Foundations of Macroeconomics, 7e (Bade/Parkin)
Chapter 10 Finance, Saving, and Investment
10.1 Financial Institutions and Markets
1) Economists use the word “capital” to mean
A) the tools, instruments, and other produced goods used to produce goods and services.
B) the funds that irms use to buy and operate their businesses.
C) purchases in the market for stocks and bonds.
D) the workers that irms employ to produce goods and services.
E) people’s skills and talents.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
2) Federal Express’s purchase of trucks and planes
A) is inancial capital.
B) includes depreciation.
C) is an example of physical capital.
D) creates wealth.
E) relects capital gains.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
3) The distinction between physical and inancial capital is that
A) physical capital is equal to inancial capital plus depreciation.
B) inancial capital is used to purchase and operate physical capital.
C) the value of inancial capital depends on the amount of available physical capital.
D) physical capital is equal to inancial capital minus depreciation.
E) inancial capital depreciates and physical capital does not.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
1
4) Financial capital
A) is accumulated investment.
B) is another name for the machines and tools that businesses buy.
C) is independent of physical capital.
D) depends on saving and borrowing decisions.
E) depreciates each year.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
5) Financial capital is used to help inance
A) consumption expenditure by households.
B) the purchase of physical capital by irms.
C) gross investment but not net investment.
D) net investment but not gross investment.
E) people’s savings.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
6) The funds irms use to buy and operate physical capital are referred to as
A) physical capital.
B) inancial capital.
C) government capital.
D) human capital.
E) business capital.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
2
7) An example of inancial capital is
A) machines.
B) buildings.
C) computers.
D) bonds.
E) the talents of a highly paid movie star.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
8) ________ increases the quantity of capital, and ________ decreases the quantity of capital.
A) Net investment; gross investment
B) Investment; depreciation
C) Depreciation; net investment
D) Investment; saving
E) Gross investment; net investment
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
9) ________ decreases a irm’s capital stock, and ________ increases its capital stock.
A) Saving; depreciation
B) Saving; investment
C) Depreciation; investment
D) Time; depreciation
E) Investment; saving
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
3
10) The total amount spent on new capital goods is called
A) net investment.
B) gross investment.
C) depreciation.
D) inancial capital.
E) wealth.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
11) Which of the following is correct?
A) Gross investment equals net investment minus depreciation.
B) Net investment is the same as capital consumption.
C) Gross investment is the total spent on capital.
D) Net investment is the total spent on capital.
E) The change in the nation’s capital stock over a year equals the amount of gross
investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
12) The total amount spent to buy new physical capital and replace old capital is referred
to as
A) depreciation.
B) net investment.
C) savings.
D) gross investment.
E) wealth.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
4
13) Bill’s Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers
break and are not worth ixing. Bill also expands his business and buys 10 more mowers.
Bill’s gross investment is ________ mowers.
A) 10
B) 13
C) 7
D) 27
E) 30
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
14) During the year, suppose a country’s total purchases of newly produced capital goods is
$2,000 billion, issues $1,600 billion of stock certiicates, and has $500 billion in
depreciation. Gross investment in this country equals
A) $2,000 billion.
B) $2,500 billion.
C) $3,600 billion.
D) $4,100 billion.
E) $2,100 billion.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
15) On January 1, Rick’s Photo owned $50,000 of equipment. During the year, the value of
the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick’s
company experienced
A) $10,000 of depreciation.
B) $40,000 of depreciation.
C) an increase of new capital by $10,000.
D) an increase of net investment of $35,000.
E) a change in total inancial capital of $15,000.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
5
16) Gross investment equals
A) net investment plus depreciation.
B) net investment minus depreciation.
C) gross inancial capital minus depreciation.
D) gross inancial capital plus depreciation.
E) net investment inancial investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
17) Net investment equals
A) new capital plus old capital.
B) capital plus depreciation.
C) gross investment minus depreciation.
D) gross investment plus depreciation.
E) the amount of national wealth.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
18) Net investment equals
A) gross inancial capital minus stock dividends.
B) depreciation plus gross investment.
C) gross investment minus interest payments.
D) gross investment minus depreciation.
E) depreciation minus gross investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
6
19) Net investment is
A) the same as gross investment.
B) the same as depreciation.
C) gross investment minus depreciation.
D) gross investment plus depreciation.
E) the same as wealth.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
20) Which of the following statements is correct?
A) Gross investment minus inancial capital equals net investment.
B) Net investment plus depreciation equals gross investment.
C) Net investment plus corporate proits equals gross investment.
D) Net investment is greater than gross investment.
E) Net investment minus depreciation equals gross investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
21) If an economy’s depreciation is greater than its gross investment, then
A) net investment is positive and saving is negative.
B) the economy’s capital stock decreases.
C) net investment is positive and saving is positive.
D) net investment is negative and saving is negative.
E) net investment must equal saving.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
7
22) The Zonamo company produces waste disposal machines and sells them to militaries all
over the world. The company started last year with $10 million of capital on hand and
invested $15 million in new capital throughout the year. At the end of the year, the
company’s capital stock was $17 million. Hence, for the year, depreciation equaled ________
and net investment equaled ________.
A) $8 million; $7 million
B) $7 million; $8 million
C) $25 million; $5 million
D) $5 million; $5 million
E) $8 million; $15 million
Skill: Level 3: Using models
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
23) The local Allied Moving Company begins this year with capital equal to $250,000.
During the year the irm depreciates $150,000 worth of its capital and ends the year with
capital equal to $250,000. Which statement correctly summarizes Allied Moving Company’s
investment?
A) Allied Moving Company made no capital investment during the year.
B) Allied Moving Company made no gross investment during the year.
C) Allied Moving Company made no net investment during the year.
D) Allied Moving Company made net investment of $150,000 during the year.
E) Allied Moving Company made gross investment of $250,000 during the year.
Skill: Level 3: Using models
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
24) Bill’s Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers
break and are not worth ixing. Bill also expands his business and buys 10 more mowers.
Bill’s net investment is ________ mowers.
A) 10
B) 13
C) 7
D) 27
E) 20
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
25) Bill’s Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers
break and are not worth ixing. Bill also expands his business and buys 10 more mowers.
Bill’s capital at the end of the year is ________ mowers.
A) 20
B) 30
C) 27
D) 33
E) 10
8
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Revised
AACSB: Analytical thinking
26) At the beginning of the year, AAA-1 Towing owns trucks and buildings for a total value
of $1 million. During the year, it invests $250,000 to replace towing trucks worth $230,000
destroyed in a lood and to cover $50,000 worth of depreciation. AAA-1 Towing’s net
investment was
A) $200,000.
B) $20,000.
C) $280,000.
D) -$30,000.
E) $250,000.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
27) At the beginning of the year, AAA-1 Towing owns trucks and buildings for a total value
of $1 million. During the year, it invests $250,000 to replace towing trucks worth $230,000
destroyed in a lood and to cover $50,000 worth of depreciation. AAA-1 Towing’s capital
stock at the end of the year was
A) $970,000.
B) $1,250,000.
C) $950,000.
D) $1,280,000.
E) $1,020,000.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
9
28) On January 1, Rick’s Photo owned $50,000 of equipment. During the year, the value of
the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick’s
company experienced
A) net investment of $15,000.
B) an increase in inancial capital of $65,000.
C) a decrease in inancial capital of $15,000.
D) depreciation of $15,000.
E) gross investment of $50,000.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Revised
AACSB: Analytical thinking
29) On January 1, Rick’s Photo owned $50,000 of equipment. During the year, the value of
the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick’s
company experienced ________ because ________.
A) net investment of $15,000; net investment equals gross investment minus depreciation
B) gross investment of $15,000; gross investment equals net investment minus
depreciation
C) gross investment of $40,000; gross investment equals net investment plus depreciation
D) net investment of $15,000; net investment equals beginning year inancial capital minus
depreciations and investment
E) depreciation of $15,000; depreciation equals investment in new products minus loss in
values
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: New
AACSB: Analytical thinking
30) On January 1, Derek had CD recording devices valued at $30,000. During the year, the
value of Derek’s devices depreciated by $20,000. He spent $30,000 on new devices.
Derek’s net investment was ________ and at the end of the year Derek had capital valued at
________.
A) $10,000; $40,000
B) $30,000; $40,000
C) $20,000; $60,000
D) $40,000; $70,000
E) $10,000; $60,000
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
10