Given a lag structure in the investment patterns that bring the actual capital stock in line with the desired stock, a reduction in the price of capital should mean that
A) the marginal revenue earned by new capital projects should exceed the rental price of capital for a while.
B) both gross and net investment should be positive for a while.
C) the ratio of the market value of most firms to the price of their capital stock should exceed unity for a while.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

A reduction in the price of capital makes investment in new capital projects more attractive, leading to situations where the marginal revenue from these projects exceeds their cost (A), both gross and net investment increase as firms adjust their capital stock towards the desired level (B), and the market value of firms relative to the price of their capital stock increases as the expected future returns from the cheaper capital investments are capitalized into the firms' market valuations (C).

Given a Lag Structure in the Investment Patterns That Bring