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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%.

E) A) and C)
F) A) and B)

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D

Figure 14-2 Figure 14-2 -Refer to Figure 14-2. 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 -Refer to Figure 14-2. 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

E) A) and C)
F) B) and C)

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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.

E) B) and C)
F) A) and C)

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Figure 14-2 Figure 14-2 -Refer to Figure 14-2. 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 -Refer to Figure 14-2. 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

E) None of the above
F) A) and D)

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C

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.

E) None of the above
F) B) and C)

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Which of the following is true in the United States, based on the experience of the past two decades (1990-2011) ?


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.

E) A) and D)
F) All of the above

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An increase in the cost of capital goods will generally cause an increase in investment by shifting the investment demand curve to the right.

A) True
B) False

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False

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.

E) A) and B)
F) A) and C)

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Figure 14-3 Panel (a) Panel (b) Figure 14-3 Panel (a) Panel (b) -Refer to Figure 14-3. Suppose the interest rate falls from 6% to 4.8%. The quantity of investment demanded rises by (I<sub>a</sub> - I<sub>b</sub>) as shown in Panel (a) . At a given price level, P<sub>1</sub>, 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 (I<sub>a</sub> - I<sub>b</sub>) . B) The distance CD is equal to [MPC *(I<sub>a</sub> - I<sub>b</sub>) ] where MPC = marginal propensity to consume. C) The distance CD is equal to [MPI*(I<sub>a</sub> - I<sub>b</sub>) ] where MPI = marginal propensity to invest. D) The distance CD is equal to [Im *(I<sub>a</sub> - I<sub>b</sub>) ] where Im = investment spending multiplier. Figure 14-3 Panel (a) Panel (b) -Refer to Figure 14-3. Suppose the interest rate falls from 6% to 4.8%. The quantity of investment demanded rises by (I<sub>a</sub> - I<sub>b</sub>) as shown in Panel (a) . At a given price level, P<sub>1</sub>, 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 (I<sub>a</sub> - I<sub>b</sub>) . B) The distance CD is equal to [MPC *(I<sub>a</sub> - I<sub>b</sub>) ] where MPC = marginal propensity to consume. C) The distance CD is equal to [MPI*(I<sub>a</sub> - I<sub>b</sub>) ] where MPI = marginal propensity to invest. D) The distance CD is equal to [Im *(I<sub>a</sub> - I<sub>b</sub>) ] where Im = investment spending multiplier. -Refer to Figure 14-3. 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.

E) A) and B)
F) A) and D)

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Figure 14-5 Figure 14-5 -Refer to Figure 14-5. 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. -Refer to Figure 14-5. 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.

E) All of the above
F) B) and C)

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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.

E) C) and D)
F) All of the above

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Net investment adds to the nation's capital stock.

A) True
B) False

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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

E) A) and C)
F) A) and B)

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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.

E) None of the above
F) B) and C)

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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

E) C) and D)
F) All of the above

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Figure 14-5 Figure 14-5 -Refer to Figure 14-5. 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. -Refer to Figure 14-5. 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.

E) All of the above
F) B) and C)

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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.

E) C) and D)
F) All of the above

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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.

E) B) and C)
F) A) and B)

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Figure 14-2 Figure 14-2 -Refer to Figure 14-2. 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 -Refer to Figure 14-2. 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

E) A) and B)
F) C) and D)

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An important short-run consequence of a lower interest rate is an increase in aggregate demand.

A) True
B) False

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