ECON 2000 Lecture Notes - Lecture 88: Stock Market
14 May 2018
School
Department
Course
Professor
ECON 2000
Lecture 88
- Tax incentives for investment are one tool policymakers can use to
control AD
o E.g. increase in investment tax credit reduces cost of capital,
shifts investment function out and raises AD
o Reduction in tax credit reduces AD by making investment more
costly
- Sweden’s govt attempting to control AD by encouraging or
discouraging investment
- Because use of countercyclical investment subsidies could either
reduce or amplify size of economic fluctuations, their overall impact
on economic performance hard to measure
The stock market and Tobin’s q
- Stock – shares in ownership of corporations
- Stock market – market in which shares are traded
- Stock prices tend to be high when firms have many opportunities for
profitable investment since these opportunities mean higher future
income for shareholders
- Stock prices reflect incentives to invest
- James Tobin proposed that firms base investment decision on ratio
called:
o Tobin’s q = market value of installed capital / replacement cost
of installed capital
- Numerator is value of econ’s capital determined by stock market
find more resources at oneclass.com
find more resources at oneclass.com
