Exam 17: The Theory of Investment

Holding other factors constant, a decline in the real interest rate will ______ the price of housing and ______ the flow of residential housing investment.

The housing industry frequently complains that restrictive monetary policy adversely affects their industry more than other industries. Use the model of residential investment to illustrate graphically the impact of restrictive monetary policy on housing prices and the quantity of residential investment. Also explain your answer in words.

The investment demand function would shift for all of the following reasons except:

Explain briefly the types of investment spending.

According to the neoclassical model of investment, when the real interest rate increases, business fixed investment ______ because the ______ of capital increases.

Use the neoclassical model of business fixed investment to illustrate graphically how a plague that kills a large proportion of the labor force would change the rental price of capital. If other factors remained unchanged, how would this change the quantity of investment in the economy?

Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:

______ is a share of ownership in a corporation, and the ______ market is the market where these shares are traded.

Assume that the production function for an economy is given by Y = AK^aH^bL ^{1- a - b}, where H is the stock of inventories. Then the marginal product of inventories (MPH) is given by MPH = bAK^aL^{1 - a - b}H^{b - 1}. If the stock of inventories does not depreciate, the price of inventories is the same as the price of output, and taxes are ignored, then the real "cost of capital" for inventories is just the interest rate r. a. Derive an expression for the "desired equilibrium stock of inventories" (H*) as a function of $r$ and output $Y$ by equating the cost of capital to $M P H$ . (Hint: First substitute the production function into the expression for $M P H$ to get $M P H = b Y / H$ .) If $r = 0.1 , b = 0.05$ , and $Y =$ 5,000 , what is the desired stock of inventories? b. If $r$ rose to $0.12$ , how would the desired stock of inventories change?

While a rental firm is renting out its capital, the price of capital can change. What is the impact of changed capital price on the firm?

According to the neoclassical model of investment, the immediate impact of an earthquake that destroys part of the capital stock will be to:

Economic booms should stimulate investment spending because during booms:

Inventory investment will decrease when interest rates _____ and credit conditions are _____.

Give at least two reasons why a decline in stock prices might lead to a slowdown in economic activity. Be sure to connect your reasons to economic models.

Use the following to answer questions : Exhibit: Rental Price of Capital -(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in equilibrium at A with real rental price R₃/P and capital stock K₂, then holding other factors constant, an increase in the quantity of labor employed will move the real rental price of capital to:

Analogous to the role of expected profits from owning installed capital in the q theory of business fixed investment is the role played by the _____ in the model of the housing market.

The real cost of capital is the:

Net investment is the:

Assume that a car-rental company buys cars for $20,000 each and rents them out to other businesses. The company faces a nominal interest rate of 10 percent per year, and car prices are rising at 6 percent per year. If cars depreciate at 30 percent per year, what will be the company's cost of capital per car?

Compare and contrast the explanation for declining stock market prices according to: a. the efficient markets hypothesis, and b. the Keynesian "beauty contest" hypothesis.