Economics • Economic BasicsHard
In macroeconomic accounting, what does 'Tobin's q' measure?
A. The ratio of the market value of a firm's installed capital to the replacement cost of that capital.✓ Correct Answer
B. The sensitivity of money demand to changes in the nominal interest rate.
C. The proportion of national income saved by households in liquid bank accounts.
D. The degree of monopoly pricing power in an imperfectly competitive industry.
💡 Solution & Explanation
Tobin's q is calculated as the market value of a firm divided by the replacement cost of its physical assets, serving as a key indicator for corporate investment decisions. A ratio above unity indicates that capital is valued more than its replacement cost, incentivizing firms to invest in new physical assets.
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