Question 1

The standard model of business fixed investment is called the of investment.

Accepted Answer

A) new classical model 
B) neoclassical model 
C) classical model 
D) Keynesian model

Question 2

In a typical recession, more than half the fall in spending comes from a decline in:

Accepted Answer

A) consumption spending. 
B) business fixed investment. 
C) government spending. 
D) inventory investment.

Question 3

In the mortgage market, a rise in the real interest rate:

Accepted Answer

A) lowers housing demand, housing prices, and residential investment. 
B) raises housing demand, housing prices, and residential investment. 
C) lowers housing demand and residential investment but raises housing prices. 
D) raises housing demand but lowers housing prices and residential investment.

Question 4

The real cost of capital is the:

Accepted Answer

A) purchase price of a unit of capital divided by the price level. 
B) purchase price of a unit of capital minus the rate of inflation. 
C) cost of a unit of capital less the marginal product of capital. 
D) cost of buying and renting out a unit of capital measured in units of the economy's output.

Question 5

Assume that the government levies a one-time-only tax on oil companies equal to a proportion of the value of the company's oil reserves. According to the neoclassical model, if firms face no financing constraints and also believe the tax will not be repeated, the effect of this tax on investment by these firms will be to:

Accepted Answer

A) decrease investment. 
B) Not affect investment. 
C) increase investment. 
D) decrease the rental price of capital but not change the cost of capital.

Question 6

Residential investment equals the:

Accepted Answer

A) stock of existing housing. 
B) flow of new housing. 
C) demand for housing. 
D) imputed rent from housing.

Question 7

According to the neoclassical model of investment, the immediate impact of a rise in the real interest rate will be to:

Accepted Answer

A) increase the cost of capital, the rental price of capital, and the rate of investment. 
B) increase the cost of capital and the rental price of capital, but to lower the rate of investment. 
C) increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged. 
D) increase the cost of capital and lower the rate of investment, but to leave the rental price of capital

Question 8

If the capital stock is fixed and something happens to raise the marginal product of capital (MPK) for any given quantity of capital, then the real rental price of capital will:

Accepted Answer

A) remain the same. 
B) rise. 
C) fall. 
D) fall and then rise.

Question 9

As firms' profits increase during a boom, business fixed investment will increase because:

Accepted Answer

A) the marginal product of capital falls. 
B) stock-out avoidance diminishes. 
C) corporate tax payments decrease. 
D) the high profit levels relax financing constraints.

Question 10

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

Question 11

Residential investment spending includes spending on:

Accepted Answer

A) new housing that people buy to live in and that landlords buy to rent out. 
B) new and existing housing. 
C) all houses purchased less the value of mortgages used to finance the houses. 
D) only those houses that landlords buy to rent out.

Question 12

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.

Question 13

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.

Question 14

The inventories of a company that manufactures snow blowers increase in the summer and decline in the winter. This example is most consistent with which of the following explanations for holding inventories?

Accepted Answer

A) production smoothing 
B) inventories as factors of production 
C) stock-out avoidance 
D) work in progress

Question 15

The rate of depreciation is the:

Accepted Answer

A) nominal interest rate times the purchase price of capital. 
B) capital losses resulting from decreases in the price of capital. 
C) fraction of the value of capital lost per period because of wear and tear. 
D) change in the q value of the firm.

Question 16

Holding other factors constant, a fall in the interest rate will inventory investment.

Accepted Answer

A) increase 
B) decrease 
C) have no impact on 
D) sometimes increase and sometimes decrease

Question 17

According to Hall, consumption spending follows a random walk and, according to the efficient-markets model, stock prices follow a random walk.
a. What determines changes in consumption and stock prices in this case?
b. What is the implication of following a random walk for predicting changes in consumption and stock prices?

Accepted Answer

The answer of According to Hall, consumption spending follows a...

Question 18

According to the neoclassical model of investment, the immediate impact of an earthquake that destroys part of the capital stock will be to:

Accepted Answer

A) increase the cost of capital, the rental price of capital, and the rate of investment. 
B) increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged. 
C) increase the rental price of capital and the cost of capital, but to leave the rate of investment unchanged. 
D) increase the rental price of capital and the rate of investment, but to decrease the cost of capital.

Question 19

Inventory investment will decrease when interest rates and credit conditions are .

Accepted Answer

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

Question 20

Adding to the stock of spare parts that a manufacturer keeps on hand to replace worn out or broken parts is an example of:

Accepted Answer

A) the efficient markets hypothesis. 
B) precautionary saving. 
C) inventory investment. 
D) reserve requirements.

Exam 18: Open-Economy Macroeconomics: Basic Concepts