| accelerator model | Asserts that investment spending is proportional to the change in output and is not affected by the cost of capital; describes the behavior of inventory investment surprisingly well.
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| business fixed investment | Annual increase in machinery, equipment, and structures
used in production.
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| capital gains | The amount an asset appreciates in value over time.
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| capital stock | The amount of capital available for use in the economy.
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| credit rationing | Limiting the amount of money that individuals can borrow at the prevailing interest rate.
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| diminishing marginal product | A characteristic of a production function whereby the
marginal product of a factor falls as the amount of the factor increases while all other factors are held constant.
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| discounted cash flow analysis | Method of determining the present value of cash to be
received in the future.
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| dynamic behavior | Behavior that depends on values of economic variables in periods other than the current period.
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| expected inflation rate | The inflation rate expected in the future by workers and
firms.
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| expected real interest rate | The real cost of borrowing, or the real return on a de-posit. re = i — Πe
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| flexible accelerator model | Asserts that firms plan their investment to close a fraction
of the gap between their actual capital stock and their desired capital stock; a result is that firms with a larger gap between their actual and desired capital stocks accumulate
capital more quickly than other firms.
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| flow of investment | The amount of spending per unit of time, usually per quarter or year, that adds to the physical stock of capital.
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| inventory cycle | Response of inventory investment to changes in sales that causes further changes in aggregate demand.
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| inventory investment | Increase in the stock of goods on hands.
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| investment | Purchase of new capital, principally by the business sector.
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| just-in-time inventory management | Inventory management strategy; firms hold inventories
for as short a time as possible by sending goods out as soon as they are produced, and ordering parts only as they are needed.
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| marginal product of capital (MPK) | Increment to output obtained by adding one unit of capital, with other factor inputs held constant.
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| opportunity cost | What is forgone to take an action. For example, one opportunity cost of attending college is the lost wages the student could be earning in a full-time job.
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| q theory of investment | Investment theory emphasizing that investment will be high
when assets are valuable relative to their reproduction cost. The ratio of asset value to cost is called q.
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| real interest rate | Return on an investment measured in dollars of constant value; roughly equal to the difference between the nominal interest rate and the rate of inflation.
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| rental (user) cost of capital | Cost of using a dollar's worth of capital for a given unit
of time, usually a year.
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| residential investment | Investment in housing.
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