Gordon_Answers11e_ch16 - Chapter 16 The Economics of...

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Chapter 16 The Economics of Investment Behavior 175 and development of the WWW all contributed to the demand for computers and components. The collapse of the investment boom is due to the temporary nature of the causes—the World Wide Web can only be invented once, the “Y2K problem” has passed, there are fewer new “killer applications” being developed, and finally, the large number of e-commerce businesses going bust flooded the market with cheap computers. However, by the years 2004–05, high-tech investment began to revive, but not like the level of 1990s. An IP Box in this section describes differences among countries in sources of funds used to finance investment and discusses the possibility that firms, like households, may face liquidity constraints that make investment spending more variable. It should be pointed out here that demand for capital and supply of savings in each country basically determines the investment GDP ratio for the country. Section 16-10 explains that investment spending is positively correlated with the interest rate and that, as the accelerator theory predicts, it moves in a pro-cyclical fashion. Section 16-11 concludes the chapter by considering the debate over activist stabilization policy. Stress that the text arrives at a compromise between the activists and those who advocate policy rules. Note that the Taylor Rule studied in Chapter 14 is based on a formula to ease monetary policy either when inflation drops below the Fed’s inflation target or when the log output ratio becomes negative. Thus, as Gordon points out, using the Taylor Rule, the Fed can formulate appropriate monetary policy if and when investment slumps, as it did in the 2000–02 period. But again the subprime mortgage crisis of 2007–08 may be a direct result of the Fed’s excessively easy monetary policy ± Changes in the Eleventh Edition The title of the chapter has changed, but the structure and content of this chapter are largely unchanged from the 10th edition. Gordon has replaced a subsection entitled “Investment and the Great Depression” with “Investment in the Great Depression and World War II”. In this changed subsection, he has added one additional figure, “The Erratic Path of Investment, 1929–50.” He has moved the Box : “Tobin’s q : Does it Explain Investment Better than the Accelerator or Neoclassical Theories?” from Section 16-7 to Section 16-6. The data in Figures 16-1, 16-3, and 16-5 have been updated through 2007. The data in the IP Box and the IP Box figure have been similarly updated. ± Answers to Questions in Textbook 1. Net investment is the amount by which the capital stock changes during a period of time, usually a year. Gross investment measures the total production of capital goods within a period of time. Gross investment cannot be negative; the minimum value is zero. On the other hand, net investment will be
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch16 - Chapter 16 The Economics of...

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