Investment Flashcards
What is Future value in terms of present value?
PV (1+i)^n
How do we calculate PV from FV?
FV / (1+i)^n
Or FV * 1/(1+i)^n
Discounting is the opposite of
saving
What is MPK?
Marginal productivity of Capital
What is business fixed investment?
Investment in products that will produce goods and services
What are production firms?
Rent the capital they use to produce goods and services
What are rental firms?
Own capital, rent it to production firms
How do we get MPK?
R/P
What are the components of the cost of capital?
- Interest cost
- Depreciation costs
- Capital loss
What is interest cost?
i x Pk (Pk = nominal price of capital)
What is depreciation cost?
δ x Pk (δ = rate of depreciation)
What is Capital loss?
-ΔPk
What is n, in terms of investment functions?
number of years over which compounding takes place
What is the equation for Tobin’s q?
Market value of installed capital
/
Replacement cost of installed capital
In Tobin’s q, if q>1:
Firms buy more capital to raise the market value of their firms
If Tobin’s q<1:
Firms do not replace capital as it wears out
A wave of pessimism about future profitability of capital would:
- Cause stock prices to fall
- Cause Tobin’s q to fall
- Shift the investment function down
- Cause a negative aggregate demand shock
A fall in stock prices would:
- Reduce household wealth
- Shift the consumption function down
- Cause a negative aggregate demand shock
What are financing constraints?
Limits on the amounts firms can borrow (or otherwise raise in financial markets)
In Ph/P, Ph stands for:
Price of housing
In Ph/P, P stands for
Price of other goods
What are incentives for holding inventories?
- Production smoothing
- Inventories as a factor of production
- Stock out avoidance
- Work in process
