16. If Tobin's q is greater than 1, then managers should: A) increase the capital stock of the firm. B) maintain the existing capital stock of the firm. C) allow inventories to run down. D) decrease the capital stock of the firm. prospered A) the B) k C) 22. Economis 17, For a firm facing financing constraints on its investment spending, the most importan. determinant of how much it invests is the: A) firm's expected future profitability. B) "firm's current profitability. C) interest rate. D) firm's cost of capital. 23. 18. The demand for housing is brought into equilibrium with the existing stock of housing by changes in the: A) real interest rate. B) nominal interest rate. C) relative price of housing. D) overall price level. 19. Inventory investment includes spending on: A) equipment and structures that businesses buy to use in production. B) goods that businesses put aside in storage, including materials and supplies, work in progress, and finished goods O goods that businesses produce to sell to other businesses D) capital equipment less depreciation expense. 20. The production-smoothing motive for holding inventories suggests that: A) firms hold inventories in order to produce more output. B) when sales are low, firms produce more than they sell and put the extra goods in inventories, O irms hold inventories to avoid losing sales D) when a product is only partly completed, its components are counted as part of the firm's inventory. 21. During recessions, investment spending usually decreases because: A) the real interest rate falls. B) lower profits mean more firms face financing constraints. O the purchase price of capital decreases D) corporate tax rates usually decrease Page 4