The document summarizes key concepts from Chapter Seventeen of a macroeconomics textbook. It discusses the three main components of investment - business fixed investment, residential investment, and inventory investment. For business fixed investment, it outlines the neoclassical model of investment and how the real interest rate, marginal product of capital, and cost of capital determine the investment function. It also discusses how Tobin's Q ratio and the stock market can influence investment decisions. Residential investment is impacted by housing demand and prices. Inventory investment is explained through the accelerator model where investment depends on changes in output. Throughout, it provides examples of how investment rises during economic booms and falls during recessions.
It shows the meaning of aggregate demand and aggregate supply. Why aggregate demand curve downward slopping? Show the Short run and Long run Aggregate demand aggregate supply.
Discussion on Fisher's Theory and it's effect on money supply.
The Fisher effect is an economic theory that describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
Visit us on www.norrenberger.com for more insight.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
It shows the meaning of aggregate demand and aggregate supply. Why aggregate demand curve downward slopping? Show the Short run and Long run Aggregate demand aggregate supply.
Discussion on Fisher's Theory and it's effect on money supply.
The Fisher effect is an economic theory that describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
Visit us on www.norrenberger.com for more insight.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
Monte Carl Simulation is a powerful and effective tool when used properly helps to navigate the expected Net Present Value NPV. This presentation helps to improve the pattern to ackowlege onthe Odessa Investment by Decision Dres.
1. Payback Period and Net Present Value[LO1, 2] If a project with .docxpaynetawnya
1. Payback Period and Net Present Value[LO1, 2] If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project’s life, what can you say about the NPV? Explain.
Internal Rate of Return[LO5] Concerning IRR:
a. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?
b. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other? Explain.
c. Despite its shortcomings in some situations, why do most financial managers use IRR along with NPV when evaluating projects? Can you think of a situation in which IRR might be a more appropriate measure to use than NPV? Explain.
14. Net Present Value[LO1] It is sometimes stated that “the net present value approach assumes reinvestment of the intermediate cash flows at the required return.” Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do the following:
a. Calculate the future value (as of the end of the project) of all the cash flows other than the initial outlay assuming they are reinvested at the required return, producing a single future value figure for the project.
b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will get the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.
17. Comparing Investment Criteria Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which investment will you choose? Why?
c. If you apply the NPV criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
5. Equivalent Annual Cost [LO4]
1. When is EAC analysis appropriate for comparing two or more projects?
2. Why is this method used?
3 .Are there any implicit assumptions required by this method that you find troubling? Explain.
6. Cash Flow and Depreciation [LO1] “When evaluating projects, we’re concerned with only the relevant incremental after tax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.
QUESTION AND PROBLEMS
1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5 ...
1. Read the information on the STREAMING VIDEO INDUSTRY and apply .docxjeremylockett77
1. Read the information on the STREAMING VIDEO INDUSTRY and apply the elements of PESTEL analysis, PORTER analysis, and STRATEGIC GROUPS analysis.
a. What are the strategically relevant components of the streaming video industry macro-environment? What is the impact of these macro factors on the growth and competitiveness of the industry.
b. Work through each of the vertical and horizontal forces in the Porter model and draw conclusions about rivalry and industry competition. Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants?
2. Read the information on the impact of the coronavirus and apply the elements of macro environmental and industry level analysis to understand how it impacts the industry forces (PORTER model) for two industries. Go through the forces model, then draw conclusion about whether this will increase or decrease competitiveness and attractiveness in this industry
3. Read the information on Tesla (attached documents). In one reading, Tesla is called either a disrupter or a sustaining innovator. This article also suggests that Tesla maybe a Blue Ocean or a Red Ocean (more traditional strategy) company. How do you interpret Tesla’s strategy? Use information from the articles, the most recent earnings presentation, and your evaluation of company financial performance in supporting your answer.
Red Ocean StrategyBlue Ocean Strategy
Compete in existing market space
Create uncontested market space.
Beat the competition
Make the competition irrelevant
Exploit existing demand
Create and capture new demand
Make the value-cost trade-off
Break the value-cost trade-off
Align the whole system of a firms activities with its strategic choice of differentiation or low cost
Align the whole system of a firms activities in pursuit of differentiation and low cost
Working Capital Management
Chapter 15
Working Capital Terminology
Working capital: current assets.
Net working capital:
current assets - current liabilities.
Net operating working capital:
current assets - (current liabilities - notes payable).
Working capital management:
controlling cash, inventories, and A/R, plus short-term liability management.
2
Working Capital Financing Policies
Aggressive: Use short-term financing to finance permanent assets.
Moderate: Match the maturity of the assets with the maturity of the financing.
Maturity Matching, or “Self-Liquidating”, approach
Conservative: Use permanent capital for permanent assets and temporary assets.
3
Cash Conversion Cycle
The cash conversion cycle focuses on the length of time between when a company makes payments to its creditors and when a company receives payments from its customers.
4
Cash Conversion Cycle
15-5
5
Cash Budget
Forecasts cash inflows, outflows, and ending cash balances.
Used to plan loans needed or fun ...
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
Yes of course, you can easily start mining pi network coin today and sell to legit pi vendors in the United States.
Here the what'sapp contact of my personal vendor.
+12349014282
#pi network #pi coins #legit #passive income
#US
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the what'sapp contact of my personal pi vendor
+12349014282
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the what'sapp contact of my personal pi merchant to trade with.
+12349014282
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the what's app number of my personal pi vendor to trade with.
+12349014282
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the what'sapp information for my personal pi vendor.
+12349014282
^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Duba...mayaclinic18
Whatsapp (+971581248768) Buy Abortion Pills In Dubai/ Qatar/Kuwait/Doha/Abu Dhabi/Alain/RAK City/Satwa/Al Ain/Abortion Pills For Sale In Qatar, Doha. Abu az Zuluf. Abu Thaylah. Ad Dawhah al Jadidah. Al Arish, Al Bida ash Sharqiyah, Al Ghanim, Al Ghuwariyah, Qatari, Abu Dhabi, Dubai.. WHATSAPP +971)581248768 Abortion Pills / Cytotec Tablets Available in Dubai, Sharjah, Abudhabi, Ajman, Alain, Fujeira, Ras Al Khaima, Umm Al Quwain., UAE, buy cytotec in Dubai– Where I can buy abortion pills in Dubai,+971582071918where I can buy abortion pills in Abudhabi +971)581248768 , where I can buy abortion pills in Sharjah,+97158207191 8where I can buy abortion pills in Ajman, +971)581248768 where I can buy abortion pills in Umm al Quwain +971)581248768 , where I can buy abortion pills in Fujairah +971)581248768 , where I can buy abortion pills in Ras al Khaimah +971)581248768 , where I can buy abortion pills in Alain+971)581248768 , where I can buy abortion pills in UAE +971)581248768 we are providing cytotec 200mg abortion pill in dubai, uae.Medication abortion offers an alternative to Surgical Abortion for women in the early weeks of pregnancy. Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman
^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Duba...
24 investment
1. Chapter Seventeen 1
A PowerPoint™Tutorial
to Accompany macroeconomics, 5th ed.
N. Gregory Mankiw
®
Investment
2. Chapter Seventeen 2
In this chapter, we’ll explain why
investment is negatively related to the
interest rate, what causes the investment
function to shift and why investment
rises during a boom and falls during a
recession.
3. Chapter Seventeen 3
• Business fixed investment includes the equipment and
structures that businesses buy to use in production.
• Residential investment includes the new housing that
people buy to live in and that landlords buy to rent out.
• Inventory investment includes those goods that businesses
put aside in storage, including materials and supplies, work
in progress, and finished goods.
4. Chapter Seventeen 4
The standard model of business fixed investment is called the
neoclassical model of investment. It examines the benefits and costs of
owning capital goods. Here are three variables that shift investment:
1) the marginal product of capital
2) the interest rate
3) tax rules
To develop the model, imagine that there are two kinds of
firms: production firms that produce goods and services
using the capital that they rent and rental firms that make
all the investments in the economy.
5. Chapter Seventeen 5
To see what variables influence the equilibrium rental price, let’s
consider the Cobb-Douglas production function as a good approximation
of how the actual economy turns capital and labor into goods and
services. The Cobb-Douglas production function is: Y = AKα
L1-α
,
where Y is output, K capital, L labor, and α a parameter measuring the
level of technology, and a a parameter between 0 and 1 that measures
capital’s share of output. The real rental price of capital adjusts to
equilibrate the demand for capital and the fixed supply.
K Capital stock, K
Realrental
price,R/P
Capital demand (MPK)
Capital supply
6. Chapter Seventeen 6
The marginal product of capital for the Cobb-Douglas production
function is MPK = αA(L/K)1-α
. Because the real rental price equals the
marginal product of capital in equilibrium,
we can write R/P = αA(L/K)1-α
. This expression identifies the variables
that determine the real rental price. It shows the following:
• the lower the stock of capital, the higher the real rental price of capital
• the greater the amount of labor employed, the higher the real rental
price of capitals
• the better the technology, the higher the real rental price of capital.
Events that reduce the capital stock, or raise employment, or improve
the technology, raise the equilibrium real rental price of capital.
7. Chapter Seventeen 7
Let’s consider the benefit and cost of owning capital.
For each period of time that a firm rents out a unit of capital, the rental
firm bears three costs:
1) Interest on their loans, which equals the purchase price of a unit of
capital PK times the interest rate, i, so i PK.
2) The cost of the loss or gain on the price of capital denoted as -∆PK .
3) Depreciation δ defined as the fraction of value lost per period
because of the wear and tear, so δ PK .
Therefore the total cost of capital = i PK - ∆PK + δPK or
= PK (i - ∆ PK/PK + δ)
Finally, we want to express the cost of capital relative to other goods in
the economy. The real cost of capital-- the cost of buying and renting
out a unit of capital measured in terms of the economy’s output is:
The Real Cost of Capital = (PK / P)(r + δ), where r is the real interest
rate and PK / Pequals the relative price of capital. To derive this
equation, we assume that the rate of increase of the price of goods in
8. Chapter Seventeen 8
Now consider a rental firm’s decision about whether to increase or
decrease its capital stock. For each unit of capital, the firm earns real
revenue R/P and bears the real cost (PK / P)(r + δ).
The real profit per unit of capital is
Profit rate = Revenue - Cost
= R/P - (PK / P)(r + δ).
Because the real rental price equals the marginal product of capital, we
can write the profit rate as
Profit rate = MPK - (PK / P)(r + δ).
The change in the capital stock, called net investment depends on the
difference between the MPK and the cost of capital. If the MPK exceeds
the cost of capital, firms will add to their capital stock. If the MPK
falls short of the cost of capital, they let their capital stock shrink, thus:
∆K = In [MPK - (PK / P)(r + δ)],
where In ( ) is the function showing how much net investment responds
to the incentive to invest.
9. Chapter Seventeen 9
We can now derive the investment function in the neoclassical model of
investment. Total spending on business fixed investment is the sum of
net investment and the replacement of depreciated capital.
The investment function is:
I = In [MPK - (PK / P)(r + δ)] + δK.I = In [MPK - (PK / P)(r + δ)] + δK.
investment
depends on
marginal product of capital
the cost of capital
amount of depreciation
This model shows why investment depends on the real interest rate.
A decrease in the real interest rate lowers the cost of capital.
10. Chapter Seventeen 10
Investment, I
Realinterest
rate,r
Notice that business fixed investment increases when the interest rate
falls-- hence the downward slope of the investment function. Also,
an outward shift in the investment function may be a result of an
increase in the marginal product of capital.
11. Chapter Seventeen 11
Finally, we consider what happens as this adjustment of the capital
stock continues over time. If the marginal product begins above the
cost of capital, the capital stock will rise and the marginal product will
fall. If the marginal product of capital begins below the cost of capital,
the capital stock will fall and the marginal product will rise.
Eventually, as the capital stock adjusts, the MPK approaches the cost
of capital. When the capital stock reaches a steady state level,
we can write:
MPK = (PK / P)(r + δ).
Thus, in the long run, the MPK equals the real cost of capital. The
speed of adjustment toward the steady state depends on how quickly
firms adjust their capital stock, which in turn depends on how costly
it is to build, deliver and install new capital.
12. Chapter Seventeen 12
The term stock refers to the shares in the ownership of corporations, and
the stock market is the market in which these shares are traded.
The Nobel-Prize-winning economist James Tobin proposed that firms
base their investment decisions on the following ratio, which is now
called Tobin’s q:
q = Market Value of Installed Capital
Replacement Cost of Installed Capital
13. Chapter Seventeen 13
The numerator of Tobin’s q is the value of the
economy’s capital as determined by the stock market.
The denominator is the price of capital as if it were
purchased today. Tobin conveyed that net investment
should depend on whether q is greater or less than 1. If
q >1, then firms can raise the value of their stock by
increasing capital, and if q < 1, the stock market values
capital at less than its replacement cost and thus, firms
will not replace their capital stock as it wears out.
Tobin’s q measures the expected future
profitability as well as the current profitability.
14. Chapter Seventeen 14
1) Higher interest rates increase the cost of capital and reduce business
fixed investment.
2) Improvements in technology and tax policies such as the corporate
income tax and investment tax credit shift the business fixed
investment function.
3) During booms higher employment increases the MPK and therefore,
increases business fixed investment.
15. Chapter Seventeen 15
We will now consider the determinants of
residential investment by looking at a simple
model of the housing market. Residential
investment includes the purchase of new
housing both by people who plan to live in
it themselves and by landlords who plan to rent
it to others.
There are two parts to the model:
1) the market for the existing stock of houses determines the
equilibrium housing price
2) the housing price determines the flow of residential investment.
16. Chapter Seventeen 16
Demand
RelativePrice
ofhousingPH/P
PH/P
The relative price of housing adjusts to equilibrate supply and demand
for the existing stock of housing capital. The relative price then
determines residential investment, the flow of new housing that
construction firms build.
Stock of housing capital, KH Flow of residential investment, IH
17. Chapter Seventeen 17
Demand
RelativePrice
ofhousingPH/P
PH/P
Stock of housing capital, KH Flow of residential investment, IH
When the demand for housing shifts, the equilibrium price of housing
changes, and this change in turn affects residential investment.
An increase in housing demand, perhaps due to a fall in the interest
rate, raises housing prices and residential investment.
Demand'
18. Chapter Seventeen 18
1) An increase in the interest rate increases the cost of borrowing
for home buyers and reduces residential housing investment.
2) An increase in population and tax policies shift the residential
housing investment function.
3) In a boom, higher income raises the demand for housing and
increases residential investment.
19. Chapter Seventeen 19
Inventory investment, the goods that businesses put aside
in storage, is at the same time negligible and of great
significance. It is one of the smallest components of
spending-- but its volatility makes it critical in the study
of economic fluctuations.
20. Chapter Seventeen 20
When sales are high, the firm produces less that it sells
and it takes the goods out of inventory. This is called
production smoothing. Holding inventory may allow
firms to operate more efficiently. Thus, we can view
inventories as a factor of production. Also, firms don’t
want to run out of goods when sales are unexpectedly
high. This is called stock-out avoidance. Lastly, if a
product is only partially completed, the components are
still counted in inventory, and are called, work in
process.
21. Chapter Seventeen 21
The accelerator model assumes that firms hold a stock of
inventories that is proportional to the firm’s level of output. Thus, if
N is the economy’s stock of inventories and Y is output, then
N = β Y
where β is a parameter reflecting how much inventory firms wish to
hold as a proportion of output. Inventory investment I is the change in
the stock of inventories ∆N. Therefore, I = ∆N = β ∆Y.
The accelerator model assumes that firms hold a stock of
inventories that is proportional to the firm’s level of output. Thus, if
N is the economy’s stock of inventories and Y is output, then
N = β Y
where β is a parameter reflecting how much inventory firms wish to
hold as a proportion of output. Inventory investment I is the change in
the stock of inventories ∆N. Therefore, I = ∆N = β ∆Y.
22. Chapter Seventeen 22
The accelerator model predicts that inventory investment is
proportional to the change in output.
• When output rises, firms want to hold a larger stock of inventory,
so inventory investment is high.
• When output falls, firms want to hold a smaller stock of inventory,
so they allow their inventory to run down, and inventory investment
is negative.
The model says that inventory investment depends on whether the
economy is speeding up or slowing down.
The accelerator model predicts that inventory investment is
proportional to the change in output.
• When output rises, firms want to hold a larger stock of inventory,
so inventory investment is high.
• When output falls, firms want to hold a smaller stock of inventory,
so they allow their inventory to run down, and inventory investment
is negative.
The model says that inventory investment depends on whether the
economy is speeding up or slowing down.
23. Chapter Seventeen 23
Like other components of investment, inventory investment depends
on the real interest rate. When a firm holds a good in inventory and
sells it tomorrow rather than selling it today, it gives up the interest it
could have earned between today and tomorrow. Thus, the real
interest rate measures the opportunity cost of holding inventories.
When the interest rate rises, holding inventories becomes more
costly, so rational firms try to reduce their stock. Therefore, an
increase in the real interest rate depresses inventory investment.
Like other components of investment, inventory investment depends
on the real interest rate. When a firm holds a good in inventory and
sells it tomorrow rather than selling it today, it gives up the interest it
could have earned between today and tomorrow. Thus, the real
interest rate measures the opportunity cost of holding inventories.
When the interest rate rises, holding inventories becomes more
costly, so rational firms try to reduce their stock. Therefore, an
increase in the real interest rate depresses inventory investment.
24. Chapter Seventeen 24
1) Higher interest rates increase the cost of holding inventories and
decrease inventory investment.
2) According to the accelerator model, the change in output shifts
the inventory investment function.
3) Higher output during a boom raises the stock of inventories firms
wish to hold, increasing inventory investment.
25. Chapter Seventeen 25
Business fixed investment
Residual investment
Inventory investment
Neoclassical model of investment
Depreciation
Real cost of capital
Net investment
Corporate income tax
Investment tax credit
Stock
Stock market
Tobin’s q
Financing constraints
Production smoothing
Inventories as a factor of
production
Stock-out avoidance
Work in process
Accelerator model