Chapter 10, Problem 12P

To determine

Concept Introduction:

Investment Spending:Spending done on physical capital that increases an economy’s level of physical capital is known as investment spending.

Investment in Financial Assets: Spendingwhich are made on financials assets like bonds, securities, stocks and bills are known as investment in financial assets.

Investing in Physical Asset:Spending which are made on goods or services that do not add up to an economy’s existing capital.

Answer to Problem 12P

a.Buying shares

Buying of shares is an example of investment in financial assets.

Explanation of Solution

• 100 Shares bought by Mr. R is not an example of investment spending. It is because there is no addition made in the stock of physical capital in the economy.

• It is an example of investment in financial assets as it involves buying of shares which has a paper claim promising him to pay in the future.

b. Buying an old mansion

Buying old mansion is an example of investment in physical assets.

• Spending made by Mr. R on an old mansion is not an example of investment spending. It is because there is no addition made in the stock of physical capital in the economy.

• It is an example of investment in physical assets because mansion already existed in the economy.The transaction has only led to transfer of ownership of the mansion.

c. Building a new mansion

Building a new mansion is an example of investment spending.

• Building a new mansion is an example of investment spending.

• $10 Spent by Mr. R on building a new mansion is an example ofinvestment spending. It is because there isan addition made in the stock of physical capital in the economy.

d. Building a new plant to make catcher’s mitts

Building a new plant is an example of investment spending.

• Spending made by Mr. R on building a new plant to make catcher’s mitts is an example of investment spending.

• It is because there is an addition made in the stock of physical capital in the economy.

e. Russia buying US bonds

Buying of US bonds by Russia is an example of investment in financial assets.

• When Russia buys $100 million US bonds then it is not considered as the investment spending rather it is an investment in financial assets.

• It is because the given transaction does not add up to the stock of physical capital in an economy.It involves buying of bonds which has a paper claim promising him to pay in the future.