SOLVED

1) Tobin’s q is equal to ________. A) the market value of a firm times the replacement cost of installed capital. B) the market value of a firm plus the replacement cost of installed capital. C) the market value of a firm divided by the replacement cost of installed capital. D) the market value of a firm minus the replacement cost of installed capital. 2) If the market value of a firm is $6 billion and the replacement cost of installed capital is equal to $3 billion, then Tobin’s q is equal to A) 9. B) 3. C) 18. D) 2. 3) If the market value of a firm is $6 billion and Tobin’s q is equal to 2, then the replacement cost of installed capital must be ________. A) $2 billion. B) $3 billion. C) $ 9 billion. D) $18 billion. 4) A rise in stock prices leads to ________. A) an increase in income. B) an increase in Tobin’s q. C) a decrease in Tobin’s q. D) a decrease in income. 5) A decline in Tobin’s q can be caused by ________. A) a rise in the market value of a firm. B) an increase in stock prices. C) a decline in stock prices. D) a decline in the replacement cost of capital. 6) Fluctuations in Tobin’s q are ________, because ________. A) frequent and substantial; asset prices are volatile B) frequent and substantial; replacement costs are volatile C) infrequent and mild; replacement costs are relatively stable D) infrequent and mild; the marginal product of capital does not change quickly 7) When Tobin’s q is greater than one, ________. A) a unit of a firm’s stock (equity) is worth more than a unit of the firm’s capital B) a new unit of capital has more value than a new unit of stock (equity) C) installed capital is worth less than new capital D) a unit of capital that a firm owns has more value than a unit it might buy 8) According to Tobin’s q theory, the principal objective of investment is ________. A) to increase eligibility for the investment tax credit B) to expand production C) to increase the market value of the firm D) to lower the replacement cost of installed capital 9) Tobin’s q theory adds to neoclassical theory because it ________. A) illustrates the important relationship between tax rates and the incentive to labor. B) emphasizes the role played by asset price fluctuations on investment spending. C) highlights the impact of a tax increase on business investment. D) underlines the relationship between financial innovation and the financial crisis of 2007-2009. 10) 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. 11) In many economies, a substantial fraction of investment is by multinational corporations (MNCs) whose stock value is determined on global markets. Based on Tobin’s q theory, how might we expect MNC investment to affect the volatility of aggregate investment in an economy? 12) 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.