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Exam 11: Investment Demand

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Question 21

Multiple Choice

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In general, the rental price of capital is

A) decreased by the amount of an expected increase in the price of capital.
B) increased by the amount of an expected increase in the price of capital.
C) not affected by the amount of an expected increase in the price of capital.
D) determined only by the real interest rate, depreciation, and the actual price of capital.
E) rarely considered by most firms operating in the real world.

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Question 22

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Let net investment based on the accelerator principle predict that net investment will equal twice the change in GDP in a given year. If GDP is expected to climb from $2 to $2.2 trillion with an initial capital stock of $3 trillion facing an annual rate of depreciation of 10 percent, then gross investment should be expected to be somewhere in the neighborhood of

A) $300 billion.
B) $400 billion.
C) $520 billion.
D) $620 billion.
E) $700 billion.

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Question 23

Multiple Choice

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Both capital budgeting and rental approaches to capital employment decisions agree that

In 2002, United States inventories amounted to

Let the wage rate climb. The marginal benefit schedule for capital must therefore shifts

The dependence of investment on the level of GDP is based on

Let the nominal rate of interest be 10 percent in the face of expected inflation equaling 6 percent. Suppose further that the price of capital is expected to climb from an index number of 100 at the same pace as the overall price index. Imposing a 20 percent tax on rental income and allowing a 20 percent credit against income tax liability for the purchase of new capital should

Inventories in the United States

The paradox of thrift is

The view of Keynes that investment drives an economy and makes it vulnerable to the capricious effects of speculative expectations

Inventory holdings are fractionally composed of finished goods held in buffer stocks, on the one hand, and material inputs, on the other. The fractions, in the United States, have hovered recently around

For the economy as a whole, the volume of investment undertaken each year is a joint outcome of which of the following factors?

Suppose investment is independent of GDP. Which answer describes an IS-LM representation of a second economy in which investment is positively correlated with GDP?

A capital gains tax rate reduction stimulates investment because

Investment tends to increase with

Which of the following provisions of the Tax Reform Act of 1986 worked to raise the effective cost of capital?

Let investment be given by I = 500 - 1,200R + 0.4Y, C = 200 + 0.75YD, the personal income tax rate equal 33 percent, and 0.8Y - 2,400 = M/P. If government spending equals 500 and the nominal money supply equals 100, which of the following represents the corresponding aggregate demand curve?

Suppose that an economy with a $4 trillion dollar GDP supported by a $6 trillion dollar capital stock were at the end of two years of no real growth. If people expected the no-growth circumstance to continue and faced depreciation of 5 percent per year, then the accelerator model of investment would predict

Given a lag structure in the investment patterns that bring the actual capital stock in line with the desired stock, a reduction in the price of capital should mean that

Suppose that an investment tax credit that would come on line in the next tax year were enacted to try to avoid an anticipated recession. The result of this type of delayed policy would be