Economics • Economic BasicsHard
What does the 'Tobin's q' ratio measure in investment economics?
A. The ratio of the market value of a firm's installed capital to its replacement cost.✓ Correct Answer
B. The ratio of liquid assets to total liabilities held by commercial banks.
C. The marginal propensity to consume out of permanent income.
D. The sensitivity of money demand to changes in the interest rate.
💡 Solution & Explanation
Tobin's q represents the financial ratio comparing the market value of a firm's recorded assets to the current replacement cost of those physical assets, serving as an indicator for corporate investment decisions. Measures like liquid asset ratios evaluate banking liquidity rather than corporate capital valuation. When Tobin's q exceeds unity, companies find it profitable to invest in new physical capital because the market values assets above construction costs.
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