Economics • Economic BasicsHard
What does the 'Tobin Q' ratio measure in investment economics?
A. The ratio of the market value of installed capital to its replacement cost.✓ Correct Answer
B. The ratio of liquid assets to total liabilities in a commercial bank.
C. The sensitivity of money demand to changes in interest rates.
D. The speed of price adjustment in monopolistically competitive markets.
💡 Solution & Explanation
Tobin Q is defined mathematically as the market value of a registered company divided by the replacement cost of its total installed capital assets. When this ratio exceeds one, corporate management finds it profitable to invest in new physical capital because the market values these assets higher than their production cost. Conversely, ratios below unity discourage capital expansion. This indicator is a vital metric in monetary policy transmission and macroeconomics.
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