Chapter 16Instability in the Private Economy: Investment
1)Aggregate private spending is unstable according to policy activists, primarily because
A)consumer non-durable spending is volatile.
B)private residential and non-residential investment is volatile.
C)government spending is volatile.
D)the money supply is unstable.
2)Aggregate private spending is stable according to non-activists PRIMARILY because
A)consumer spending is insulated from changes in income according to the PIH and LCH theories.
B)private residential and non-residential investment is volatile.
C)government spending is volatile.
D)the money supply is unstable.
3)The simple accelerator theory suggests that investment will be rising when
A)output is rising.
B)the growth of output is rising.
C)output is high.
D)the growth of output is high.
4)Which of the following is a primary implication of the accelerator theory of investment?
A)net investment occurs when the desired and actual capital stocks are equal
B)in order for gross investment to remain constant, income must remain constant
C)rising rather than high levels of output are necessary to maintain a high level of net investment
D)B and C are both correct.
5)In the simple accelerator model, if expected output declines,
A)gross investment becomes negative.
B)net investment becomes negative.
C)both gross investment and net investment become negative.
D)the desired stock of capital will become negative.
6)In the simple accelerator theory an increase in expected sales will
A)lead to an increase in net investment.
B)not necessarily lead to an increase in net investment.
C)lead to an immediate increase in replacement investment.
D)lead to an increase in net investment in the following period.
7)In the simple accelerator theory an
A)increase in actual sales will always lead to an increase in investment.
B)increase in actual output will not lead to an increase in expected sales.
C)increase in actual sales will lead to an increase in replacement investment.
D)increase in the size of the increase in actual sales will lead to an increase in next period's net investment.
8)In the accelerator theory the
A)smaller the desired capital-output ratio the larger will be net investment.
B)smaller the desired capital-output ratio the larger will be replacement investment.
C)larger the desired capital-output ratio the larger will be net investment.
D)larger the desired capital-output ratio the smaller will be replacement investment.
9)The accelerator theory states that
A)the larger this period's desired capital stock the smaller will be this period's net investment.
B)the larger the previous period's desired capital stock the larger will be this period's net investment.
C)the larger the previous period's desired capital stock the smaller will be this period's net investment.
D)this period's net investment is unrelated to this period's desired capital stock.
Figure 16-1
10)In Figure 16-1, the increase in gross investment lags actual sales because
A)replacement investment is not determined by actual sales.
B)expected sales lag actual sales and net investment is determined by expected sales.
C)actual sales lag expected sales and net investment is determined by expected sales.
D)expected sales lead actual sales and net investment is determined by expected sales.
11)Residential investment did not decline in the recession which began in
A)1973.
B)1981.
C)1990.
D)2001.
12)Which of the following is NOT likely to affect investment?
A)variations in expected output
B)the nominal interest rate
C)the real interest rate
D)the tax treatment of depreciation allowances
13)Which of the following policies would reduce the user cost of capital?
A)a reduction in the money supply
B)a reduction in the personal income tax rate
C)an increase in the corporate profit tax rate
D)an increase in an investment tax credit
14)A fall in the user cost of capital
A)could occur as a result of a higher depreciation rate.
B)would lead to more capital-intensive methods of production.
C)would lead to less capital-intensive methods of production.
D)could occur as a result of a decrease in the marginal product of capital.
Figure 16-2
15)In Figure 16-2, the line BF is
A)the MPK less the user cost of capital.
B)the user cost of capital less MPK.
C)the MPK.
D)the demarcation line for profitability.
16)In Figure 16-2, if user costs fall, U0 to U1, then area ______represents the opportunity cost.
A)ABE0U0
B)GE1V0V1
C)U0E0GU1
D)E0E1G
17)The amount of gross investment in the economy depends on the
A)response of expected output to the error in estimating the past period's actual output.
B)amount of the difference between the desired capital stock and last period's capital stock that can be put in place this period.
C)fraction of the capital stock that is replaced each period.
D)All of the above are correct.
18)The idea that business firms attempt to maintain a fixed relation between their stock of capital and their expected sales is the basis for the
A)accelerator hypothesis of net investment.
B)permanent income hypothesis.
C)life cycle hypothesis.
D)adaptive expectations approach.
19)If the government allows businesses to accelerate (increase) depreciation then
A)the user cost of capital declines and V* increases.
B)the user cost of capital declines and V* decreases.
C)the user cost of capital increases and V* decreases.
D)the user cost of capital increases and V* increases.
20)If the government allows business firms an investment credit to lower taxes then
A)the user cost of capital declines and V* increases.
B)the user cost of capital declines and V* decreases.
C)the user cost of capital increases and V* decreases.
D)the user cost of capital increases and V* increases.
21)If the government increases the corporate income tax
A)the user cost of capital declines and V* increases.
B)the user cost of capital declines and V* decreases.
C)the user cost of capital increases and V* decreases.
D)the user cost of capital increases and V* increases.
22)If the Fed ______the money supply, the user cost of capital will ______and V* will ______.
A)increases; increase; increase
B)increases; decrease; increase
C)decreases; decrease; decrease
D)decreases; decrease; increase
23)It is often stated that the Japanese firms develop and adapt new technology to manufacturing process twice as fast as U.S. firms. If this is true, ceteris paribus, we would conclude that the
A)depreciation rate of capital does not change, but the user cost of capital increases
B)depreciation rate of capital increases, but the user cost of capital decreases.
C)depreciation rate of capital increases, and the user cost of capital increases.
D)U.S. interest rate is too high preventing American manufacturers from adopting new technologies.
24)Following a recession businesses are likely to be ______and thus ______the user cost of capital.
A)optimistic; overestimate
B)pessimistic; overestimate
C)optimistic; underestimate
D)pessimistic; underestimate
25)One "problem" with applying the Jorgenson theory of investment to project investment is that
A)the MPK is known with certainty by business executives but the user cost is uncertain.
B)the MPK is known with uncertainty by business executives but the user cost is certain.
C)both user cost and the MPK are uncertain.
D)it does not explain the accelerator.
26)Which of the following will raise the expected marginal product of capital?
A)a reduction in the interest rate
B)increased business optimism
C)an investment tax credit
D)a reduction in the corporate profits tax
27)Suppose the IRS were to introduce a tax exemption for portion of interest income earned on corporate bonds. This would
A)reduce the user cost of capital.
B)raise the marginal product capital.
C)raise the rate of depreciation.
D)All of the above are correct.
28)The interest income earned on most municipal bonds in the United States is tax exempt. Thus, for such municipalities
A)the level of public investment projects is lower than it would be otherwise.
B)municipal tax revenues are higher than they would be otherwise.
C)the user cost of cost capital is lower than it would be otherwise.
D)All of the above are correct.
29)The tax-exempt status of municipal bonds implies that, for private firms
A)the user cost of capital will be higher than otherwise.
B)the user cost of capital will be lower than otherwise.
C)the marginal product of capital will be lower than otherwise.
D)the accelerator will be higher than otherwise.
30)Which of the following types of expenditure is most likely NOT determined by an accelerator model?
A)consumer durable spending
B)inventory investment
C)residential housing construction
D)consumer spending on food
31)The minimum level of net investment necessary to maintain the stock of capital depends on
A)the rate of interest and the size of the capital stock.
B)the rate of depreciation and the size of the capital stock.
C)the corporate profits tax and the interest rate.
D)business confidence and the corporate profits tax.
32)The desired stock of capital is that stock which
A)firms always obtain.
B)corresponds to the natural level of output.
C)would obtain when net investment is zero.
D)firms are always adjusting toward.
33)Under the adaptive method of estimating expected sales in the simple acceleration theory, if a firm's actual sales increase
A)expected sales will increase if j is greater than zero.
B)expected sales will remain the same if j equals zero.
C)expected sales will equal the previous period's actual sales if j equals one.
D)All of the above are correct.
34)The flexible accelerator theory
A)recognizes that the desired capital-output ratio is not a constant.
B)assumes that firms can make this period's actual capital stock equal to the desired capital stock.
C)sets this period's expected output equal to last period's actual output.
D)recognizes that a constant fraction of the capital stock is replaced each period.
35)Employing the error learning model to forecast sales, a firm where sales last period were expected to be $110 million, but actually sold $100 million would forecast that sales this period would be ______if ______is the coefficient of adjustment.
A)103; .03
B)105; .5
C)110; .10
D)All of the above are correct.
36)If investment in capital equipment requires two to three years between conceptualization and start-up to production then
A)the gap between the desired capital stock and the existing capital stocks is closed slowly.
B)a change in expected sales will not increase output.
C)V* will be smaller than expected.
D)All of the above are correct.
37)Monetarist economists might conclude that the accelerator hypothesis supports their position via fiscal policy since
A)the gap between the desired capital stock and the existing capital stocks is closed slowly.
B)a change in expected sales will not increase output.
C)V* will be smaller than expected.
D)All of the above are correct.
38)The 1981 economic recovery act ______net investment according to ______.
A)greatly increased; Barry Bosworth
B)decreased; Barry Bosworth
C)increased; Martin Feldstein
D)decreased; Martin Feldstein
39)The efficacy of tax incentives as an instrument of activist fiscal policy
A)has been proven to be very substantial in the view of most economists.
B)is not plagued by a substantial lag between the passage of tax legislation and the resulting
C)investment spending.
D)is subject to debate but still is limited by the "legislative lag."
E)has been proven to be so limited that it is no longer considered to be a serious option by most economists
40)"The weather induced failure of the 1999 grain crop leads the Russia to quadruple grain imports from the U.S." Assuming that the U.S. grain exports come from government warehouses,
A)net investment in the U.S. would increase dramatically according to the flexible accelerator theory
B)net investment in the U.S. would decrease dramatically according to the flexible accelerator theory
C)there would be no change in net investment since the Russian demand is temporary
D)net investment would increase slowly since this is agriculture
41)"Our knowledge of the factors which govern the yield of an investment some years hence is usually very slight and often negligible." This quote by ______helps to explain ______.
A)Jorgenson; cycles of overbuilding
B)Keynes; cycles of overbuilding
C)Jorgenson; the accelerator hypothesis
D)Keynes; the accelerator hypothesis
42)If the actual capital stock exceeds the desired capital stock due to a cycle of overbuilding then
A)net investment will fall dramatically.
B)net investment will increase dramatically.
C)net investment will not change.
D)the effect on net investment is unknown.
43)If capital demand shifts to shorter lived equipment then
A)net investment will fall.
B)net investment will increase.
C)net investment will not change.
D)the effect on net investment is unknown.
44)If actual output increases are believed to be temporary then
A)net investment will fall.
B)net investment will increase.
C)net investment will not change.
D)the effect on net investment is unknown.
45)The accelerator theory can explain the paradox that both interest rates and investment rise and fall in concert during the business cycle if
A)the effect of changes in Y effect on In dominate the effect of interest rates on investment.
B)the LM curve is constant.
C)the IS curve is constant.
D)the effect of changes in interest rates on In dominate the effect of changes in Y on In.
46)The effects on the economy of a prolonged decrease in investment are ______if ______occurs.
A)more pronounced; consumers adjust permanent income downwards
B)less pronounced; consumers do not adjust permanent income upwards
C)more pronounced; consumers adjust permanent income upwards
D)less pronounced; consumers adjust permanent income downwards
47)Business investment is most similar to what form of consumer expenditures and why?
A)consumer nondurables since they are "used up" in producing consumer welfare
B)consumer durables since they accelerate consume welfare
C)consumer durables since they may be treated as a form of household saving
D)Both A and B are correct.
48)If the economic growth rate SLOWS from 5% to 1%, the simple accelerator hypothesis suggests that
A)investment will continue to rise as output increases.
B)investment will fall as output increases.
C)investment will accelerate since output growth is positive.
D)None of the above is correct.
49)If the economic growth rate INCREASES from 1% to 5%, the simple accelerator hypothesis suggests that
A)investment will continue to rise as output increases.
B)investment will fall as output increases.
C)investment will rise since the rate of change in output increases.
D)None of the above is correct.
50)During the 1987-88 expansion period interest rates in the U.S. rose as did the rate of investment in the economy. These facts suggest
A)the simple accelerator effect and the effects of higher interest rates complemented each other to raise output growth.
B)the simple accelerator effect and the effects of lower interest rates complemented each other to lower output growth.
C)the effects of the accelerator were greater than those of increased interest rates.
D)the effects of the accelerator were smaller than those of increased interest rates.
51)Gross private domestic investment makes up about _____ percent of nominal GDP in the U.S.
A)40
B)31
C)22
D)16
E)6
52)Private investment fluctuates ______, which supports those economists who advocate policy ______.
A)procyclically, rules
B)procyclically, activism
C)countercyclically, rules
D)countercyclically, activism
53)Over the most recent movement from cyclical trough to peak, 1991:Q1 to 200:Q1, gross private domestic investment ______approximately ____ percent.
A)rose, 49
B)rose, 113
C)rose, 6
D)fell, 68
E)fell, 20
54)Residential investment plunged quite noticeably ______the start of the 1973-1975 and 1981-1982 recessions, with the prospect that recent financial deregulation would make it ______sensitive to future changes in monetary policy.
A)after, more
B)after, less
C)before, more
D)before, less
55)Changes in inventory investment are ______for the Fed to use to time changes in monetary policy.
A)too short-lived
B)short-lived enough
C)gradual enough
D)too gradual
56)What is the largest component of GPDI?
A)residential fixed investment
B)nonresidential fixed investment
C)inventory investment
D)consumer durables
57)GPDI is ______volatile than total consumption spending.
A)much more
B)slightly more
C)slightly less
D)much less
58)The "accelerator hypothesis" of investment states that a firm's net investment is most closely related to the
A)level of its actual sales.
B)change in its actual sales.
C)level of its expected sales.
D)change in its expected sales.
59)By the accelerator hypothesis, if a firm's actual sales jump in one period to a higher maintained level, that firm's net investment
A)also jumps in one period to a higher maintained level.
B)gradually drifts upward to a higher maintained level.
C)jumps upward and then falls back to zero.
D)jumps upward and then falls back part of the way.
60)By the accelerator hypothesis, if a firm's actual sales jump in one period to a higher maintained level, that firm's gross investment
A)also jumps in one period to a higher maintained level.
B)gradually drifts upward to a higher maintained level.
C)jumps upward and then falls back to zero.
D)jumps upward and then falls back part of the way.
61)By the accelerator hypothesis, if a firm's actual sales jump in one period to a higher maintained level, that firm's replacement investment
A)also jumps in one period to a higher maintained level.
B)gradually drifts upward to a higher maintained level.
C)jumps upward and then falls back to zero.
D)jumps upward and then falls back part of the way.
62)By the accelerator hypothesis, if a firm's actual sales jump in one period to a higher maintained level, that firm's capital stock
A)also jumps in one period to a higher maintained level.
B)gradually drifts upward to a higher maintained level.
C)jumps upward and then falls back to zero.
D)jumps upward and then falls back part of the way.
63)Where does the interest rate fit into the accelerator hypothesis of investment?
A)It helps determine the error-learning parameter, j.
B)It helps determine the ratio of desired capital to expected sales, v*.
C)It helps determine the depreciation ratio of capital stock to replacement investment.
D)Nowhere: the hypothesis says that investment is independent of the interest rate.
Suppose that a firm in periods 0 through 5 has the following actual sales: 100, 180, 180, 180, 180, 180. Also suppose that j = 0.5, v* = 3.5, and the replacement investment fraction is 0.15.