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Unformatted text preview: IV. B. Speculative Investment and the Recession of 2008-2009 Speculation was important in generating this and other recessions. We need to add some apparatus to think about speculative motives for investment. 1. Two-Sector Model Two sectors of productionone where consumption goods are produced and one where investment goods are produced. Let K P denote the price of capital or investment goods. Think of P as now some index of the prices of capital and consumption goods, as we did when discussing how the GDP Deflator was measured. 2. The Return to Capital and Speculative Investment To purchase one unit of capital an investor must pay K P dollars today. The expected return on this purchase is based on (i) dollar value of the future output that one can produce with the capital--- MPK P e (ii) the expected value of the capital itself next year--- e K P ) 1 ( - . The annual rate of return is then the growth in future dollars relative to the dollars invested minus one, (1) 1 ) 1 (-- + K e...
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- Spring '08