Chapter 17. Investment

Homework: pp. 517-18 #1, 4 or 5

Some sections omitted from previous edition.

Link to syllabus

The volatility of investment

Other text.

Fig. 17-1, p. 498. Three Components of Investment

Fig. 17-2, p. 499. The Rental Price of Capital

Fig. 17-3, p. 503. The Investment Function

Fig. 17-4, p. 507. Stock Market and Economic Activity

“Predicted seven out of the last five recessions.”

James Tobin, 1918-2002

Born in Champaign, IllinoisTaught mostly at YaleB.A., Ph.D. at Harvard Nobel prize, 1981

Served in the navy during WWII. Worked in the CEA, Fed’s Board ofGovernors, and the Treasury Department.Prominent early Keynesian. Highlights in his academic career: Consumption function, many contributions to monetary theory, the proposed Tobin tax – which would restrict short term (speculative) capital flows, Tobit functions in econometrics, his ‘q’ theory of investment. He supported gov’t programs guaranteeing a minimal income.

Fig. 17-5, p. 511. The Determinants of

Residential Investment.

Fig. 17-6, p. 512. An Increase in Housing Demand

Figure 17-7 p. 513. Housing Market from 2000 to 2011

Case-ShillerIndex of prices

Seems to be a strong response in housing starts, to a small price change.

Sixth edition? Table 17-1, p. 475

Mortgage payments are ¼ to 1/3 of monthly income, plus tax deductions

Accelerator Example Click

Depreciation 4 capital output ratio 3

Desired Previous Gross Depreciation Net EndPeriod Income Capital Capital Investment Investment of Year

Stock Stock stock142

1 50 150 142 8 4 4 1462 52 156 146 10 4 6 1523 54 162 152 10 4 6 1584 56 168 158 10 4 6 1645 54 162 164 0 4 -4 1606 54 162 160 2 4 -2 1587 48 144 158 0 4 -4 1548 52 156 154 2 4 -2 1529 56 168 152 16 4 12 164

10 60 180 164 16 4 12 176

Fifth Edition? Fig. 17-7, p. 478. Evidence for the Accelerator.