Econ 322 Week 12 Notes
Econ 322 Week 12 Notes Econ 322
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This 3 page Class Notes was uploaded by Tulsi on Friday April 8, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 21 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 04/08/16
Week 12 Tuesday, April 5, 2012:55 PM Neo-Classical Model of Business Investment -looks at marginal costs/benefits -looks at marginal utilities Production Firms -rents capital and uses it to produce goods and services for consumers Rental Firms -firm that buys capital and rents it out to production firms Production Firm's Problem Marginal Benefits -marginal product of capital (MPK) -how much more do we benefit from renting more capital -Price * MPK = marginal benefit from renting more capital Marginal Costs -R = rental rate of capital Firm will rent until R = P*MPK Rental Firm's Problem Marginal Benefits: -R = P*MPK Marginal Costs: δ*P =Kdepreciation on capital i*P K nominal interest -∆*P =Kcapital gain -Cost of Owning Capital = i*P -∆KP δ*P K K P (i - ∆P /P + δ) = C.O.C. k K K ∆P KP K π = inflation ratio Pk(i - π+ δ) = C.O.C. i - π = real interest rate Pk(r + δ) = C.O.C. -COC/P = P /P(r + δ) k Invest in more capital if MPK > P /Pkr + δ) Divest capital if MPK < P /k(r + δ) In long-run, MPK = P /Pkr + δ) Net Investment Function: In= [MPK - P /Pkr + δ)] Gross Investment Function: I = n [MPK - P kP(r + δ)] + δ*K If interest rate r increases, Inand I decrease (movement along IS curve) If MPK increases, I and I increase (shift to the right on IS curve) If Pk/P increases, Inand I decrease (shift to the left on IS curve) If δ increases, I decreases and change in I is ambiguous n Corporate Income Taxes and Investment -35% of firms "profits" -Define profits as P*MPK - (r + δ)P K -depreciation is hard to measure (δ*P ) K -use historical cost of capital for P Kproblematic due to inflation over the years) 4/7/16 I = I [MPK - P /P(r + δ)] + δ*K n k Tobin's Q Ratio: Q = If Q >1, firm should expand investment If Q <1, firm should disinvest Marginal product of capital (MPK) is major determinant of market value of firm's capital P /P and r + δ determine the replacement cost of firm's capital K Is the Stock Market "Efficient?" 1) Efficient markets hypothesis says yes -Market price of stock is rational evaluation of the company given current -Market price of stock is rational evaluation of the company given current info about company's business prospects -financial analysts follow major companies and money is traded based on their recommendations -stock prices reflect all information available about a company -stock prices will only change due to unanticipated info about a company -prices follow a "random walk" 2) Keynes's "Beauty Contest" Hypothesis -Psychological factors can drive fluctuations in stock prices -stock prices can change for reasons other than new info about a firm May 2010: "Flash Crash" -Dow Jones started falling quickly: fell 700 points in an hour -Came back up when market opened next morning -all due to computerized algorithms that automatically sell stocks when Dow starts to fall -people realized what was happening and started buying again, so Dow rose again Residential Investment -purchases of NEW homes and apartments for private use -price of existing homes positively affects supply of new homes -housing demand tends to go up when interest rate (r) is low and vice versa Inventory Investment -Price speculation -Stock-out Avoidance -insurance against unexpectedly large orders -Production smoothing -Demand might be predictable (volatile) than the ability to change supply -Showroom effect -Having a large number/variety of goods makes it easier to satisfy consumer preferences
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