fill-in questions
1. The three principal types of investment are___________________,___________________, and___________________.
2. The machinery, equipment, and structures used in production are a part of___Business fixed investment/Property plant and equipment________________investment.
3. The rental cost of capital is equal to the real interest rate plus the rate of___________________.
4. The rental cost of capital is also called the_______real____________cost of capital.
5. The____________________________model assumes that firms try to close some fraction of the gap between their desired and actual capital stock each period.
6.___________________inventory management techniques reduce the number of inventories kept on hand, bringing production more closely into line with sales.
7. The government can subsidize firms’ investment by giving them______________________.
8. The___________________theory of investment restates the “marginal benefit equals marginal cost” rule in more easily quantifiable terms.
9.___________________consist of raw materials held for use in production, unfinished goods, and finished goods held by firms in anticipation of future sale.
10. Investment, because it adds to the capital stock, increases___________________.
true-false questions
T F 1. Investment is the most volatile sector of aggregate demand.
T F 2. Rising interest rates increase investment.
T F 3. Rising GDP increases investment.
T F 4. Investment is a stock variable.
T F 5. Investment is the primary link between monetary policy and aggregate demand.
T F 6. Expansionary monetary policy increases investment.
T F 7. Rising interest rates reduce investment.
T F 8. Unexpectedly high sales cause inventories to fall.
T F 9. The actual capital stock adjusts gradually to the desired capital stock.
T F 10. The adoption of just-in-time inventory management techniques have caused inventories to fluctuate less over the business cycle.
multiple-choice questions
1. An increase in the corporate tax rate _______ investment.
a. increases
b. decreases
c. has no effect
d. could be any of the above
2. An increase in the investment tax credit _____ investment.
a. increases
b. decreases
c. has no effect
d. could be any of the above
3. Which of the following is
not
a type of investment?
a. purchase of a machine
b. accumulation of inventories
c. construction of new home
d. purchase of stock or bond
4. An increase in the rate of depreciation _______ the rental cost of capital.
a. increases
b. decreases
c. has no effect
d. who knows?
5. An increase in the rate of depreciation _______ the desired capital stock.
a. increases
b. decreases
c. has no effect
d. who knows?
6. An increase in the real interest rate _______ the rental cost of capital.
a. increases
b. decreases
c. has no effect
d. could be any of the above
7. An increase in the real interest rate _______ the desired capital stock.
a. increases
b. decreases
c. has no effect
d. could be any of the above
8. Which of the following measures of the benefit to a firm of acquiring capital?
a. market value of firm
b. replacement cost of capital
c. user cost of capital
d. rate of depreciation
9. Expansionary monetary policy ___________ investment.
a. increases
b. decreases
c. does not affect
d. who knows?
10. Expansionary fiscal policy,whenit is accommodated, ___________ investment.
a. increases
b. decreases
c. does not affect
d. who knows?
conceptual problems
1. Why does an increase in the real interest rate reduce the desired capital stock?
2. Why does an increase in the rate at which capital depreciates reduce the desired capital stock?
3. Why do we use real instead of nominal interest rates in our formula for the rental cost of capital?
technical problems
1. If the desired capital stock is $20,000, the current level of the capital stock is $12,000, and a firm wishes to close half of the gap between them each period, what does the flexible accelerator model suggest will be next period’s level of investment? What will be the level of investment the year after that?
2. Assume that the desired capital stock is determined by the equationK* = 0.25Y/rc. The nominal interest rate is 12%. The rate of inflation is 6%. Capital depreciates at a rate of 10% per year.
a) If income is $16,000, what is the desired capital stock?
b) What will be the desired capital stock if income doubles?
c) What will be the desired capital stock if, instead, the rental cost of capital doubles?
3. Consider a publicly held firm with 1 million shares of common stock, each priced at $35. If the replacement value of this firm’s capital stock is $50 million, should it acquire any new capital? Why or why not? How would your answer change if the price of this company’s stock rose to $80 per share?