Question

From mid-$2008$ to early $2009$ , the Dow Jones Industrial Average declined by more than $50\%$, while real interest rates were low or falling. What does this scenario suggest should have happened to investment?

Short answer

Low genuine loan fees decrease the expense of funding speculation and, thus, empower venture spending

Step-by-step solution

Step 1. Concept of Dow Jones industrial average 

Instead of the number of stocks in the average, the Dow Jones industrial average is the proportion of the sum of components of stock prices divided by the divisor. Tobin was the first to describe the relationship between stock market and investment, and his explanation is known as Tobin's q.

Step 2. Explanation

Low real interest rates reduce the cost of financing investment and, as a result, encourage investment spending. When the stock market falls, the market valuations of the companies fall, and Tobin's q falls as well. The decrease in Tobin's q would result in a decrease in investment spending. Because of the massive collapse in Tobin's q and the stock market, investment spending dropped dramatically at this time.