Investment, the capital market, and the wealth of nations

Investment plays a crucial role in the growth and development of nations. It provides the resources necessary for businesses to expand and create jobs while offering individuals the opportunity to grow their wealth. In this context, the capital market, which is the market for securities (such as stocks and bonds), serves as a platform for investors to buy and sell financial assets.

The capital market can be divided into two parts: the primary market and the secondary market. The primary market is where new securities are issued and sold directly to investors, while the secondary market is where existing securities are traded among investors. Capital markets help to provide businesses with the necessary funding to finance their operations while also allowing investors to own a piece of the company.

The wealth of nations is closely tied to the performance of their capital markets. A strong capital market allows businesses to access the funding they need to grow, which drives economic growth and development. This is why many countries have placed great importance on developing and strengthening their capital markets. The World Bank, for example, has made capital market development a key focus of its efforts to reduce poverty and promote economic growth in developing countries.

However, while capital markets are essential, they are not without risks. Financial crises, such as the 2008 global financial crisis, have shown that the capital market can be volatile and that investors must be careful when making investment decisions. Governments must also be careful to strike a balance between promoting economic growth and maintaining financial stability to protect the interests of both investors and the broader economy.

In conclusion, investment and the capital market are critical economic growth and development drivers. The capital market provides businesses with the resources they need to grow while also offering investors the opportunity to grow their wealth. Governments must take a strategic approach to developing and regulating their capital markets to promote economic growth and protect the interests of both investors and the broader economy.

1.The present value of a future income stream is the current worth of future income after it is discounted to reflect the fact that:

the market value of an asset is less than the present value of the expected future net earnings from the asset

revenues in the future are valued less highly than revenues now

the market value of an asset is more than the present value of the expected future net earnings from the asset

revenues in the future are valued more highly than revenues now

2.For the past several decades, the percentage of national income in the United States allocated to human capital (employees and self-employed workers) has been approximately

20 percent

80 percent

40 percent

60 percent

3.Consumers demand loanable funds because:

these funds help them evade taxes

these funds generate high rates of return in the future

they have a positive rate of time preference

they prefer future consumption to current consumption

4.Identify the correct statement about the risk associated with a loan.

Loans to a well-established business with substantial assets are riskier than loans to an unemployed worker

The risk associated with a loan decreases with the duration of the loan

Loans secured with an asset are riskier than unsecured credit card loans

The risk associated with a loan increases with the duration of the loan

5.If an asset generates $5,500 of net earnings annually and the market interest rate is 10 percent, the asset would be worth:

$50,000

$55,000

$4,500

$5,500

6.Business managers and asset owners:

do not have a strong incentive to use the resources under their control efficiently because their incomes are independent of a firm’s profits

have a strong incentive to use the resources under their control efficiently because failing to do so will decrease the value of their assets

do not have a strong incentive to use the resources under their control efficiently because doing so does not guarantee the maximization of profits

have a strong incentive to use the resources under their control efficiently because failing to do so will decrease the total surplus in an economy

7.Which of the following is an example of physical capital?

Technical know-how about the machine-tool industry

Stocks

Management skills

Machines

8.Which of the following is true about the market value of an asset?

It is inversely related to the future income stream generated by the asset

It is always less than the present value of the expected net revenue that can be earned by the asset

It is inversely related to the market interest rate

It is always greater than the present value of the expected net revenue that can be earned by the asset

9.Discounting is the procedure used to calculate the:

present value of future income

profit on an investment over a period of time

number of years it takes for a certain variable to double itself

annual growth rate of an investment over a specified period of time

10.Identify the correct statement about interest rates in an economy.

They are controlled by the government

They provide lenders with the incentive to increase their current consumption so that borrowers can either invest or consume beyond their present income

They are determined by the demand for and supply of loanable funds

They are directly related to the amount of funds demanded by consumers but inversely related to the amount of funds demanded by investors

11.If the interest rate in an economy is 8 percent in 2020, the current value of $2,000 to be received in 2021 will be:

$500.10

$1,851.85

$3,010.52

$2,005.93

12.Which of the following is true of individuals in an economy?

If people refrain from consumption, the supply of capital in the economy will decrease

Other things being the same, people subjectively value goods obtained later more highly than goods obtained sooner

If people save, the resources for investment in the economy will decrease

Other things being the same, people subjectively value goods obtained sooner more highly than goods obtained later

13.Identify the correct statement about saving.

It increases the demand for capital resources in the economy

It refers to the amount of income that is not spent on current consumption

It increases the average productivity of workers in an economy

It refers to the use of unconsumed income in the production of a capital good in an economy

14.Which of the following is likely to occur when people anticipate inflation?

The inflationary premium paid to the lender will decrease

The purchasing power of money will increase

The money interest rate will rise, and it will overstate the yield from lending funds in the loanable funds market

The money interest rate will fall, and it will understate the true cost of borrowing funds in the loanable funds market

15.Successful entrepreneurship involves:

investments in potential investment projects for which the discounted present value of the additional future earnings are lower than the costs

investments in potential projects that intend to decrease the value of the resources used in production

the ability to identify previously unnoticed profit opportunities

the ability to generate windfall gains due to unanticipated changes in economic conditions

16.Economic profits can be earned in competitive markets only if:

there are a large number of buyers and sellers in the markets

diseconomies of scale in production are present in the markets

uncertainty and entrepreneurship are present in the markets

there are low barriers to entry into the markets

17.Identify the correct statement about the capital market in an economy.

It channels the savings of individuals into the finance of investment goods

It is governed by a central authority that decides whether a project will be undertaken or not

It facilitates the easy exchange of goods and services in a market

It facilitates the exchange of the economic resources used as factors of production for income

18.If the interest rate in an economy is 10 percent and an investment is expected to yield a net revenue of $10,000 per year (to be received at year end) for each of the next three years, a profit-maximizing decision maker will undertake the investment as long as it costs less than:

$20,218.5.

$24,868.5.

$5,789.8.

$30,987.1.

19.Which of the following is an example of human capital?

The laborers in an economy

The technical expertise of engineers

The office building owned by a company

The natural resources available in an economy

20.Which of the following is likely to occur when lenders and borrowers anticipate inflation in a market?

The real rate of interest will exceed the money rate of interest in the market

The demand for funds will decrease in the loanable funds market

The money rate of interest will exceed the real rate of interest in the market

The supply of funds will increase in the loanable funds market

21.Which of the following is likely to occur when investment funds are allocated by the government?

An efficient and equitable allocation of capital will take place in an economy

Market returns will decide which projects will be undertaken

The number of new start-up businesses will increase in an economy

Rent-seeking activities will be encouraged in an economy

22.If an asset is expected to generate a constant annual net income each year in the future, its value is determined by:

the product of the annual net income from the asset and the interest rate

the sum of the annual net income from the asset and the interest rate

the ratio of the annual net income from the asset to the interest rate

the difference between the annual net income from the asset and the interest rate

23.Firms can sometimes earn persistent economic profits if:

there are low barriers to entry into a market

they can restrict entry into a market

they can charge high prices for their products

they can continue to produce more at low prices

24.An investment in human capital will be profitable if the discounted present value of the additional future earnings generated by the investment exceeds the:

value of the marginal product of labor

discounted value of both the direct and indirect costs of the investment

expected real value of the future income stream

dollar amount of the direct and indirect costs of the investment

25.Which of the following happened in Eastern Europe and the former Soviet Union during 1950–1990?

The investment rates in these countries were among the lowest in the world

Borrowing to finance the large budget deficits in these countries accounted for a sizeable share of the loanable funds market

Resources were often wasted on impractical projects favored by important political leaders

Market allocated approximately one-eighth of the national output of these countries into capital investment

26.Which of the following is true of investment expenditure in an economy?

It is required to increase the level of savings in the economy

It increases the demand for capital resources in the economy

It increases the availability of capital resources in the economy

It refers to the excess of disposable income over consumption expenditure

27.Identify the correct statement about the U.S. economy.

During the last decade, borrowing to finance the large federal deficits accounted for a sizeable share of the loanable funds market

During the 2008–2009 financial crisis, investors had less incentive to cater to political officials who can provide them with subsidies and tax breaks

During the last decade, government regulations increased the supply of low-cost petroleum and natural gas in the economy

During the 2008–2009 financial crisis, investors had more incentive to evaluate risks and act prudently since the operation of the capital market was undermined

28.Identify the correct statement about the market value of an investment project.

It is inversely related to the present value of the expected future net earnings from the investment

It is directly related to the present value of the expected future net earnings from the investment

It is determined by the product of the annual net income from the investment and the interest rate in an economy

It is determined by the ratio of the interest rate in an economy to the annual net income from the investment

29.Which of the following best describes how economic profit affects the choices of investors in human and physical capital?

Economic profit provides investors with a strong incentive to invest in physical capital, but not human capital

Economic profit provides both human and physical capital investors with a strong incentive to undertake investments that increase the value of resources

Economic profit provides investors with a strong incentive to invest in human capital, but not physical capital

Economic profit provides both human and physical capital investors with a strong incentive to undertake only projects for which the returns are certain

30.Identify the correct statement about the present value of a future dollar payment.

It is positively related to the demand for loanable funds in a market

It is inversely related to the productivity of the capital resources available in an economy

It is inversely related to the interest rate

It is positively related to how far in the future the payment will be received

31.Economic efficiency requires that costs associated with the expansion and utilization of capital be balanced against the

future increases in output derived from improved tools and production methods

need to maintain a reserve army of the unemployed

reduction in future employment due to automation

indirect costs of capital goods

32.The money rate of interest that lenders pay for borrowed funds minus the real rate of interest equals the

nominal rate of interest

productivity of capital

present value of an asset

inflationary premium

33.Which of the following is true of corporate officers?

They have the authority to hire and fire the members of a corporate board

They do not have a strong incentive to use the resources under their control efficiently

They are typically large shareholders in a corporation

Their pay packages generally depend on the stock prices of the corporation

34.Identify the correct statement about a corporation.

The corporate officers do not have a strong incentive to act on the feedback from the stock market

The price of the corporation’s shares gives corporate officers fast feedback on what investors think of their decisions

The members of the corporate board, which hires and fires corporate officers, are typically not large shareholders in the corporation

The pay packages of corporate officers are independent of the stock prices of the corporation

35.Which of the following is likely to happen when interest rates increase in an economy?

It will stimulate lenders in the economy to supply additional funds to the market

Investors will borrow more because some investment projects would be more profitable at higher rates

It will increase the present value of a future dollar payment

Consumers will increase their current consumption because they value the earlier availability of goods and services more than the high interest premium they are required to pay

36.Compared to investments in physical capital, human capital investments are more likely to be influenced by:

the rate of returns to capital in an economy

nonmonetary considerations

the interest rates in an economy

the opportunity cost of investments

37.If an economy is going to reach its full potential, it must have:

a central investment authority that will ensure an efficient allocation of funds for investment

an environment in which private investors place government funds at risk in the capital market

a mechanism that will keep the interest rates in the economy at their minimum

a mechanism that will attract savings and channel them into the investments that are most likely to create wealth

38.Which of the following will likely occur when investment funds are allocated by the government and not by market returns?

An improvement in the living standards of people

An increase in the market returns from investment projects

An inefficient allocation of capital

The innovation and discovery of new products and technologies

39.Higher interest rates:

encourage borrowers to increase their demand for loanable funds because the present value of a future dollar payment decreases with higher interest rates

discourage lenders to save because they always value current consumption more than future consumption

discourage lenders to save because the present value of a future dollar payment increases with higher interest rates

encourage lenders to sacrifice their current consumption so that borrowers can consume beyond their present income

40.Which of the following is likely to be true when the present value of the revenue derived from an investment project exceeds the present value of its cost?

The investor will undertake the project

The project will be counterproductive

The investor will incur losses in the future

The project will diminish the value of the resources used

41.Identify the correct statement about an inflationary premium.

It is the sum of the nominal rate of interest and the real interest rate

It reflects the compensation given by borrowers to lenders for the expected decrease in the purchasing power of the principal and interest due to inflation

It is the ratio of the nominal rate of interest to the real interest rate

It reflects the incentives given to borrowers by lenders for the expected increase in the purchasing power of income due to inflation

42.Which of the following is a reason why stocks have historically yielded a higher average return than bonds?

Stringent government regulations

Uncertainty of return

A progressive tax structure in an economy

Unanticipated changes in an economy

43.Which of the following is true of the interest rate in an economy?

It is the market price for the earlier availability of funds

From the viewpoint of a potential lender, it is the premium that must be paid in order to acquire goods sooner and pay later

It is the dollar price of a foreign currency

From the viewpoint of a potential borrower, it is a reward for supplying others with current purchasing power

44.If the interest rate in an economy is 10 percent, the present value of $500 received two years from now would be:

$513.65

$312.90

$251.90

$413.22

45.Which of the following will help determine whether the expected future revenues from an investment project will be sufficient to cover the up-front costs?

The tax structure of an economy

The law of diminishing marginal returns

The discounting procedure

The Rule of 70

46.The experiences of Eastern Europe and the former Soviet Union during 1950–1990 illustrate the fact that even high rates of investments may do little to improve the living standards of people when:

central planners, rather than market returns, allocate investment funds in an economy

the government subsidizes the production of essential goods and services in an economy

an economy experiences an inflationary gap

an economy experiences stable rates of inflation

47.The real rate of interest is equal to the:

sum of the money rate of interest and the inflationary premium

ratio of the money rate of interest to the inflationary premium

difference between the money rate of interest and the inflationary premium

product of the money rate of interest and the inflationary premium

48.Investors’ demand for loanable funds stems mainly from:

the level of income of the consumers in an economy

the productivity of capital

the present value of existing assets

the consumers’ marginal propensity to save

49.Physical and human capital investments are:

different as the prospect for economic profit is present for physical capital but not for human capital investment

similar as both use the discounting procedure to help gauge whether or not to make the investments

different as human capital decisions do not have opportunity costs, while physical capital investments do have opportunity costs

similar as both use the compounding method to decide whether or not to make the investments

Investment, the capital market, and the wealth of nations

Investment, the capital market, and the wealth of nations

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