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Chapter 6: Q2. (page 129)

True or False. The term economic investment includes purchases of stocks, bonds, and real estate.

Short Answer

Expert verified

The statement “the term economic investment includes purchases of stocks, bonds, and real estate” is false.

Step by step solution

01

Meaning of economic investment

Economic investment is the spending that would increase the economy’s output in the future. The economic investment is a payment for newly acquired capital goods that would increase the productive capacity of the firms in the future. This can include investment in machinery, tools and factories.

The objective of economic investment is to increase the productive capacity of the economy in the future.

02

Reason for the false statement

Stocks, bonds, and real estate form a part of the financial market. The purchase of financial assets will not increase the output of the economy. It merely transfers the ownership of an asset from one party to another. The productive capacity can only be increased by investment in newly acquired capital goods.

The financial investment refers to the financial market, whereas the economic investment refers to the market for capital goods. Therefore, the economic investment and purchase of stocks, bonds, and real estate are separate phenomena. Hence, the given statement is false.

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Most popular questions from this chapter

Assume that a national restaurant chain called BBQ builds 10 new restaurants at a cost of \(1 million per restaurant. It outfits each restaurant with an additional \)200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 per share. What is the amount of economic investment that has resulted from BBQ’s actions? How much purely financial investment took place?

Catalog companies are committed to selling at the prices printed in their catalogs. If a catalog company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or as expected? If the company could change the price of sweaters, would it raise the price, lower the price, or keep the price the same? Given that the company cannot change the price of sweaters, however, consider the number of sweaters it orders each month from the company that manufactures the sweaters. If inventories become very high, will the catalog company increase orders, decrease orders, or keep orders the same? Given what the catalog company does with its orders, what is likely to happen to employment and output at the sweater manufacturer?

Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility over months or years?

If an economy has sticky prices and demand unexpectedly increases, you would expect the economy’s real GDP to

  1. increase.

  2. decrease.

  3. remain the same.

Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the economic growth process?
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