Homework Clinic
Social Science Clinic => Economics => Macroeconomics => Topic started by: fahad on Jun 30, 2018
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What is Tobin's q? How tight is the relation between Tobin's q and investment?
What will be an ideal response?
Question 2
With a nominal interest rate of 10, the present discounted value of 200 to be received in one year is
A) 90.91.
B) 165.29.
C) 181.82.
D) 190.00.
E) 220.00.
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Answer to Question 1
Tobin constructed a variable corresponding to the value of a unit of capital in place relative to its purchase price. This variable is called Tobin's q. The data shows that it appears that there is a strong relation between investment this year and Tobin's q last year. Put another way, movements in investment this year are more closely associated with movements in the stock market last year. This is because investment decisions and stock market prices depend very much on the same factors-expected future profits and expected future interest rates.
Answer to Question 2
C