Tobin's q theory adds to neoclassical theory because it ________.
A)illustrates the important relationship between tax rates and the incentive to labor
B)emphasizes the role played by asset price fluctuations on investment spending
C)highlights the impact of a tax increase on business investment
D)underlines the relationship between financial innovation and the financial crisis of 2007-2009

Question

Quizplus · Accepted Answer

Tobin's q theory adds to neoclassical theory by emphasizing the role played by asset price fluctuations on investment spending. It suggests that firms' investment decisions are influenced by the gap between the market value of their assets and the replacement cost of those assets. When Tobin's q is high, indicating that the market value of assets is greater than their replacement cost, firms are more likely to invest in new capital. This adds nuance to the neoclassical theory, which focuses primarily on the relationship between interest rates and investment spending.

Tobin's Q Theory Adds to Neoclassical Theory Because It ________