Chapter 12 Flashcards
The interest rates quoted in the market are
d. nominal interest rates.
Firms are likely to ________ investment spending when they believe that
growth in real GDP will _________.
decrease, decrease
increase, increase
accelerator theory
The model in which a downturn in real GDP leads to a sharp fall in
investment, which further reduces GDP through the multiplier, is known
as the ________ model.
multiplier-accelerator
Compared to a 30-year U.S. Treasury, the interest rate on a 30-year
fixed mortgage will be ______ because it is a loan with _______.
c. higher, more risk
Table 11.2 - Returns on Investment
Investment Cost Returns
A $100 $104
B 300 324
C 200 212
D 50 51
E 400 440
14. Referring to Table 11.2, if the nominal interest rate is 9% and there is
no inflation, which investments will be undertaken?
E
Only E because the return from simply saving the money is 0.09£400
= $36 which is less than your $40 dollar return. The other projects yield a
lower return. What if in°ation was 5%, which investments should you choose?
Table 11.2 - Returns on Investment
Investment Cost Returns
A $100 $104
B 300 324
C 200 212
D 50 51
E 400 440
Referring to Table 11.2, if the nominal interest rate is 3% and there is
no inflation, which investments will be undertaken?
E, B, C, and A
Table 11.3 - Returns on Investment
Investment Cost Returns
A $200 $218
B 500 515
C 100 111
D 400 420
E 300 321
16. If Table 11.3 represents all the investments available to the economy,
the nominal interest rate is 10% and there is no inflation, what will be
the level of investment in the economy?
a. $100
As the real interest rate _______, the real investment spending
__________.
c. increases, decreases
d. decreases, increases
The neoclassical theory of investment:
emphasizes the role of real interest rates and taxes.
The Q-theory of investment:
links investment spending to stock prices.
Financial intermediaries reduce risk by:
investing in a large number of projects with independent returns.