According to Tobin\'s Q theory, a rise in stock prices will: A. Increase investm

Question

According to Tobin's Q theory, a rise in stock prices will: A. Increase investment spending by pushing businesses to purchase more new capital rather than buy used capital on the stock market. B. Reduce investment spending by providing an incentive for stock ownership rather than starting new businesses. C. Increase investment spending by leading to a rise in household wealth. D. Reduce investment spending by increasing medium and long-term interest rates. E. Increase investment spending by enabling businesses to sell more stock to the public.

Explanation / Answer

Ans a) According to Tobin's Q theory , a rise in stock prices will E)Increase investment spending by enabling businesses to sell more stock to the public

When q >1 where q= value of capital assets at current price/ replacement cost of capital. The stock prices of installed capital goes up than the replacement capital, inducing more investment on installed capital by selling more stock to public.

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