Exam Questions Ch.14 Investment And Economic Activity - Macroeconomics v3.0 Complete Test Bank by LibRittenberg. DOCX document preview.
Chapter 14: Investment and Economic Activity
Multiple Choice
1. 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
Difficulty: Easy
2. 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
Difficulty: Easy
3. 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
Difficulty: Easy
4. 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.
Difficulty: Medium
5. 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
Difficulty: Medium
6. 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
Difficulty: Medium
7. 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.
Difficulty: Medium
8. 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
Difficulty: Medium
9. 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.
Difficulty: Medium
10. 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.
Difficulty: Easy
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
Difficulty: Easy
12. 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.
Difficulty: Medium
13. 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
Difficulty: Easy
14. 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
Difficulty: Medium
15. 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.
Difficulty: Medium
16. 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.
Difficulty: Medium
17. 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.
Difficulty: Medium
18. 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.
Difficulty: Easy
19. 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.
Difficulty: Medium
20. 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.
Difficulty: Medium
21. 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.
Difficulty: Medium
22. 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.
Difficulty: Difficult
23. 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.
Difficulty: Medium
Use the following to answer questions 24-29.
Exhibit: Investment and Production Possibilities
24. (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.
Difficulty: Medium
25. (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.
Difficulty: Medium
26. (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.
Difficulty: Medium
27. (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.
Difficulty: Medium
28. (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
Difficulty: Medium
29. (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
Difficulty: Difficult
30. 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
Difficulty: Medium
31. 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.
Difficulty: Medium
32. 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.
Difficulty: Medium
33. 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.
Difficulty: Medium
34. 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
Difficulty: Medium
35. 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.
Difficulty: Difficult
36. 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.
Difficulty: Difficult
37. 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 $100,000 at the interest rate of 10%.
Difficulty: Difficult
38. The investment demand curve shows
A) the quantity of investment demanded at each interest rate, with all other determinants of investment unchanged.
B) the rate of return on investment at each interest rate, with all other determinants of investment unchanged.
C) the relationship between investment and saving.
D) the relationship between investment and gross domestic product.
Ans A
Difficulty: Easy
Use the following to answer questions 39-46.
Exhibit: Investment Projects
Investment Project | Effective Expected Interest Rate on Investment Project (percent) | Cost of Investment Project ($) |
Finola | 20 | 500 |
Garron | 18 | 300 |
Hattrick | 16 | 1,000 |
Iroda | 14 | 200 |
Jemma | 12 | 2,000 |
Kenra | 10 | 1,500 |
39. (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.
Difficulty: Medium
40. (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.
Difficulty: Medium
41. (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
Difficulty: Medium
42. (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
Difficulty: Medium
43. (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
Difficulty: Medium
44. (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
Difficulty: Medium
45. (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.
Difficulty: Medium
46. (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 $2,200 because investment is now more profitable.
Difficulty: Medium
Use the following to answer questions 47-48.
Exhibit: The Economy’s Investment Demand Schedule
Interest Rate (percent) | Amount of Investment ($ billion) |
30 | 10 |
25 | 15 |
20 | 25 |
15 | 35 |
10 | 40 |
47. (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
Difficulty: Medium
48. (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
Difficulty: Medium
49. 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.
Difficulty: Medium
50. 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.
Difficulty: Medium
51. 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.
Difficulty: Medium
52. There is a _____ relationship between the quantity of investment demanded and the rate of interest.
A) Positive
B) Direct
C) Negative
D) Volatile
Difficulty: Medium
53. 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.
Difficulty: Medium
54. 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.
Difficulty: Medium
55. 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
Difficulty: Medium
56. 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
Difficulty: Medium
57. 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.
Difficulty: Medium
58. 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.
Difficulty: Medium
59. 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
Difficulty: Medium
60. 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.
Difficulty: Medium
61. 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.
Difficulty: Medium
62. 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
Difficulty: Medium
63. 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
Difficulty: Medium
64. 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.
Difficulty: Medium
65. 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.
Difficulty: Medium
66. 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.
Difficulty: Medium
67. 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.
Difficulty: Medium
68. 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
Difficulty: Medium
69. 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
Difficulty: Medium
70. 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
Difficulty: Medium
71. 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
Difficulty: Medium
72. 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
Difficulty: Medium
73. 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.
Difficulty: Medium
74. 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.
Difficulty: Medium
75. 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
Difficulty: Medium
76. 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.
Difficulty: Medium
77. 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
Difficulty: Medium
78. 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.
Difficulty: Medium
79. 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.
Difficulty: Medium
Use the following to answer questions 80-89.
Exhibit: Investment Demand
80. (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
Difficulty: Medium
81. (Exhibit: Investment Demand) Which panel represents the result of the selling of bonds in the open market by the Fed?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
82. (Exhibit: Investment Demand) Which panel represents the result of the purchase of bonds in the open market by the Fed?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
83. (Exhibit: Investment Demand) Which panel shows the result of a decrease in the cost of capital goods?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
84. (Exhibit: Investment Demand) Which panel represents a sharp decrease in taxes on profits earned by firms?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
85. (Exhibit: Investment Demand) Which panel shows the result of the realization that the capital stock is very large and greater than the desired level?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
86. (Exhibit: Investment Demand) Which panel represents the result of repealing a significant investment tax credit?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
87. (Exhibit: Investment Demand) Which panel shows the result of a reduction in the capital gains tax?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
88. (Exhibit: Investment Demand) Which panel shows the result of a lower interest rate?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
89. (Exhibit: Investment Demand) Which panel shows the result of higher interest rates?
A) Panel (a)
B) Panel (b)
C) Panel (c), a movement from B to A
D) Panel (c), a movement from A to B
Difficulty: Medium
90. The reduction of a firm’s tax liability by a fraction of its investment during a period is a(n)
A) investment tax credit.
B) balanced budget amendment.
C) capital gains tax.
D) real estate tax.
Difficulty: Medium
91. What does the term “repatriated profits” refer to?
A) It refers to the transfer of profits earned by firms from their domestic operations to fund their overseas operations.
B) It refers to profits accumulated by firms in their overseas operations that are transferred to the United States.
C) It refers to profits accumulated by firms in their overseas operations that are not subject to U.S. taxes as long as these profits are used to purchase U.S. government bonds.
D) It refers to the transfer of profits earned by firms from their domestic operations to be distributed as dividends to their partners in foreign countries.
Difficulty: Medium
92. In 2004, Congress, supported by the Bush administration, passed a law called the American Jobs Creation Act that gave businesses a one-year special tax break on any profits accumulating overseas that were transferred to the United States. What was the intent of this law?
A) To raise revenue for the government to fund its massive defense spending and to create jobs in the defense industry
B) To discourage U.S. firms from investing in foreign countries
C) To create jobs and spur investment in the U.S.
D) To free up much needed funding for domestic firms in the face of an impending financial crisis
Difficulty: Medium
93. In the short run, the most important consequence of an increase in investment is a(n)
A) increase in the capital stock.
B) decrease in the capital stock.
C) increase in aggregate demand.
D) decrease in aggregate demand.
Difficulty: Medium
94. In the short run, the most important consequence of a decrease in investment is a(n)
A) increase in the capital stock.
B) decrease in the capital stock.
C) increase in aggregate demand.
D) decrease in aggregate demand.
Difficulty: Medium
95. In the short run, a decrease in the interest rate
A) will shift the aggregate demand curve to the right.
B) will shift the investment demand curve to the right.
C) will shift the long-run aggregate supply curve to the right.
D) will shift the short-run aggregate supply curve to the right.
Difficulty: Medium
Use the following to answer questions 96-97.
Exhibit: Investment Demand and Aggregate Demand
Figure 14-3
Panel (a) Panel (b)
96. (Exhibit: Investment Demand and Aggregate Demand) Suppose the interest rate rises from 4.8% to 6% as shown in Panel (a) and the quantity of investment demanded falls from Ia to Ib. As a result of this, in Panel (b),
A) the aggregate demand curve shifts from AD1 to AD2.
B) the aggregate demand curve shifts from AD2 to AD1.
C) the aggregate demand curve does not shift; there is a movement up along the prevailing aggregate demand curve.
D) the aggregate demand curve does not shift; there is a movement down along the prevailing aggregate demand curve.
Difficulty: Medium
97. (Exhibit: Investment Demand and Aggregate Demand) Suppose the interest rate falls from 6% to 4.8%. The quantity of investment demanded rises by (Ia − Ib) as shown in Panel (a). At a given price level, P1, this causes the aggregate demand curve to shift from C to D as shown in Panel (b). What is the size of this shift?
A) The distance CD is equal to (Ia − Ib).
B) The distance CD is equal to [MPC × (Ia − Ib)] where MPC = marginal propensity to consume.
C) The distance CD is equal to [MPI × (Ia − Ib)] where MPI = marginal propensity to invest.
D) The distance CD is equal to [Im × (Ia − Ib)] where Im = investment spending multiplier.
Difficulty: Medium
98. An increase in investment demanded will shift the aggregate demand curve to the right by an amount equal to the _________.
A) (∆I) where ∆I = change in investment
B) (MPC × ∆I) where MPC = marginal propensity to consume
C) (Im × ∆I) where Im = investment spending multiplier
D) (Mm × ∆I) where m = money multiplier
Difficulty: Medium
99. If the Fed wishes to stimulate aggregate demand, it will conduct an open market
A) sale which will lower bond prices, lower interest rates, and stimulate investment.
B) purchase which will lower bond prices, lower interest rates, and discourage investment.
C) sale which will lower bond prices, raise interest rates, and discourage investment.
D) purchase which will raise bond prices, lower interest rates, and stimulate investment.
Difficulty: Medium
100. If the Fed wishes to reduce aggregate demand, it will conduct an open market
A) sale which will lower bond prices, lower interest rates, and stimulate investment.
B) purchase which will lower bond prices, lower interest rates, and discourage investment.
C) sale which will lower bond prices, raise interest rates, and discourage investment.
D) purchase which will raise bond prices, lower interest rates, and stimulate investment.
Difficulty: Medium
101. Which of the following is a reason why monetary policy can be effectively used to stimulate aggregate demand in the short run?
A) Monetary policy stimulates aggregate demand by working through the positive relationship between the price level and the quantity of investment demanded.
B) Monetary policy stimulates aggregate demand by working through the negative relationship between the interest rates and the quantity of investment demanded.
C) Monetary policy stimulates aggregate demand by working through the positive relationship between the interest rates and the general price level.
D) Monetary policy stimulates aggregate demand by working through the positive relationship between the interest rates and the quantity of investment demanded.
Difficulty: Medium
102. Over time, changes in investment
I. shift a nation’s production possibilities curve outward.
II. shift the long-run aggregate supply curve to the right.
III. shift the short-run aggregate supply curve to the right.
IV. contribute to economic growth.
A) I and IV only
B) II and IV only
C) I, II, and IV only
D) I, II, III, and IV
Difficulty: Medium
Use the following to answer questions 103-104.
Exhibit: Aggregate Demand and Investment 1
103. (Exhibit: Aggregate Demand and Investment 1) The economy is in short-run equilibrium. To move the economy to a long-run equilibrium, policy makers should
A) increase interest rates and discourage investment to close the inflationary gap.
B) reduce interest rates and encourage investment to close the recessionary gap.
C) increase interest rates and encourage investment to close the inflationary gap.
D) reduce interest rates and discourage investment to close the recessionary gap.
Difficulty: Medium
104. (Exhibit: Aggregate Demand and Investment 1) Economic performance would be improved by stimulating investment demand which would shift the
A) aggregate demand to the right to restore long-run equilibrium at “b”.
B) short-run aggregate supply to the right to restore long-run equilibrium at “c”.
C) aggregate demand curve and the short-run aggregate supply curve to the right to restore long-run equilibrium between “b” and “c”. The long-run aggregate supply curve does not shift.
D) long-run aggregate supply to the left to restore long-run equilibrium at “a”.
Difficulty: Medium
Use the following to answer questions 105-107.
Exhibit: Aggregate Demand and Investment 2
105. (Exhibit: Aggregate Demand and Investment 2) The economy is in short-run equilibrium. To move the economy to a long-run equilibrium, policy makers should
A) increase interest rates and encourage investment to close the inflationary gap.
B) reduce interest rates and discourage investment to close the recessionary gap.
C) increase interest rates and discourage investment to close the inflationary gap.
D) reduce interest rates and encourage investment to close the recessionary gap.
Difficulty: Medium
106. (Exhibit: Aggregate Demand and Investment 2) To eliminate the output gap, policy makers could conduct
A) an open market sale to raise interest rates and reduce investment spending which will shift the aggregate demand curve to the left.
B) an open market sale to lower interest rates and stimulate investment spending which will shift the short-run aggregate supply curve to the right.
C) an open market purchase to raise interest rates and reduce investment spending which will shift the aggregate demand curve to the left.
D) an open market purchase to lower interest rates and stimulate investment spending which will shift the short-run aggregate supply curve to the left.
Difficulty: Medium
107. (Exhibit: Aggregate Demand and Investment 2) The economy is in short-run equilibrium. If policymakers want to use monetary policy to improve economic performance, they should
A) buy bonds to reduce investment and aggregate demand.
B) sell bonds to reduce investment and aggregate demand.
C) buy bonds to reduce investment and short run aggregate supply.
D) sell bonds to reduce investment and short run aggregate supply.
Difficulty: Medium
108. In the long run, an increase in investment shifts ________because of an increased capacity to produce.
A) The long-run aggregate supply curve
B) The long run aggregate demand curve
C) The investment demand curve
D) The short-run aggregate supply curve but not the long-run aggregate supply curve
Difficulty: Medium
109. We would expect that nations that devote a larger share of GDP to gross private domestic investment
A) to be highly industrialized nations.
B) to have a higher savings rate.
C) to have higher growth rate in potential real GDP.
D) to have less volatile fluctuations in economic activity.
Difficulty: Medium
110. Policies that deter investment such as an increase in the corporate profit tax rate,
A) will increase aggregate demand due to increased tax revenue, and eventually shift the long-run aggregate supply (LRAS) curve to the right of where it would have been.
B) will reduce aggregate demand, and eventually shift the LRAS curve to the left of where it would have been.
C) will initially increase aggregate demand due to increased tax revenue, but eventually shift the long-run aggregate supply (LRAS) curve to the left of where it would have been.
D) will initially reduce aggregate demand, but eventually shift the LRAS curve to the right of where it would have been as firms raise prices to compensate for the tax increase.
Difficulty: Medium
Use the following to answer questions 111-113.
Exhibit: Money and Investment
111. (Exhibit: Money and Investment) If the money supply is increased in Panel (a) from MS1 to MS2, then in Panel (b), the quantity of investment demanded
A) decreases, and this will lead to a rightward shift of the aggregate supply curve.
B) increases, and this will lead to a rightward shift of the aggregate demand curve.
C) increases, and this will lead to a rightward shift of the investment demand curve.
D) decreases, and this will lead to a rightward shift of the investment demand supply curve.
Difficulty: Medium
112. (Exhibit: Money and Investment) If the money supply is decreased in Panel (a) from MS1 to MS2, then in Panel (b),
A) there is a movement along the investment demand curve from D to C.
B) there is a movement along the investment demand curve from C to D.
C) the investment demand curve shifts to the right.
D) the investment demand curve shifts to the left.
Difficulty: Medium
113. (Exhibit: Money and Investment) In Panel (a), it is apparent that if the interest rate falls, all other things unchanged, the
A) demand for money increases.
B) demand for money decreases.
C) quantity of money demanded increases.
D) quantity of money demanded decreases.
Difficulty: Medium
True/False
1. Investment adds to the nation’s stock of capital so long as no resources are allocated to consumption.
2. The purchase of a bond is an addition to the capital stock.
3. Investment represents a choice to consume less now.
4. Construction of a new home is an example of gross private domestic investment.
5. There is a negative relationship between the quantity of investment demanded and the interest rate.
6. A reallocation of resources to consumption goods from capital goods is investment that shifts the production possibilities curve outward.
7. An increase in the interest rate causes a decrease in investment by shifting the investment demand curve to the left.
8. Expectations of an improving economy will generally cause an increase in investment by shifting the investment demand curve to the right.
9. An increase in the cost of capital goods will generally cause an increase in investment by shifting the investment demand curve to the right.
10. An investment tax credit is a type of capital gains tax.
11. An important short-run consequence of a lower interest rate is an increase in aggregate demand.
12. A reduction in the interest rate, while stimulating investment in the short run, has little or no effect on economic growth in the long run.
13. Net investment adds to the nation’s capital stock.
14. Investment will generally lead to an increase in a nation’s capacity to produce.
15. Higher interest rates will lead to increased investment.
16. Higher interest rates increase the opportunity cost of using funds for investment.
17. Higher interest rates encourage investment.
18. Changes in the interest rate will lead to shifts in the investment demand curve.
19. Changes in the corporate profits tax rate will shift the investment demand curve.
20. Suppose real estate analysts expect that 100,000 homes will be needed in a particular community by 2014. If the current number of homes in the community is only 50,000, we can expect to see a significant increase in the demand for investment.
21. Investment contributes to economic growth.
22. For investment to occur, saving must also occur.
Short Answer
1. Explain how an increased money supply affects the quantity of investment demanded and the aggregate demand. Illustrate your answer with a graph of the money market, investment demand and an AD–AS graph.
2. Explain the difference between a shift of the investment demand curve and a movement along the investment demand curve. Give one example of what causes a movement along the investment demand curve and one example of what shifts the curve itself.
3. Explain how each of the following events affects (i) the investment demand curve; and (ii) aggregate demand and/or aggregate supply curve.
a. an increase in interest rates
b. a decrease in interest rates
c. an increase in the cost of capital goods
d. a decrease in the level of economic activity
e. a decrease in the minimum wage
f. a natural disaster that destroys much of the capital stock