Use Tobin's q theory and the neoclassical theory of investment to explain how optimistic scenarios of the "information age" would cause overinvestment in computer-related capital goods, and how that overinvestment would cause a sudden reversal
What will be an ideal response?
A high expected marginal product of capital causes a high demand for "information age" capital goods. Both producers and buyers of capital goods are rewarded with rising stock market valuations, which inspires increased investment. Though productivity improves — the marginal product of capital curve shifts up — the rapid increase in the capital stock is subject to diminishing returns — the marginal product of capital declines due to the rightward movement along the curve. Increasing supply and technological progress among the capital-producing firms prevents an increase in the real price of capital, so the user cost remains low and the capital stock continues to rise. When diminishing returns to capital meets "exuberance" driven stock prices, the latter begin to fall, which softens the demand for capital goods. The market valuation of firms in the tech sector drops dramatically, because they have both excess capital and depressed demand.
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Mr. Scrooge owns assets worth $100 million. The rate of return on his assets is 5 percent per year. Mr. Scrooge's wealth is ________, and his income is ________
A) $5 million a year; $100 million B) $100 million; $5 million a year C) $100 million; $105 million D) $5 million a year; $100 million a year
Negative demand shocks have a tendency to ________ real GDP relative to potential GDP and ________ the inflation rate
A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
Transfer payments, like Social Security, are known as entitlements since ________
A) they are locked up by earlier legislation B) the individuals who receive these payments are poor and deserve our support C) the individuals who receive these payments made payments to the federal government in excess of the monies they draw from the system D) these monies tend to rise in an economic downturn
PPP-adjustment:
A. gives us a more realistic sense of differences in living standards around the world. B. allows us to see that poorer countries are not quite so poor as suggested by their nominal GDP per capita. C. gives us a realistic sense of how the living standards of the world's poorest citizens translate into dollar terms. D. All of these statements are true.