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| 1 | |
It is important to understand the factors that influence investment spending since |
| | A) | investment links the money market to the goods market |
| | B) | fluctuations in investment are largely responsible for business cycles |
| | C) | investment is important for long-run growth even though it has little effect on short-run aggregate supply |
| | D) | all of the above |
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| 2 | |
Which of the following will NOT affect the productive capacity of a country? |
| | A) | more people getting a higher education |
| | B) | more people investing in government bonds |
| | C) | the government improving the infrastructure such as bridges and highways |
| | D) | firms replacing old PCs with newer, more efficient ones |
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| 3 | |
Which of the following will affect real investment as defined in the national income accounts? |
| | A) | the government upgrading the country's existing infrastructure |
| | B) | you investing a large portion of your savings in Microsoft stock |
| | C) | you investing in human capital by getting a good education |
| | D) | none of the above |
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| 4 | |
In absence of taxation, the rental cost of capital can be defined as |
| | A) | rc = i + πe - d |
| | B) | rc = i - πe - d |
| | C) | rc = i - πe + d |
| | D) | rc = i + πe + d |
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| 5 | |
If we ignore taxation and know that the rental cost of capital is 12%, the expected rate of inflation is 4%, and the nominal interest rate is 9%, we can conclude that the rate of depreciation must be |
| | A) | d = 1% |
| | B) | d = 7% |
| | C) | d = 17% |
| | D) | d = 25% |
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| 6 | |
If the rental cost of capital is above the marginal product of capital, then a firm should |
| | A) | increase its investment spending |
| | B) | decrease its investment spending |
| | C) | not replace some of the machines that have broken down in the production process |
| | D) | undertake primarily replacement investments |
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| 7 | |
Which of the following will NOT increase the rental cost of capital? |
| | A) | an increase in the nominal interest rate |
| | B) | an increase in the real interest rate |
| | C) | an increase in the expected rate of inflation |
| | D) | an increase in the rate of depreciation |
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| 8 | |
If we have a Cobb-Douglas production function of the form Y = AKθN1-θ and the rental cost of capital is rc, the demand for capital can be expressed by the equation |
| | A) | K* = rcθY |
| | B) | K* = rcθ/Y |
| | C) | K* = Y/rcθ |
| | D) | K* = θY/rc |
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| 9 | |
Assume a Cobb-Douglas production function of the form Y = AK0.2N0.8. If the rental cost of capital is rc = 5%, the desired capital stock of a cost-minimizing firm should be equal to |
| | A) | K* = 2Y |
| | B) | K* = 4Y |
| | C) | K* = 5Y |
| | D) | K* = 8Y |
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| 10 | |
Assume the government gives a temporary tax credit for any investment projects undertaken, but only for this year. What will be the result? |
| | A) | the level of the nation's capital stock will not be significantly affected in the long run |
| | B) | firms will accelerate investment projects originally planned for next year |
| | C) | a few marginal investment projects that otherwise would not have been profitable will now be undertaken |
| | D) | all of the above |
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| 11 | |
Through much of the 1990s, the U.S. stock market was booming. This had a positive effect on the level of real capital investment since |
| | A) | more people bought stocks, which is a form of investment |
| | B) | the booming stock market enabled firms to raise equity capital more easily |
| | C) | high stock values induced a higher level of saving, which is good for investment |
| | D) | higher stock values lower the value of Tobin's q and this, according to the q-theory induced firms to undertake even marginal investments |
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| 12 | |
The q-theory of investment suggests that |
| | A) | managers are likely to respond to an increase in the price of a share of their company's stock by investing more |
| | B) | a firm will increase the level of its capital investments if the replacement cost of capital is smaller than the market value of the firm |
| | C) | if the ratio of the market value of a firm to the replacement cost of capital is greater than 1, a corporation should issue new stocks to raise funds for capital investment |
| | D) | all of the above |
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| 13 | |
Assume the market interest rate is 10% and is not expected to change over the next three years. If an investment project has net returns of $2,420 after one year, $3,630 after the second year, and $3,993 after the third year, what is its net present discounted value? |
| | A) | $10,043 |
| | B) | $9,130 |
| | C) | $9,020 |
| | D) | $8,200 |
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| 14 | |
Assume an investment project has set up costs of $72,000 in the current year. The project promises profits of $44,000 after one year and additional profits of $36,300 after the second year, after which time the project becomes obsolete. What is the net present discounted value for this project if the market interest rate is 10% and is not expected to change over the next two years? |
| | A) | - $2,000 |
| | B) | $0 |
| | C) | + $5,000 |
| | D) | + $8,300 |
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| 15 | |
The most likely source of funding for a U.S. firm wishing to finance a new investment project is |
| | A) | a credit line with a bank |
| | B) | retained earnings |
| | C) | selling bonds |
| | D) | issuing equity (stocks) |
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| 16 | |
Which of the following statements is FALSE? |
| | A) | credit rationing generally affects large firms more than small firms |
| | B) | credit rationing can reinforce the central bank's restrictive monetary policy |
| | C) | credit rationing arises since banks fear that the risk of default is high if a firm still borrows at very high interest rates |
| | D) | credit rationing was held at least partially responsible for the slow rate of U.S. investment in 1991 despite declining U.S. interest rates |
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| 17 | |
According to the accelerator model, |
| | A) | a change in investment is proportional to the level of output |
| | B) | the level of investment spending is proportional to the level of output |
| | C) | the level of investment spending is proportional to the change in output |
| | D) | the level of investment spending is mainly affected by interest rate changes |
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| 18 | |
Expansionary monetary policy has an effect on the housing market since it |
| | A) | decreases the price of all assets, including housing prices |
| | B) | lowers real interest rates in the long run, so people will postpone buying homes |
| | C) | lowers nominal interest rates, so banks find mortgage lending less profitable |
| | D) | lowers nominal interest rates, so more homebuyers are able to qualify for mortgages |
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| 19 | |
An unanticipated decrease in the level of inventories may occur |
| | A) | in the midst of a boom, as firms prepare for the upcoming recession |
| | B) | in a boom when increased sales cannot be met by increases in production |
| | C) | in a recession when firms expect lower profits and try to keep their costs low |
| | D) | at the beginning of a recession as firms slash their prices to induce more sales |
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| 20 | |
Because more U.S. firms used new computer technology to implement just-in-time management techniques in the 1980s and 1990s, the ratio of manufacturing inventories to sales |
| | A) | became much more volatile |
| | B) | contributed much more to economic fluctuations than ever before |
| | C) | decreased substantially over time |
| | D) | decreased for unanticipated inventories but increased for anticipated inventories |
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