Deck 16: Investment

Question 1

One reason we are interested in investment is its:

A)contribution to higher interest rates.
B)negative impact on current consumption.
C)relationship to exchange rate markets.
D)impact on financial markets.
E)link to long-term economic growth.

Answer 1

E

Question 2

In 2006,investment __________ from about __________ of GDP to about __________ by mid-2009.

A)fell;17.5 percent;11 percent
B)rose;12 percent;15 percent
C)rose;70 percent;71 percent
D)fell;-2.5 percent;-5 percent
E)rose;20 percent;21 percent

Answer 2

A

Question 3

In the equation
,
Is the:

A)capital gain of capital.
B)return to stock prices.
C)return to capital.
D)user cost of capital if taxes are zero.
E)return to a bank account.

Answer 3

E

Question 4

We can use the arbitrage equation:

A)to forecast government spending.
B)for understanding fluctuations in precautionary saving.
C)for maximizing profits.
D)to analyze investment in capital,financial assets,and human capital.
E)to improve our understanding of the quantity theory of money.

Question 5

If the real interest rate is 4 percent,the marginal product of capital is 2%,the depreciation rate is 10 percent,the tax rate is 0 percent,and capital gain is 1 percent,what is the user cost of capital?

A)30 percent
B)-4 percent
C)13 percent
D)35 percent
E)18.2 percent

Question 6

If capital gain rises,a firm should:

A)consider shutting down.
B)invest in financial assets,like stocks.
C)invest in more capital.
D)lower its output prices.
E)lay off some of its workers.

Question 7

In the equation
,
Is the:

A)capital gain.
B)real interest rate.
C)rate of return to capital.
D)marginal product of capital.
E)opportunity cost of capital.

Question 8

For the profit-maximizing firm,if the real interest rate is greater than the marginal product of capital,the firm should

A)invest in more capital.
B)get rid of some capital.
C)keep its capital stock the same,as there is a risk premium attached to the real interest rate.
D)hire more workers.
E)buy stocks.

Question 9

The arbitrage condition for capital demonstrates that:

A)returns to a bank account are equal to the return to capital.
B)returns to a bank account are equal to the user cost of capital.
C)if taxes are zero,profits are maximized.
D)profit maximizing will yield the optimal amount of capital a firm should buy.
E)the user cost is less than the marginal product of capital.

Question 10

The important tool introduced in Chapter 16 on investment is the:

A)arbitrage equation.
B)present value relationship.
C)Fisher equation.
D)quantity theory of money.
E)asset model.

Question 11

The user cost of capital is:

A)the cost of using one more unit of capital.
B)zero if taxes are zero.
C)equal to the real interest rate.
D)equal to negative capital gain.
E)higher as corporate taxes fall.

Question 12

In the arbitrage equation a profit maximizing firm can choose between __________ and __________.

A)investing in capital;investing in human capital
B)investing new capital;hiring more labor
C)buying new capital;buying a new car
D)putting money in a bank;investing in new capital
E)allocating resource toward production;allocating resources toward inventory

Question 13

When capital depreciation is included in the arbitrage equation for capital,the user cost of capital is given by:

A) ¯.
B) .
C) .
D) .
E) .

Question 14

If the real interest rate is 4 percent,the marginal product of capital is 2%,the depreciation rate is 10 percent,the tax rate is 25 percent,and capital gain is 1 percent,what is the user cost of capital?

A)40.9 percent
B)7.5 percent
C)12.5 percent
D)10.5 percent
E)17.3 percent

Question 15

When __________ said "An investment in knowledge always pays the best interest," he was referring to investing in __________.

A)John Maynard Keynes;government spending
B)Karl Marx;health
C)Benjamin Franklin;new ideas
D)Sir John Templeton;technology
E)Winston Churchill;human capital

Question 16

In macroeconomics investing includes purchases of:

A)roads.
B)buildings.
C)stocks and bonds.
D)a and b
E)a and c

Question 17

The equation
:

A)is the capital arbitrage equation.
B)states that a firm should invest in new capital until the marginal product of capital is equal to the difference between the real interest rate and the growth rate the price of capital.
C)states that if the real interest rate is zero,arbitrage equation states the marginal product of capital is equal to minus the capital gain.
D)states that if a firm has "too much" capital,it should divest of some of its capital stock.
E)all of the above

Question 18

In the equation
,
Is the __________ and
Is the __________.

A)stock return;bond return
B)return from a bank account;return to owning capital
C)capital gain;initial price of capital
D)real interest rate;rate of return to capital
E)opportunity cost of capital;user cost of capital

Question 19

If R is the real interest rate;w is the real wage;MPK is the marginal product of capital;and MPL is the marginal product of labor,which of the following conditions informs the profit-maximizing firm how much capital to invest in?

A)R = MPK
B)R = w
C)R = 0 and MPK = MPL
D)MPK = MPL
E)MPK > MPL if R < w

Question 20

During recessions __________ disproportionately to __________.

A)taxes;income
B)consumption falls;government expenditures
C)consumption rises;income
D)investment falls;consumption
E)output falls;income

Question 21

In the simple model of financial asset model arbitrage we assume that:

A)futures markets are perfectly efficient.
B)there is no uncertainty about stock prices.
C)stock prices follow a random walk.
D)the risk premium does not equal zero.
E)capital gains are zero.

Question 22

For the following questions use Figure 16.1 below.
Consider Figure 16.1 above.If there is an increase in the marginal product of capital,then curve __________ would shift to curve __________.

A)d;c
B)b;a
C)c;d
D)a;b
E)not enough information

Question 23

When discussing arbitrage in the stock market,a financial investor can choose between __________.

A)putting money into a savings account or buying a stock
B)buying a bond or buying a stock
C)buying a new machine or buying a stock
D)earning the real interest rate or the marginal product of capital
E)the price of a bond at maturity or the price of a stock when it is sold

Question 24

If the savings interest rate rises,to maintain the financial asset arbitrage equality,either the __________ or the __________ or both.

A)equity falls;price to equity ratio falls
B)risk premium falls;dividends rise
C)capital depreciation rises;investment rate rises
D)dividends rise;capital gain rises
E)marginal product of capital falls;user cost falls

Question 25

The investment share of GDP has a __________ relationship to the user cost and a __________ relationship to the capital depreciation rate.

A)negative;negative
B)positive;positive
C)zero;positive
D)negative;positive
E)positive;inverse

Question 26

The payment the owner of a stock receives from a firm is called the __________.

A)return on assets,or ROA
B)coupon payment
C)dividend
D)profit margin
E)price-to-equity ratio

Question 27

In the growth model,we assumed the savings rate was given by __________,which is exogenous,but from the chapter on investment,we know it is equal to __________.

A)the saving rate;the growth rate of capital
B)
C)
D)a savings shock;
E)total factor productivity;

Question 28

For the following questions use Figure 16.1 below.
Consider Figure 16.1.If there is a decrease in the corporate tax rate,then curve __________ would shift to curve __________.

A)d;c
B)b;a
C)c;d
D)a;b
E)not enough information

Question 29

For the following questions use Figure 16.1 below.
Consider Figure 16.1 above.If there is an increase in capital gains,then curve __________ would shift to curve __________.

A)d;c
B)b;a
C)c;d
D)a;b
E)not enough information

Question 30

For the following questions use Figure 16.1 below.
Consider Figure 16.1.If there is an increase in the capital,then curve __________ would shift to curve __________.If the MPK falls,curve __________ would shift to __________.

A)d;c;a;b
B)b;a;c;d
C)c;d;b;a
D)a;b;d;c
E)not enough information

Question 31

A decline in the corporate income tax will __________and the firm will __________.

A)rise the user cost of capital;put more money in the bank
B)increase corporate profits;offset higher capital gains by hiring more labor
C)lower the capital user cost;invest in more capital
D)lower the rate of capital depreciation;hire more capital
E)raise the marginal product of capital;pay more taxes

Question 32

In the equation
,the left side of the equation is __________.

A)equal to zero,if the real interest rate equals the user cost of capital
B)the holding cost of the stock
C)the return from a stock
D)the return on a bank account
E)equal to the marginal product of capital

Question 33

According to data in the text,which of these is the country with the lowest corporate tax rate?

A)South Korea
B)Germany
C)the United States
D)Japan
E)Ireland

Question 34

According to data in the text,which is the country with highest corporate tax rate?

A)the Slovak Republic
B)Finland
C)the United States
D)Japan
E)Ireland

Question 35

If the bank real interest rate is 4 percent;the percent gain in physical capital gain is 3 percent;the marginal product of capital is 2 percent;and the capital gain of financial capital is 1 percent;what is the percent dividend return?

A)1 percent
B)6 percent
C)50 percent
D)2 percent
E)5 percent

Question 36

Which of the following represent the financial asset arbitrage equation?

A)
B)
C)
D)
E)

Question 37

According to the financial asset arbitrage equation,a rise in the capital gain for a stock implies __________.

A)a decline in the user cost of capital
B)a rise in the dividend.
C)a rise in the real interest rate.
D)the marginal product of capital stays constant.
E)a fall in the price of the stock.

Question 38

If the growth rate of the capital stock is 9 percent;the user cost of capital is 13 percent;the capital depreciation rate is 3 percent;and capital gain is 1 percent,the investment rate is about

A)6.6 percent.
B)29.5 percent.
C)11.7 percent.
D)1.4 percent.
E)50 percent.

Question 39

For the following questions use Figure 16.1 below.
Consider Figure 16.1.If there is an increase in the real interest rate,then curve __________ would shift to curve __________.

A)d;c
B)b;a
C)c;d
D)a;b
E)not enough information

Question 40

The user cost of capital with a corporate income tax is given by which of the following?

A)
B)
C)
D)
E)

Question 41

We can write the stock price as:

A) .
B)
C) .
D) .
E) .

Question 42

When Tobin's q is __________,the market is signalling a firm should __________.

A)greater than one;invest in more capital
B)equal to zero;shut down
C)infinity;sell its stock holdings
D)less than one;raise dividend payments
E)equal to one;try to take over a firm with a Tobin's q = 0.

Question 43

The equation
,
Is the __________.

A)rate of return to dividends
B)dollar value of the stock market
C)capital return
D)marginal product of stocks
E)discount factor

Question 44

If the real interest rate is,more or less,constant and the growth rate of dividends falls sharply,

A)the price-earning ratio would fall.
B)the marginal product of capital would fall.
C)firm profits would rise.
D)stock prices would fall.
E)both a and d

Question 45

Empirical evidence suggests that __________ mutual funds __________ funds.

A)actively managed;have lower returns than passively managed
B)passively managed;have equal returns to a single stock price
C)actively managed;have lower "betas" than single stock
D)passively managed;are more likely to follow a random walk than actively managed
E)indexed;under-perform compared to managed

Question 46

Over the ten-year period from 1997-2005 real interest rates fell gradually.Given this information,what does this theory suggest happened to stock prices?

A)Stock prices fell.
B)There is no relationship between real interest rates and stock prices.
C)Stock prices remained constant.
D)Stock prices rose.
E)not enough information

Question 47

Tobin's q is:

A)the ratio of stock market value of a stock to the value of its capital.
B)the ratio of user cost to the corporate tax rate.
C)equal to a stock's capital gains plus any dividends paid.
D)the difference between the marginal product of capital and the real interest rate.
E)an index of the economic environment.

Question 48

For the following questions refer to Figure 16.2 below.
Your uncle asks you to explain the price of stock prices based on the financial capital arbitrage equation.He shows you the graph shown in Figure 16.2,which shows the Dow Jones Industrial (DJI)Average for 2000-2010.He asks you to explain the cause in the rise of stock prices for the years 2002-2006.You tell him:

A)"As the DJI rises,there are financial capital gains which drive up stock prices."
B)"The rise in the DJI implies there was an incentive for Congress to increase corporate tax rates,which would have led to falling capital investment.With less capital,stock prices rise."
C)"The rising DJI leads to falling dividend payments which would lead to a decline in physical capital accumulation.With less capital available,the marginal product of capital rises,leading to higher stock prices."
D)"I wasn't paying attention the day we covered this in class."
E)"Rising capital gains,as shown in the figure,have no impact on stock prices."

Question 49

If the marginal product of capital is 3 percent;the real interest rate is 4 percent;and the capital depreciation rate is 10 percent,what is the equilibrium stock price?

A)$1.33
B)$83.33
C)$25.00
D)$0.18
E)not enough information

Question 50

If a stock is just as likely to move up or down it __________.

A)is highly correlated.
B)follows a random walk.
C)has a high standard deviation.
D)is stationary.
E)is highly volatile.

Question 51

You hear that Ford is likely to announce strong fourthquarter profits at its next shareholders' meeting.You excitedly decide to buy some Ford stock.When you look up Ford stock prices,you notice that Ford's stock price __________.This is because of __________.

A)is unpredictable;the lack of a random walk
B)is lagging behind other gains in the stock market;its status as a "moribund" company.
C)has fallen;the market believes Ford is lying
D)is flat;pundits believe Ford won't meet its targets
E)has already risen;markets are informationally efficient

Question 52

For the following questions refer to Figure 16.2 below.
Your grandmother is a follower of the financial press and decides to quiz you about your knowledge of financial markets.She asks you to explain the price of stock prices based on the financial capital arbitrage equation.She shows you the graph shown in Figure 16.2 above,which shows the Dow Jones Industrial (DJI)Average for 2000-2010.She asks you to explain the cause in the rise of stock prices for the years 2007-2009.You tell her:

A)"The graph suggest there are capital losses in financial markets,so to cover these losses stock prices have to rise."
B)"Grandma,I was an art major and didn't have to take finance or economics classes."
C)"Ironically,falling capital gains have no impact on stock prices."
D)"A falling DJI leads to negative capital gains in financial assets.This,in turn,drives stock prices down."
E)"Because,in equilibrium,the real interest rate,capital gains,and dividends move in tandem,the decline in stock prices is due to 'irrational exuberance.'"

Question 53

A financial market is efficient if financial prices:

A)fully and correctly reflect all available information.
B)reflect information only available to traders.
C)adjust to any information.
D)allow for consistent short-term profits to be made.
E)yield returns for owners of capital.

Question 54

If the marginal product of capital is 3 percent;the real interest rate is 4 percent;growth is 2.5 percent,and the capital depreciation rate is 10 percent,what is the equilibrium stock price?

A)$166.67
B)$500
C)$.40
D)$1.88
E)$0.01

Question 55

If the bank real interest rate is 2 percent;the percent gain in physical capital gain is 2 percent;the marginal product of capital is 3 percent;and the percent dividend return is 5 percent;what is the financial capital gain?

A)1 percent
B)0 percent
C)8 percent
D)-3 percent
E)3 percent

Question 56

If markets are efficient,it is __________ when trading on the basis of information.

A)easy to ignore a random walk
B)possible to make sustained profits
C)impossible to make economic profits
D)easy to generate economic rent
E)difficult to understand fundamentals

Question 57

Calculate Tobin's q for a firm.You have the following information: MPK = 2%,R = 3%,the stock market value is $1,368,the capital stock is 15 units,and the price of stock is $100.What is Tobin's q? Given your answer,the market believes the firm should __________.

A)1.5;invest in capital.
B)0.7;invest in capital.
C)1.1;disinvest in capital.
D)0.9;disinvest in capital.
E)0.8;hold capital constant.

Question 58

Calculate Tobin's q for a firm.You have the following information: MPK = 2%,R = 4%,the stock market value is $1,728,the capital stock is 12 units,and the price of stock is $120.What is Tobin's q? Given your answer,the market believes the firm should

A)1.2;invest in more capital.
B)1.3;disinvest in capital.
C)0.83;disinvest in capital.
D)0.75;invest in more capital.
E)2.07;raise its depreciation rate.

Question 59

If we divide both sides of the equation
By earnings we get:

A)the price-earnings ratio.
B)the equilibrium interest rate.
C)firm capital gains/losses.
D)the marginal product of capital.
E)inflation-adjusted prices.

Question 60

Which of the following equations represents Tobin's q?

A)
B)
C)
D)
E)

Question 61

You decide to move to the mountains of Colorado and want to know what would be a good offering price on a home,but you know you'll only own it a year.Fortunately,you are armed with the simple residential investment equation.You have the following information: the real interest rate is 4 percent;the depreciation rate of homes is 5 percent;average rent is $1,000;and you will have a 20 percent downpayment.You offer the owner,rounding to the nearest dollar,

A)$25,000.
B)$125,000.
C)$4,167.
D)$17,241.
E)$50,000.

Question 62

Consider Figure 16.3,which shows changes in private inventories.Which of the following (approximate)dates are likely to be periods of an expansion? Given your analysis,inventories are __________.

A)2009;procyclical
B)2001;countercyclical
C)1982;procyclical
D)1991;procyclical
E)none.

Question 63

In the mid- to late 2000s,several housing markets in the United States had a bubble in residential investment.One cause was likely to be:

A)consistently rising real interest rates.
B)growth in residential capital gains.
C)rising residential depreciation.
D)more lax down-payment requirements.
E)controls which held rents down.

Question 64

For the profit-maximizing firm,if the real interest rate is less than the marginal product of capital,the firm should invest in more capital.

Question 65

Which of the following are motives for holding inventories?
I)pipeline theory
Ii)present value inventory control
Iii)high transportation costs

A)i
B)ii
C)i and iii
D)i,ii,and iii
E)ii and iii

Question 66

"Goodwill capital" is essentially:

A)advertising.
B)money set aside for political contributions.
C)the amount of charitable contributions a firm gives.
D)ownership of a brand name.
E)a euphemism for tax payments.

Question 67

Which of the the following are components of physical investment?
I)Nonresidential fixed investment
Ii)Residential fixed investment
Iii)Inventory

A)i
B)ii
C)i and iii
D)ii and iii
E)i,ii,and iii

Question 68

One reason we are interested in investment is its link to long-term economic growth.

Question 69

The smallest component of physical investment is:

A)nonresidential fixed investment.
B)software.
C)residential investment.
D)changes in inventory.
E)unplanned investment.

Question 70

The largest component of physical investment is:

A)nonresidential fixed investment.
B)software.
C)residential investment.
D)changes in inventory.
E)unplanned investment.

Question 71

From the residential arbitrage equation a rise in the rent will __________ the price of the house,while an increase in the depreciation rate will __________ the house price.

A)raise;reduce
B)reduce;raise
C)have no effect on;raise
D)raise,raise
E)reduce,have no effect on

Question 72

Consider Figure 16.3 below,which shows changes in private inventories.Which of the following (approximate)dates are likely to be periods of recession? Given your analysis,inventories are __________.

A)1980;procyclical
B)1997;procyclical
C)2008;countercyclical
D)2001;procyclical
E)d and a

Question 73

Between 2006 and 2009 the component of investment which fell the furthest was __________.

A)software
B)residential investment
C)changes in inventory
D)nonresidential fixed investment
E)unplanned investment

Question 74

When John Maynard Keynes said,"An investment in knowledge always pays the best interest," he was referring to investing in government spending.

Question 75

In the equation
,
is the real interest rate.

Question 76

You decide to move to Nevada;life in southern California is getting too expensive and you want to know what would be a good offering price on a home,but you know you'll only own it a year.Fortunately,you are armed with the simple residential investment equation.You have the following information: the real interest rate is 2 percent;the depreciation rate of homes is 2 percent;average rent is $500;and you will have a 10 percent downpayment.You offer the owner,rounding to the nearest dollar,

A)$41,667.
B)$333,333.
C)$25,000.
D)$4,000.
E)$71,429.

Question 77

The arbitrage condition for residential investment is:

A) .
B) .
C) .
D) .
E) .

Question 78

If firms "production smooth" they:

A)produce the same amount each month.
B)use "just in time" inventory control.
C)overproduce in bad times and underproduce in good times.
D)keep the growth of their production constant,regardless of the business cycle.
E)produce just enough to meet their orders.

Question 79

In a booming economy,__________ and so inventories __________.

A)production is rising;rise
B)consumption is rising;fall
C)government expenditures shrink;rise
D)inflation rises;fall
E)personal savings rise;rise

Question 80

From the residential arbitrage equation a rise in the down payment will __________ the price of the house,while an increase in the real interest rate will __________ the house price.

A)reduce;raise
B)raise;reduce
C)reduce;reduce
D)raise;have no effect on
E)raise;raise