Figure 3.20: Investment in New Technologies and the Dot-Com Bubble (1991–2022)

NASDAQ

Irrational Exuberance and the Dot-Com Investment Cycle

During the second half of the 1990s, the US economy experienced a widespread and rapid increase in business spending on new information and communication technologies, with investment growth rates consistently exceeding 10%. Many competing firms across various industries made these large investments in a relatively short period. Which of the following provides the most compelling economic explanation for this coordinated wave of investment?

A major new general-purpose technology is introduced, creating a significant competitive advantage for firms that adopt it first. Arrange the following events to illustrate the typical investment cycle that follows, as exemplified by the US economy from the mid-1990s to the early 2000s.

Strategic Investment Decision in the Late 1990s

Analysis of the Late 20th Century Tech Investment Cycle

Linking the Tech Boom to the Bust

The period of rapid, widespread investment in new information and communication technologies during the second half of the 1990s represented a stable, long-term acceleration in business spending that seamlessly transitioned into the new century.

The introduction of a major new technology often triggers a distinct cycle of business spending. Match each phase of this investment cycle with its correct description.

An economist observes that from the mid-1990s to 2000, business investment in a new category of information and communication technology grew by over 10% annually. However, in the few years immediately following, investment in this same technology sharply contracted. Based on this distinct pattern of rapid expansion and subsequent contraction, what is the most accurate characterization of this period?

The significant investment boom in new information and communication technologies that occurred in the US during the second half of the 1990s was marked by sustained annual growth rates of around ______ or higher, a level of expansion not repeated in the following decades.

Interpreting Concurrent Economic Trends

Causal Link Between Investor Confidence and the Dot-Com Boom-Bust Cycle

Overinvestment in the Dot-Com Bubble

Analyzing an Investment Bubble

In the late 1990s, the stock prices of technology companies soared to unprecedented heights, and simultaneously, business investment in information technology equipment grew at a record pace. Both the stock market and technology investment then crashed dramatically in the early 2000s. Which of the following statements best analyzes the relationship between these two trends?

Arrange the following events to illustrate the causal chain of an investment cycle driven by a speculative bubble, as exemplified by the dot-com era.

Investor Sentiment and Real Investment Cycles

Present Value as an Explanation for Correlated Movements in Investment and Stock Prices

Causal Link Between Investor Confidence and the Dot-Com Boom-Bust Cycle