Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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The main difference between the classical and Keynesian explanations of what
causes investment to fluctuate is that
a. | the classical economists believe that productivity shocks affect investment demand
while Keynesian economists believe investment shifts because of interest rate
fluctuations. | b. | the classical economists believe that productivity shocks affect investment demand
while Keynesian economists believe investment shifts because of animal spirits. | c. | the classical
economists believe that investment fluctuates because of changes in market psychology while Keynesian
economists believe investment fluctuates because of shocks to the production
function. | d. | the classical economists believe that productivity shocks affect the supply of saving
schedule while Keynesian economists believe that they affect the demand for investment
curve. |
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2.
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If investment demand is very unstable, but saving supply is relatively stable,
then you would expect
a. | saving and investment to be uncorrelated. | b. | investment and the
interest rate to be negatively correlated. | c. | saving and the interest rate to be positively
correlated. | d. | investment and the interest rate to be uncorrelated. |
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3.
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Economists classify all of the following as
investment except
a. | the purchase of equity in a
company. | c. | the construction of a new
road. | b. | an extension to an existing
factory. | d. | an increase in holdings of inventories. |
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4.
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If Tobin’s q for a firm is less than unity,
the value of the firm’s capital is
a. | less than the purchase price of its equity and the firm
should invest less. | b. | less than the
purchase price of its equity and the firm should invest more. | c. | more than the purchase price of its equity and the firm should invest
less. | d. | more than the purchase price of its equity and the firm
should invest more. |
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5.
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Each of the following would cause a change in
Tobin’s q except
a. | an increase in employment. | c. | a decrease in productivity. | b. | an increase in output prices. | d. | a decrease
interest rates. |
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6.
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If V0 is the present value of a firm,
PK is the price of new capital goods and K0 is the existing capital stock, then
Tobin’s q equals
a. | PK/K0V0 | c. | V0PK/K0 | b. | PKK0/ V0 | d. | V0/PKK0 |
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7.
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According to the accelerator theory of investment,
the main determinant of investment is
a. | changes in the rate of interest. | c. | changes in the level of inventories. | b. | changes in income. | d. | changes in
expectations. |
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8.
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The credit rationing view of investment suggests
that some investment projects are
a. | higher risk and are only undertaken when there is the
prospect of a higher return. | b. | not undertaken
when there is imperfect information which would be undertaken under conditions of perfect
information. | c. | started and then
cancelled because of credit rationing. | d. | undertaken because
of asymmetric information leads to adverse selection. |
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