Answer to Question #50099 in Finance for abdulla sabit
where r is the real interest rate, Y the GDP and q is Tobin's q.
The reason for investment being inversely related to the interest rate is simply because the interest rate is a measure of the opportunity cost of those resources. If the resources instead of financing the investment could be invested in financial assets, there is an opportunity cost of (1+r), where r is the interest rate. This implies higher investment spending with a lower interest rate. When GDP increases, the output and the capacity utilization increases. This results in an increase of capital investment.
Need a fast expert's response?Submit order
and get a quick answer at the best price
for any assignment or question with DETAILED EXPLANATIONS!