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Chapter 10 : Investment and Savings
MULTIPLE CHOICE
1. In an economy with a 9 percent interest rate, the present value of $1,000 that you will receive three
years from now is:
a.
$772.
c.
$917.
b.
$1,295.
d.
$1,090.
2. The net present value of a project is the:
a.
sum of the project’s cash flow from each year.
b.
project’s total cash flow divided by the current interest rate.
c.
sum of the present value of the project’s cash flow from each year.
d.
project’s total cash flow, less its start-up costs.
3. The opportunity cost of cotton:
a.
is considered a negative opportunity cost in the analysis of public projects.
b.
is considered a positive opportunity cost in the analysis of public projects.
c.
can be considered a negative or a positive opportunity cost in the analysis of public
projects, depending on whether the cotton could have been used as an export or an import.
d.
holds the same considerations for both the public and private sectors.
4. When a private firm undertakes investment analysis, it conducts:
a.
risk aversion strategy.
c.
a random walk.
b.
commercial project appraisal.
d.
asymmetric information analysis.
5. Welfare weights should:
a.
be used with caution so that they do not become arbitrary.
b.
never be used because they are unreliable.
c.
be used for every project because they are as reliable as the discount rate.
d.
only be used for small projects.
6. When welfare weights are introduced or shadow prices are further adjusted to reflect social goals, the
process is known as:
a.
Fabian socialism.
c.
consumption coordination.
b.
social project appraisal.
d.
chain-weighted social-welfare benefit.
7. The majority of direct foreign investment in developing countries comes:
a.
equally from the private and public sectors.
b.
predominantly from the public sector.
c.
predominantly from the private sector.
d.
from multinational corporations.
8. By 2010, half of all FDI in developing countries went to:
a.
10 countries.
c.
60 countries.
b.
27 countries.
d.
102 countries.
9. Today, FDI is aimed primarily at all of the following broad categories EXCEPT:
a.
natural resource-based activities.
b.
alternative and “green energy” production.
c.
manufacturing and services aimed at the domestic market in the host country.
d.
labor-intensive manufacturing aimed for export on world markets.
10. Multinational corporations:
a.
avoid spillovers whenever possible.
b.
often encourage horizontal spillover.
c.
often encourage vertical spillover.
d.
encourage both horizontal and vertical spillover.
11. A positive relationship between FDI and growth can be seen when FDI is aimed at:
a.
manufactured projects for the domestic sector.
b.
natural resource-based industries.
c.
manufactured projects for export.
d.
all of the above.
12. Which of the following is an income tax incentive that exempts firms from paying taxes on corporate
income, usually for three to six years?
a.
tax extension
c.
tax holiday
b.
tax subsidization
d.
tax shelter
13. Export-oriented, labor-intensive, “footloose” industries should:
a.
never be offered tax holidays.
b.
at times be offered tax holidays because they can be more readily influenced by such
incentives, as their options are wider than other industries.
c.
at times be offered tax holidays because they are more likely to provide positive spillover.
d.
both b and c.
14. Which of the following is NOT a standard restriction placed on FDI by governments interested in
capturing the benefits of that investment?
a.
performance requirements
c.
restrictions on profit repatriation
b.
labor requirements
d.
production schedules
15. According to the life-cycle model of household savings, when do savings rates tend to peak in a
person’s working years?
a.
beginning
c.
end
b.
middle
d.
both b and c
16. The theory that, under certain circumstances, a change in taxes will have absolutely no effect on total
domestic saving, is known as the:
a.
Ricardian equivalence.
c.
Marshall’s conundrum.
b.
Mill’s minimum.
d.
Keynesian nullification.
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Public investment, externality
ANS:
Answer will vary
2. Investment, growth
ANS:
Answer will vary
3. Cost-benefit analysis, net cash flow
ANS:
Answer will vary
4. Net present value, internal rate of return (IRR)
ANS:
Answer will vary
5. Economic project appraisal, shadow prices
ANS:
Answer will vary
6. Economic openness, investment
ANS:
Answer will vary
7. Foreign direct investment (FDI), multinational corporations (MNCs)
ANS:
Answer will vary
8. Income tax incentives, labor-intensive industries
ANS:
Answer will vary
9. FDI, growth
ANS:
Answer will vary
10. Positive spillover, negative spillover
ANS:
Answer will vary
11. Foreign savings, domestic savings
ANS:
Answer will vary
12. Dependent population, working population
ANS:
Answer will vary
