4. In what direction will each of the following occurrences shift the investment demand curve, other...

4. In what direction will each of the following occurrences shift the investment demand curve, other things equal: (answer in your own words)

a. An increase in unused production capacity occurs.

b. Business taxes decline.

c. The costs of acquiring equipment fall.

d. Widespread pessimism arises about future business conditions and sales revenues.

e. A major new technological breakthrough creates prospects for a wide range of profitable new products.

Expert Solution

a. An increase in unused production capacity occurs.

If a major proportion of the production capacity is unused, then investment will be demanded less at every interest rate because the expected profits are low (along with rate of return). Investment demand curve shifts to the left.

b. Business taxes decline.

More business profits are now available for reinvestment so investment demand is higher. Investment demand curve shifts to the right

c. The costs of acquiring equipment fall.

It will encourage more capital equipment so investment will rise. Investment demand curve shifts to the right

d. Widespread pessimism arises about future business conditions and sales revenues.

Since profitability of future investment is low, investors will demand less funds for investment. Investment demand curve shifts to the left.

e. A major new technological breakthrough creates prospects for a wide range of profitable new products

Since profitability of future investment is now higher, investors will demand more funds. Investment demand curve shifts to the right.

Rahul Sunny answered 2 years ago

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