.
B)The demand for investment decreases.
C)The two events have opposite effects on investment.Therefore, the demand for investment remains the same.
D)These events have an indeterminate effect on the demand for investment.

Question 77

A decrease in investment demand would most likely be caused by a(n)

A)decrease in the market interest rate.
B)decrease in corporate income tax rates.
C)increase in the cost of new capital goods.
D)increase in the expected demand for output.

Question 78

All other things unchanged, an increase in taxes on profits earned by firms tends to

A)cause a movement down along the investment demand curve.
B)cause a movement up along the investment demand curve.
C)shift the investment demand curve to the right.
D)shift the investment demand curve to the left.

Question 79

Use the following to answer questions
Exhibit: Investment Demand
(Exhibit: Investment Demand)
Which panel represents the result of an increase in the money supply?

A)Panel (a)
B)Panel (b)
C)Panel (c), a movement from B to A
D)Panel (c), a movement from A to B

Question 80

All other things unchanged, rapid advances in technology and the introduction of new products tends to

A)have no effect on the level of investment.
B)shift the investment demand curve to the left.
C)have no effect on the investment demand curve.
D)shift the investment demand curve to the right.