Chapter 14

Question 1

Define investment.

Answer 1

Spending on new capital assets that increases the economy’s productive capacity.

Question 2

What are the three types of investment?

Answer 2

1. Business investments
2. Change in inventories
3. housing investements

Question 3

Define capital stocks.

Answer 3

The total quantity of capital at a point in time

Question 4

What is the formula for compounded interests?

Answer 4

future value in t years = present value * (1+r)^t

Question 5

What is the formula for present value?

Answer 5

present value = future value in t years / (1+r)^t

Question 6

What is the rational rule for investors?

Answer 6

pursue an investment opportunity if next year’s profit is greater than up front cost

Question 7

What is the rational rule for investors in formula?

Answer 7

r+d > C
OR
next year profit > (r+d) * C

Question 8

What is the market for loanable funds?

Answer 8

The market for funds used to buy, rent, or build capital

Question 9

What are the three supply shifters for loanable funds?

Answer 9

1. changes in personal savings
2. changes in government savings
3. changes in foreign savings

Question 10

What are the four demand shifters for loanable funds?

Answer 10

1. Technological advances
2. expectations
3. corporate taxes
4. lending standards and cash reserves