Author Question: Over the past two decades, the saving rate in China has been approximately ________. A) 17 B) 80 ... (Read 21 times)

ericka1 · **on:** Jun 30, 2018

Over the past two decades, the saving rate in China has been approximately ________.

A) 17
B) 80
C) 40
D) 5

Question 2

Use Tobin's q theory and the neoclassical theory of investment to explain why investment rises so rapidly once the economy has passed the trough of a business cycle.

What will be an ideal response?

cam1229 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

As an economy enters the recovery phase of the business cycle, investment is encouraged by a low real interest rate, relatively low real price of capital, relatively low inventories, and improving expectations of future output that raise the desired level of the capital stock. The increased expected marginal product of capital raises the market value of firms, which inspires more investment and boosts the expected price of capital, lowering the user cost. So long as new capital is seen as augmenting the value of the firm, investment is self-propelling.