Use Tobin's q theory and the neoclassical theory of investment to explain why investment rises so rapidly once the economy has passed the trough of a business cycle
What will be an ideal response?
As an economy enters the recovery phase of the business cycle, investment is encouraged by a low real interest rate, relatively low real price of capital, relatively low inventories, and improving expectations of future output that raise the desired level of the capital stock. The increased expected marginal product of capital raises the market value of firms, which inspires more investment and boosts the expected price of capital, lowering the user cost. So long as new capital is seen as augmenting the value of the firm, investment is self-propelling.
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According to the text, over 40 percent of member nations of the International Monetary Fund have
A) a fixed exchange rate. B) no separate legal currency. C) an independently floating exchange rate. D) a managed floating exchange rate.
Which of the following would be studied by macroeconomists?
A. Inflation in developing countries. B. The effect of government subsidies on sugar prices. C. The impact of the minimum wage on families below the poverty level. D. The effect of rent controls on housing prices in New York City.