Chapter 17. The Theory of Investment

Chapter 17. The Theory of Investment 1.The most volatile component of real GDP is: A) consumption spending. B) government spending. C) investment spending. D) net exports. 2.Investment spending is: A) generally countercyclical. B) generally procyclical. C) unrelated to the business cycle. D) generally procyclical for some components and generally countercyclical for others. 3.The investment spending component of GDP includes all of the following except: A) business fixed investment. B) net foreign investment. C) residential investment. D) inventory investment. 4.Business fixed investment includes: A) rental housing that landlords buy to rent out. B) goods that businesses put aside in fixed storage facilities, including materials and supplies. C) the fixed cost of borrowing that businesses pay for new equipment. D) equipment and structures that businesses buy to use in production. 5.The construction of a new shopping center is an example of: A) business fixed investment. B) residential investment. C) inventory investment. D) financial investment. 6.The standard model of business fixed investment is called the of investment. A) new classical model B) neoclassical model C) classical model D) Keynesian model 7.According to the neoclassical model of investment, business fixed investment does not depend on: A) the realized profits of firms. B) the marginal product of capital. C) the interest rate. D) tax rules affecting firms. 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: A) remain the same. B) rise. C) fall. D) fall and then rise. 9.In equilibrium, other things being equal, all of the following changes will increase the real rental price of capital except: A) a lower quantity of labor employed. B) a lower stock of capital. C) better technology. D) a higher labor–capital ratio. Use the following to answer questions 10-12: Exhibit: Rental Price of Capital 10.(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in equilibrium at A with real rental price R3/P and capital stock K2, then holding other factors constant, an increase in the capital stock to K3 will change the real rental price of capital to: A) R1/P. B) R2/P. C) R4/P. D) R5/P. 11.(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in equilibrium at A with real rental price R3/P and capital stock K2, then holding other factors constant, an increase in the quantity of labor employed will move the real rental price of capital to: A) R1/P. B) R2/P. C) R4/P. D) R5/P. 12.(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in equilibrium at A with real rental price R3/P and capital stock K2, then holding other factors constant, an improvement in technology that increases the marginal productivity of capital will move: A) the demand curve from D2 to D1. B) the demand curve from D2 to D3. C) the supply of capital from K2 to K1. D) the supply of capital from K2 to K3. 13.If a great wave of immigration increased employment in the United States, this wave would: A) increase the marginal productivity of capital in the United States. B) decrease the marginal productivity of capital in the United States. C) leave the marginal productivity of capital in the United States unchanged. D) increase the marginal productivity of capital in the country from which the immigrants came. 14.A firm renting out capital does not bear as cost the: A) lost interest it could have earned by depositing the purchase price of the capital in a bank. B) wear and tear on the capital. C) wages of the labor that works with the capital. D) capital loss or gain in the asset's value. 15.The rate of depreciation is the: 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. 16.The cost of capital for investment, if the price of capital goods rises with the price of other goods and in the absence of taxes, may be summarized as the: A) nominal interest rate plus the depreciation rate. B) real interest rate plus the depreciation rate. C) purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate. D) purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate. 17.The real cost of capital is the: 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. 18.If the price index for capital goods is the same as the price index for other goods, an index of the real cost of capital for investment, in the absence of taxes, may be summarized as the: A) nominal interest rate plus the depreciation rate. B) real interest rate plus the depreciation rate. C) purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate. D) purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate. 19.If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should: A) add to its capital stock. B) let its capital stock shrink. C) keep its capital stock unchanged. D) reduce the real rental price of capital. 20.The profit rate of a firm that rents capital is equal to: A) the marginal product of capital minus the cost of capital. B) the cost of capital minus the marginal product of capital. C) zero. D) a negative number, if it is adding to its capital stock. 21.Net investment is the: A) business fixed investment minus inventory investment. B) change in the stock of capital. C) gross investment minus the rate of inflation. D) gross investment plus the replacement of depreciated capital.