12 Flashcards
Investment
expenditure on structures, machines and equipment (durable goods used in production) by private agents
Investment determines…
level of future income
Investment is an important component of GDP but …
not as big as consumption
Investment and capital levels rise when…
cost of capital falls (r)
Investment and capital levels fall when…
cost of capital rises (r)
A technology improvement leads to …
investment and capital levels rise
In the market for investment and savings an increase in the desire to save means
a decrease in interest rate and a higher percentage of income that is saved
In the market for investment and savings a decrease in the desire to save means
that the interest rate rises and lower percentage of income is saved
In the market for investment and savings an increase in TFP means
that both the interest rate and the percentage of income rise
what is the relevant trade-off in the investment and stock market?
value of capital vs replacement cost
replacement cost
the cost of buying the kind of capital the company currently uses and installing it onsite
tobin’s q
q= Value of capital / replacement cost
tobin’s q if q>1
the stock market values a unit of capital more than its cost
–> company should invest
tobin’s q q<1
the company should disinvest
