According to Tobin's Q Theory of Investment

question 1

Multiple Choice

According to Tobin's q theory of investment,

• A) when the stock market undervalues a company, the company should invest in capital expansion
• B) when a firm's bond prices rise, the firm should sell off existing assets
• C) borrowing funds by issuing bonds is always a less expensive way than issuing stock to raise funds for investment
• D) a firm should buy capital when its stock market valuation exceeds the replacement cost of capital
• E) firms should invest at a constant rate each month, a practice known as dollar-cost averaging

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Definitions:

Extensive Government Spending

A fiscal policy where the government spends significant resources on public services, programs, and projects to stimulate economic growth or achieve social objectives.

Externality Problems

Issues arising from the impact of one person's actions on the well-being of a bystander, which are not reflected in market prices.

Marginal Benefit

The extra pleasure or advantage obtained from acquiring or generating an additional unit of a product or service.

Tax Cost

The economic expense associated with the imposition of taxes, including the burden on consumers or producers.