Which One Of The Following Statements Are True? A In The Factor Market Investments Are Known As Depreciation B Capital Always Implies Money C Firms Produce Capital Goods And Sell It To Households Or Consumers D Financial Institutions Channel Capital Goods Towards Household's As Their Savings Increases E When Financial Institutions Have Surplus Units It Implies That Many People Save More Than They Spend In The Economy

Which one of the following statements are true? A In the factor market investments are known as depreciation B Capital always implies money C Firms produce capital goods and sell it to households or consumers D Financial institutions channel capital goods towards household’s as their savings increases E When financial institutions have surplus units it implies that many people save more than they spend in the economy

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May 31, 2020

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Which one of the following statements are true?

A In the factor market investments are known as depreciation

B Capital always implies money

C Firms produce capital goods and sell it to households or consumers

D Financial institutions channel capital goods towards household’s as their savings increases

E When financial institutions have surplus units it implies that many people save more than they spend in the economy

Answer and Explanation

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Answer

A In the factor market investments are known as depreciation

E When financial institutions have surplus units it implies that many people save more than they spend in the economy

Explanation:
- Capital may refer to money, but may also imply the physical assets like plants and equipment's that are applied in the production of goods and services.
- In the market for goods and services, firms act as sellers and households are the buyers. On the other hand, in the market for factors of production, firms are buyers while households are sellers. Financial institutions and bond markets channel consumer savings to businesses that require financing t purchase capital goods. The Encyclopedia of Money. By Larry Allen page 150.
- Surplus units are those units which receive more than the expenditure which provides the net savings to the financial institutions. Households with savings are recognized as surplus units.
- Gross investment constitutes an addition to the capital stock. Part of investment involves replacing capital and hence classified as capital depreciation.

Explanation

A. In the factor market investments are known as depreciation:

This statement is accurate. The factor market deals with the exchange of factors of production, including capital. In this context, investments made by firms to acquire capital goods are considered depreciation when viewed from the perspective of the factor market. This is because capital goods depreciate over time due to wear and tear.

B. Capital always implies money:

This statement is not entirely accurate. While capital can indeed refer to money, it extends beyond currency. In economic terms, capital encompasses physical assets such as machinery, equipment, and infrastructure that contribute to the production process.

C. Firms produce capital goods and sell them to households or consumers:

This statement is not accurate. Firms primarily produce goods and services, not capital goods. Capital goods are typically used by firms in the production process to create other goods and services.

D. Financial institutions channel capital goods towards households as their savings increase:

This statement requires clarification. Financial institutions, through various mechanisms like loans and investments, facilitate the flow of funds from households (savers) to businesses. However, it's more accurate to say that financial institutions channel funds toward businesses for investment purposes, including acquiring capital goods.

E. When financial institutions have surplus units, it implies that many people save more than they spend in the economy:

This statement is accurate. Financial institutions, as intermediaries, accumulate surplus units when the savings from individuals exceed the amount being invested or spent. This surplus reflects a scenario where a significant portion of the population is saving more than they are spending.

Capital, as mentioned in economic contexts, extends beyond money and includes physical assets.
Firms primarily produce goods and services, not capital goods for households.
Financial institutions facilitate the flow of funds, but the focus is on channeling funds toward businesses for investment, not directly providing capital goods to households.
Surplus units in financial institutions signify a scenario where a considerable portion of the population is saving more than they are spending in the economy.

Understanding these economic nuances contributes to a comprehensive grasp of the interactions between households, firms, and financial institutions in the economy.