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MACROECONOMICS
access resale markets, it can only allow the excess capital stock to depreciate
through time. The firm can always adjust its capital stock upward, but it can-
not adjust it downward by disinvesting (
I
t
0). Irreversibility usually arises
because capital is industry or
FIRM
SPECIFIC
. Industry-level uncertainty tends to
affect all firms simultaneously. As a result, if a firm wishes to sell excess capital
in response to an adverse-demand shock, it may not be able to find buyers will-
ing to purchase it. For example, a steel plant is industry specific in the sense
that if the demand for steel falls, the market ...
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