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Macroeconomics Sem1 > Investment > Flashcards

Investment Flashcards

1
Q

Business fix investment assumes

A

capital value is fixed eg: value of chairs constant

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2
Q

3 factors that influence Investment

A
  1. Mariginal Product of Capital [MPK] (photocopier eg)
  2. Interest Rate
  3. Tax rules affecting firms
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3
Q

what 2 types of firms assumed

A

Production & rental

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4
Q

Equation for change in Profit = ___ =____

Show rearranged equation at Max. profit

A

dProfit = dRev - dcost = P * MPK - R
(additional cost of 1 more unit)
MPK = R/P [at max: profit = 0]
R = Rent

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5
Q

3 factors that affect rental price?
What function do you use?
and What do you do to find MPK?

A

Capital k, (Earthquake/war)
Labour L, (pop growth/immigration)
Output A, (tech improvement/deregulation)
Cobb Douglas
FOC - change in variables affect rental price

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6
Q

x3 components of Cost of Capital? [real/nominal]

Acronym

A

COC = DIC
Deprication Cost: Delta X Pk [delta=depreciation rate]
[real] Interest Costs: i X Pk [opp cost]
Capital Loss: negative change in Pk [if +change subtract]
Sum these for Nominal total

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7
Q

Equation for nominal COC

A

back sheet 2

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8
Q

Profit Rate Equation =

A

R/P - [Pk/p]*(d + r)

MPK - Rental Costs

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9
Q

If Profit Rate >0

<0

A

it is profitable to invest more in Capital k

firm reduces capital stock (not replacing)

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10
Q

Net Investment equation = __ = ______________

Gross Investment equation =

A

sheet 3

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11
Q

affect on Investment of increase in r

how is this shown graphically?

A

raises COC, reduces profit rate, lowers investment

movement along investment function (towards origin)

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12
Q

affect of ^MPK on investment {graphical}

A

Investment function shifts outwards/right (^profit rate, ^investment for given r)

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13
Q

2 most important policies affecting investment?

Acronym

A

Corporate Income Tax

Investment tax credit

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14
Q

CIT is a tax on..

If Pk rises over time….

A

a firm’s profits

the legal definition understates true cost and overstates profit - taxed more

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15
Q

ITC reduces firm’s ____ for each pound it spends on ___

Effectively reduces ____ which increases ___ ___ so ____rises

A

taxes, capital

Pk, profit rate, investment

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16
Q

Problems with Neoclassical Model x3

what model over-comes this and how?

A

Static: does NOT consider future+expectations/uncertainty
No account for time delays/costs - capital assumed to be instantly changed which unrealistic
Assumes firms can borrow to buy capital (constraints)
Tobin’s q, which relates stock market to investing decisions

17
Q

What does tobin’s q = [words]

if q > 1

A

market value of installed capital/replacement cost of installed capital
firms buy more capital to raise market value of firm.

18
Q

Re-Write Tobin’s q more formally….

all workings inc. geometric series

A

page 4

19
Q

Sum to infinity formula for geometric series?

A

= a / (1-x)

20
Q

what is alpha value and common factor for geo series?

A

F(P,K)/1+r

1 / 1+r

21
Q

What factors cause change in investment in q model?

[hint: may have studied them before]

A

same as optimal capital stock factors

22
Q

main factor added to q model?

A

current investment will also be influence by future values/cash flows of these variables - more dynamic

23
Q

Adjustment Costs Rule to determine investment?
What does theeta represent
what happens to investment when q>1?

A

I = [1/theeta] * (q-1)
theeta installation costs
increase investment if q>1

24
Q

Relationship between q and neoclassical?

A

If MPK > COC , profit rate high, stock market value high, thus q value high

25
Q

x3 Reasons for Relationship between stock market and GDP: {x4 chain, x3 chain, x1}

A

back of sheet 4

  1. Wave of pessimism about future profits
  2. Fall in stock prices
  3. lower stock prices may mean slow down in tech-progress and LR eco growth
26
Q

impact of financing constraints…
x2 causes of constraints
what does neo assume?

A

Firms only able to invest their profits, can’t borrow
low profits and macro econ (recession)
assumes firms can borrow to buy capital whenever

27
Q

What is residential Investment

x2 egs

A

change in stock of houses

purchase of new houses or building new rental properties

28
Q

How residential investment is determined? 2 graphs

A

Sheet 5
Existing and New House market
Price in existing market determines no. of new builds

29
Q

Show affect of fall in r on housing markets?

A

sheet 5

30
Q

changes in housing demand

What do some economists believe this can cause?

A

changes in tax code; can sometimes act as deduction from mortgage interest (subsidy)
deduction applies to nominal mortgage rate so subsidy is higher when inflation higher
Some believe subsidy can cause over-investment in housing RELATIVE to other forms of capital

31
Q

Inventory investment Def
size ___ but, in recession, accountable for _____
Why?

A

value of stock held but firms
1% of GDP but more than half fall in spending due to fall in I.I
in recession, firms let stock run out bc don’t want cash tied up in inventory assets

32
Q

Motives for holding Inventories x4

A

Back of sheet 5

  1. production smoothing
  2. inventories as a factor of prod
  3. stock out avoidance
  4. Goods still in production process count
33
Q

Accelerator model assumption {Eq & what is Beta}

A

firm hold stock of inventories proportional to output
N = Beta*Y ie buffer stock
Beta - exogenous parameter for desired stock as proportion of output

34
Q

When Output is rising….

A

firm increase their inventories

[^output = ^ inventories]

35
Q

Imperical evidence for accelerator model find beta =

A

0.2

36
Q

what do all type of investment depend negatively on

A

real interest rate

37
Q

investment is most ____ component of GDP

A

volatile

38
Q

Investment volatility reasons x3 and their affects

A

Fluctuations in:
employment affects MPK
income affects residential investment
Output affects inventory investment

Macroeconomics Sem1 (7 decks)

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