Deck 26: Investment

Question 1

From the perspective of macroeconomics, investment refers to:

A)purchases of capital assets that increase a nation's productivity.
B)the purchase of bonds.
C)spending on financial assets such as stocks.
D)saving money in banks.

Answer 1

A

Question 2

Investment refers to:

A)depreciation of capital stocks.
B)spending on physical capital.
C)spending on financial assets such as stocks.
D)saving money in banks.

Answer 2

B

Question 3

The capital stock in an economy is the:

A)present value of a future stream of payments.
B)user cost of capital.
C)total quantity of capital at a point in time.
D)total amount of money at a point in time.

Answer 3

C

Question 4

In macroeconomics, the difference between saving and investment is that:

A)saving is the money left over after paying for spending, and investment is the purchase of new capital.
B)saving is the money left over after paying for spending, and investment is the purchase of stocks and bonds.
C)saving is created by the government, and investment is specific to firms.
D)saving does not depend on income, but investment depends on profitability.

Question 5

Which of the following is true about investment and saving?

A)Investment always exceeds saving in an economy.
B)Investment has the same meaning as saving.
C)Investment creates new productive capacity, whereas saving does not involve any spending on new capital.
D)Investment does not depend on the real interest rate, whereas saving does.

Question 6

Depreciation refers to the:

A)decline in the quality of output produced by a business.
B)fall in the price of output that the business produces.
C)spending by a business on new capital assets.
D)decline in capital due to wear and tear, obsolescence, accidental damage, and aging.

Question 7

Your university installs new computer systems in its labs. Each year, the value of these computers falls due to normal wear and tear. These costs are:

A)depreciation costs.
B)up-front costs.
C)real interest rate costs.
D)the price of tuition.

Question 8

The three types of business investment are:

A)business investment, inventories, and housing investment.
B)consumption, exports, and imports.
C)spending on equipment, structures, and intellectual property.
D)rent, depreciation, and real interest.

Question 9

Which of the following is an investment?

A)Marios builds a new house.
B)Mary buys $4,000 worth of Alibaba stock.
C)Cameron saves $400 in his savings account.
D)Dale purchases a house that was built in 1940.

Question 10

Which of the following is an investment?

A)Fred pays a contractor to add two new rooms to his house.
B)Dan purchases $6,800 worth of gold.
C)Frank buys a used car.
D)Ben's computer depreciates by 15%.

Question 11

When considering the user cost of capital, next year's revenue is the:

A)marginal cost.
B)depreciation cost.
C)marginal benefit.
D)real interest that is forgone.

Question 12

Refer to the following statistics. Based on these statistics, the level of business investment is:
Equipment: $2.5 billion
Business structures: $2 billion
Intellectual property: $4 billion
Inventories: $0.2 billion
Housing: $3 billion

A)$2.5 billion.
B)$8.7 billion.
C)$8.5 billion.
D)$6 billion.

Question 13

Refer to the following statistics. Based on these statistics, the level of business investment is:
Inventories: $12 million
Housing: $400 million
Equipment: $500 million
Business structures: $350 million
Intellectual property: $700 million

A)$1,550 million.
B)$500 million.
C)$1,562 million.
D)$1,050 million.

Question 14

Refer to the following statistics. Based on these statistics, the level of business investment is:
Inventories: $52 million
Housing: $600 million
Equipment: $989 million
Business structures: $500 million
Intellectual property: $800 million

A)$2,289 million.
B)$989 million.
C)$1,300 million.
D)$2,341 million.

Question 15

The user cost of capital consists of:

A)corporate taxes and depreciation.
B)forgone interest and depreciation.
C)the sum of all interest paid on business loans.
D)domestic investment and foreign investment.

Question 16

The user cost of capital is the:

A)extra cost associated with using one more machine next year.
B)real interest rate.
C)price of the machine plus forgone interest.
D)total cost of purchasing one more machine next year.

Question 17

A new assembly line robot with a price tag of $2.5 million is expected to depreciate by 3% at the end of next year. The real interest rate is 2.5%. What is the user cost of the robot for one year?

A)$62,500
B)$75,000
C)$137,500
D)$12,500

Question 18

A new assembly line robot costs $1.2 million and is expected to depreciate by 10% at the end of next year. The real interest rate is 4.5%. What is the user cost of the robot for one year?

A)$66,000
B)$54,000
C)$174,000
D)$120,000

Question 19

An industrial tanker costs $52 million and is expected to depreciate by 8% at the end of next year. The real interest rate is 6.5%. What is the user cost of the tanker for one year?

A)$7.54 million
B)$3.38 million
C)$4.16 million
D)$780,000

Question 20

A large industrial washer system costs $69,000 and is expected to depreciate by 15% at the end of next year. The real interest rate is 7%. What is the user cost of the washer system for one year?

A)$15,180
B)$4,830
C)$10,350
D)$5,520

Question 21

An advanced computer system for a multinational corporation costs $500,000 and is expected to depreciate by 4% at the end of next year. The real interest rate is 4%. What is the user cost of the computer system for one year?

A)$540,000
B)$50,000
C)$20,000
D)$40,000

Question 22

An automobile manufacturer installs a conveyor belt system for $670,000. The depreciation rate is 10% at the end of next year. The real interest rate is 6%. What is the user cost of the conveyor belt system for one year?

A)$26,800
B)$67,000
C)$40,200
D)$107,200

Question 23

Future value is the:

A)sum of all present values for a portfolio of savings instruments.
B)total amount of interest paid on a loan by a future date.
C)amount that your money will grow into by a future date as a result of earning interest.
D)equivalent of present value divided by the real interest rate.

Question 24

If the interest rate is 5%, what is the future value of $500 in one year?

A)$525
B)$530
C)$598
D)$476

Question 25

If the interest rate is 5%, what is the approximate future value of $500 in three years?

A)$525
B)$579
C)$431
D)$530

Question 26

If the interest rate is 6.75%, what is the approximate future value of $10,000 in five years?

A)$10,600
B)$7,214
C)$13,862
D)$11,966

Question 27

If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years?

A)$15,900
B)$17,949
C)$10,133
D)$22,204

Question 28

If the interest rate is 6%, what is the approximate future value of $75,000 in 20 years?

A)$79,500
B)$240,535
C)$89,743
D)$23,385

Question 29

Holding other things equal, the _____ the time period that saving earns interest in the bank, the _____ the future value of that saving.

A)longer; greater
B)longer; lower
C)shorter; greater
D)shorter; the more negative

Question 30

Holding everything else equal, the _____ the interest rate on saving, the _____ the future value of that saving.

A)higher; greater
B)higher; lower
C)lower; greater
D)lower; the more negative

Question 31

Present value is the:

A)compounded future value.
B)discounted future value.
C)discounted real interest rate.
D)compounded real interest rate.

Question 32

If the interest rate is 10%, what is the approximate present value of $50,000 received in 20 years?

A)$7,432
B)$41,322
C)$45,455
D)$336,375

Question 33

If the interest rate is 5%, what is the approximate present value of $25,000 received in five years?

A)$31,907
B)$23,810
C)$19,588
D)$22,676

Question 34

If the interest rate is 4%, what is the approximate present value of $2,000 received in four years?

A)$2,340
B)$1,710
C)$1,923
D)$2,849

Question 35

If the interest rate is 6%, what is the approximate present value of $150,000 received in seven years?

A)$133,499
B)$141,509
C)$225,545
D)$99,759

Question 36

If the interest rate is 4% and the average inflation rate is 2%, what is the approximate future value of $15,000 in 10 years?

A)$15,900
B)$17,949
C)$18,285
D)$22,204

Question 37

If the interest rate is 6% and the average inflation rate is 3.1%, what is the approximate future value of $75,000 in 20 years?

A)$132,852
B)$240,535
C)$89,743
D)$42,340

Question 38

If the interest rate is 7% and the average inflation rate is 2.5%, what is the approximate future value of $45,000 in five years?

A)$36,110
B)$47,700
C)$63,115
D)$56,078

Question 39

If the interest rate is 5% and the average inflation rate is 1.8%, what is the approximate future value of $100,000 in five years?

A)$105,000
B)$85,428
C)$117,057
D)$127,628

Question 40

One should invest in an opportunity if the:

A)present value of the costs exceeds the present value of the benefits.
B)present value of the benefits exceeds the present value of the costs.
C)nominal interest rate is equal to the inflation rate.
D)inflation rate exceeds the nominal interest rate.

Question 41

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on the proposed project.
Up-front cost: $250,000
Next year's revenue: $25,000
Real interest rate: 4%
Depreciation rate: 6%
How much profit does the project yield, and should your client invest in the project?

A)Yes, the client should invest because the project yields a $25,000 profit.
B)No, the client should not invest because the project yields a $25,000 loss.
C)The client is indifferent because the project does not yield any profit above the up-front cost.
D)Yes, the client should invest because the project yields a $50,000 profit.

Question 42

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on the proposed project.
Up-front cost: $250,000
Next year's revenue: $25,000
Real interest rate: 4%
Depreciation rate: 6%
What is the present value of the stream of payments from this project?

A)$250,000
B)$0
C)$275,000
D)$625,000

Question 43

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on the proposed project.
Up-front cost: $100,000
Next year's revenue: $15,000
Real interest rate: 7%
Depreciation rate: 3%
What is the present value of the stream of payments from this project?

A)$150,000
B)$115,000
C)$85,000
D)$500,000

Question 44

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $100,000
Next year's revenue: $15,000
Real interest rate: 7%
Depreciation rate: 3%
How much profit does the project yield, and should your client invest in the project?

A)No, the client should not invest because the project yields a $15,000 loss.
B)Yes, the client should invest because the project yields a $15,000 profit.
C)No, the client should not invest because the project yields a $10,000 loss.
D)Yes, the client should invest because the project yields a $50,000 profit.

Question 45

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $300,000
Next year's revenue: $15,000
Real interest rate: 8%
Depreciation rate: 10%
What is the present value of the stream of payments from this project?

A)$383,333
B)$83,333
C)$315,000
D)$18,000

Question 46

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $300,000
Next year's revenue: $15,000
Real interest rate: 8%
Depreciation rate: 10%
How much profit does the project yield, and should your client invest in the project?

A)No, the client should not invest because the project yields a $300,000 loss.
B)Yes, the client should invest because the project yields a $18,000 profit.
C)No, the client should not invest because the project yields a $216,667 loss.
D)Yes, the client should invest because the project yields a $33,000 profit.

Question 47

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $350,000
Next year's revenue: $45,000
Real interest rate: 8%
Depreciation rate: 10%
What is the present value of the stream of payments from this project?

A)$345,000
B)$250,000
C)$308,000
D)$310,000

Question 48

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $350,000
Next year's revenue: $45,000
Real interest rate: 8%
Depreciation rate: 10%
How much profit does the project yield, and should your client invest in this project?

A)No, the client should not invest because the project yields a $100,000 loss.
B)Yes, the client should invest because the project yields a $100,000 profit.
C)No, the client should not invest because the project yields a $305,000 loss.
D)Yes, the client should invest because the project yields a $305,000 profit.

Question 49

Which of the following graphs shows what would happen to the investment line if an investment project is expected to earn higher revenues over time?

A)

B)

C)

D)

Question 50

Which of the following graphs shows what would happen to the investment line if the depreciation rate increases?

A)

B)

C)

D)

Question 51

Which of the following graphs shows what would happen to the investment line if the depreciation rate decreases?

A)

B)

C)

D)

Question 52

Which of the following graphs shows what would happen to the investment line if technological advance makes capital more productive?

A)

B)

C)

D)

Question 53

What happens to the investment line if the real interest rate increases?

A)There is a movement up and to the left along the same investment line.
B)There is a movement down and to the right along the same investment line.
C)The investment line shifts to the right.
D)The investment line shifts to the left.

Question 54

What happens to the investment line if the government institutes a tax break for funds invested?

A)There is a movement up and to the left along the same investment line.
B)There is a movement down and to the right along the same investment line.
C)The investment line shifts to the right.
D)The investment line shifts to the left.

Question 55

Which of the following graphs shows what would happen to the investment line if the real interest rate rises?

A)

B)

C)

D)

Question 56

Which of the following graphs shows what would happen to the investment line if the real interest rate decreases?

A)

B)

C)

D)

Question 57

Which of the following graphs shows what would happen to the investment line if the cost of borrowing rises in the market?

A)

B)

C)

D)

Question 58

Which of the following graphs shows what would happen to the investment line if managers become optimistic about future profitability?

A)

B)

C)

D)

Question 59

Which of the following graphs shows what would happen to the investment line if managers become pessimistic about the future state of the economy?

A)

B)

C)

D)

Question 60

A credible forecast indicates that the economy is headed for a recession. Which of the following graphs shows what would happen to the investment line?

A)

B)

C)

D)

Question 61

A new administration arrives in Washington,

A)

B)

C)

D)

Question 62

During the Great Recession of 2007 to 2009, banks began to make fewer loans as they became wary of risky projects. Which of the following graphs shows the effect on the investment line?

A)

B)

C)

D)

Question 63

Banks become willing to take on riskier projects and begin making more loans. Which of the following graphs shows the effect on the investment line?

A)

B)

C)

D)

Question 64

The loanable funds market is the market for:

A)resources.
B)loans.
C)machines.
D)goods and services.

Question 65

The loanable funds market is the market for:

A)funds used to buy, rent, or build capital.
B)retail goods and services.
C)wholesale goods and services.
D)machines.

Question 66

The borrowers in the loanable funds market are:

A)savers.
B)investors.
C)suppliers of loanable funds.
D)those who have excess funds available.

Question 67

The suppliers in the loanable funds market are:

A)savers.
B)investors.
C)demanders of loanable funds.
D)those whose expenditures exceed their incomes.

Question 68

In the loanable funds market, the demand for loanable funds is negatively sloped because of the:

A)positive relationship between the real interest rate and the quantity supplied of loanable funds.
B)positive relationship between the real interest rate and the quantity demanded of loanable funds.
C)inverse relationship between the real interest rate and the quantity demanded of loanable funds.
D)inverse relationship between the real interest rate and the quantity supplied of loanable funds.

Question 69

In the loanable funds market, the supply of loanable funds is positively sloped because of the:

A)inverse relationship between the real interest rate and the quantity demanded of loanable funds.
B)inverse relationship between the real interest rate and the quantity supplied of loanable funds.
C)positive relationship between the real interest rate and the quantity supplied of loanable funds.
D)positive relationship between the real interest rate and the quantity demanded of loanable funds.

Question 70

In the loanable funds market, the demand for loanable funds is negatively sloped because the higher the real interest rate, the:

A)smaller the benefits of saving.
B)lower the profitability of investment projects.
C)higher the profitability of investment projects.
D)greater the benefits of saving.

Question 71

In the loanable funds market, the supply of loanable funds is positively sloped because the higher the real interest rate, the:

A)smaller the benefits of saving.
B)lower the profitability of investment projects.
C)higher the profitability of investment projects.
D)greater the benefits of saving.

Question 72

If the nominal interest rate in the loanable funds market rises by the same amount as the inflation rate, then:

A)the demand for loanable funds shifts to the right.
B)the supply of loanable funds shifts to the left.
C)nothing changes in the loanable funds market.
D)the real interest rate falls.

Question 73

If the government lowers the corporate tax rate, then the ______ loanable funds shifts to the _______ .

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 74

If the government institutes a tax credit on funds invested, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 75

If a country experiences a lot of political strife and uncertainty, which leads managers to have a pessimistic outlook, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 76

If a credible report emerges that indicates that the economy will experience strong economic growth, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 77

If a country reaches a new trade agreement that will increase export markets for domestic businesses, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 78

If banks are worried about high default rates and institute new tough lending regulations, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 79

If new regulations result in banks relaxing their lending standards, then the _____ loanable funds shifts to the _____.

A)demand for; right
B)supply of; left
C)demand for; left
D)supply of; right

Question 80

Equilibrium in the loanable funds market determines the:

A)up-front cost of capital.
B)amount of inventories in an economy.
C)equilibrium real interest rate.
D)point where there is excess demand for loanable funds.