Question

which one is true and which one is false?

1. Investment depends both on the expected present value of future profits and on the current level of profit.
2. Tobin’s q theory of consumption is based on the notion that the stock market can provide a   good estimate of expected profitability.
3. In the pipeline theory, inventories are held as part of a production process.
4. As a result of anticipated information, stock prices follow a random walk.
5. The return on the savings account is R × ps; the return on the stock is the dividend plus the capital gains, Δps.
6. The MPK equals the user costs, uc & variations in the user costs, given the MPK schedule, are then used to explain variations in the desired capital stock, investment.
7. Wage equality is largely caused by a steady increase in the demand for high-skilled workers relative to the demand for low-skill workers.

10-Deflation spiral or deflation trap occurs at Y’ when output is still below potential, and thus inflation is still decreasing.

Answer 1

Investment depends both on the expected present value of future profits and on the current level of profit. This is true as current level of profits give the sense that the company is performing well but if there is an expectation of profits in the future then the investments will be there. If there are no future expectations, there will boe no investment. If current profits are not there, companies neither have the cash nor can they borrow and so there will be no investment.

Tobin’s q theory of consumption is based on the notion that the stock market can provide a   good estimate of expected profitability. FALSE. The theory of consumption is affected by current income and past income of a household. It bears no relation to the stock market.

In the pipeline theory, inventories are held as part of a production process. FALSE In pipeline theory, the inventories are considered to be in transit or shipping. Not in the production process.

As a result of anticipated information, stock prices follow a random walk. TRUE

Ramdom walk theory states that stock price movements are independent of each other. SO the past movement cannot be used to predict future movement. So stocks take a random path which is unpredictable and so predicting prices are futile in the long run.

The return on the savings account is R × ps; the return on the stock is the dividend plus the capital gains, Δps. TRUE The return on a stock is 2 fold with dividend and capital gains when sold. For the savings account, it is only the interest income.

The MPK equals the user costs, uc & variations in the user costs, given the MPK schedule, are then used to explain variations in the desired capital stock, investment. TRUE

Wage equality is largely caused by a steady increase in the demand for high-skilled workers relative to the demand for low-skill workers. FALSE

Skilled workers are anyway highly paid. So if the demand for skilled workers increase, their wages go up even higher while lower skilled workers remain low increasing wage inequality

Deflation spiral or deflation trap occurs at Y’ when output is still below potential, and thus inflation is still decreasing. FALSE

Deflation trap occurs when prices are decreasing. Even during decreasing inflation, there will be rise in price.

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