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Chapter 25: Problem 13

For each of the following, is it an example of investment spending, investing in financial assets, or investing in physical assets? a. Rupert Moneybucks buys 100 shares of existing Coca-Cola stock. b. Rhonda Moviestar spends \(\$ 10\) million to buy a mansion built in the $1970 \mathrm{~s}$. c. Ronald Basketballstar spends \(\$ 10\) million to build a new mansion with a view of the Pacific Ocean. d. Rawlings builds a new plant to make catcher's mitts. e. Russia buys \(\$ 100\) million in U.S. government bonds.

Short Answer

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Question: Classify the following types of investments into investment spending, investing in financial assets, or investing in physical assets: a) Rupert Moneybucks buys 100 shares of existing Coca-Cola stock. b) Rhonda Moviestar spends $10 million to buy a mansion built in the 1970s. c) Ronald Basketballstar spends $10 million to build a new mansion with a view of the Pacific Ocean. d) Rawlings builds a new plant to make catcher's mitts. e) Russia buys $100 million in U.S. government bonds. Answer: a) Investing in financial assets b) Investing in physical assets c) Investment spending d) Investment spending e) Investing in financial assets

Step by step solution

01

Solution for (a)

Rupert Moneybucks buys 100 shares of existing Coca-Cola stock. This is an example of investing in financial assets, as he is purchasing existing shares in a company.
02

Solution for (b)

Rhonda Moviestar spends \(\$ 10\) million to buy a mansion built in the \(1970 \mathrm{~s}\). This is an example of investing in physical assets, as a mansion is a tangible asset.
03

Solution for (c)

Ronald Basketballstar spends \(\$ 10\) million to build a new mansion with a view of the Pacific Ocean. This is an example of investment spending, as he is spending money to create a new asset: the new mansion.
04

Solution for (d)

Rawlings builds a new plant to make catcher's mitts. This is an example of investment spending, as the company is building a new plant to create an asset that will help it produce goods.
05

Solution for (e)

Russia buys \(\$ 100\) million in U.S. government bonds. This is an example of investing in financial assets, as the bonds are financial instruments.

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Most popular questions from this chapter

Explain how a well-functioning financial system increases savings and investment spending, holding the budget balance and any capital flows fixed.

Explain why equilibrium in the loanable funds market maximizes efficiency.

Boris Borrower and Lynn Lender agree that Lynn will lend Boris \(\$ 10,000\) and that Boris will repay the \(\$ 10,000\) with interest in one year. They agree to a nominal interest rate of \(8 \%,\) reflecting a real interest rate of \(3 \%\) on the loan and a commonly shared expected inflation rate of \(5 \%\) over the next year. a. If the inflation rate is actually \(4 \%\) over the next year, how does that lower-than-expected inflation rate affect Boris and Lynn? Who is better off? b. If the actual inflation rate is \(7 \%\) over the next year, how does that affect Boris and Lynn? Who is better off?

What are the important types of financial intermediaries in the U.S. economy? What are the primary assets of these intermediaries, and how do they facilitate investment spending and saving?

Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is the budget balance? What is the relationship among the three? Is national savings equal to investment spending? There are no government transfers. $\mathrm{GDP}=\$ 1,000\( million \)\quad T=\$ 50\( million \)C=\$ 850\( million \)\quad G=\$ 100$ million
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