Review of the previous lecture 1. All types of investment depend negatively on the real interest rate 2. Things that shift the investment function:. § Technological improvements raise MPK and raise business fixed. investment § Increase in population raises demand for, price of housing and. raises residential investment § Economic policies (corporate income tax, investment tax credit). alter incentives to invest . Lecture 25 Investment - II .Instructor: Prof. Dr. Qaisar Abbas Lecture Contents .•. Things that shift the investment function .•. Why investment rises during booms and falls during recessions Tobin’s q . Market value of installed capital. q =. Replacement cost of installed capital •. numerator: the stock market value of the economy’s capital stock .•. denominator: the actual cost to replace the capital goods that were. purchased when the stock was issued .•. If q > 1, firms buy more capital to raise the market value of their. firms .•. If q cost of capital,. then profit rate is high, which drives up the stock market value of the. firms, which implies a high value of q •. If MPK |
