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In: Economics

Explain and use graphs Describe how each of the following developments will affect the investment demand...

Explain and use graphs

Describe how each of the following developments will affect the investment demand curve.

-Tax reform reduces many of the subsidies that previously existed for purchases of

new machines.

-The Federal Reserve lowers interest rates.

-Decreased regulation makes firms believe that the future marginal revenue products of capital will be higher.

Solutions

Expert Solution

1) Tax reforms reduce the many of the subsidies that previously existed previously for purchases of new machinery. This move by the government will reduce the investment because now the new machinery is more costlier and people will invest less in the given interest. It will shift the investment curve to the left.

The investment curve moved to the left after the subsidy was reduced on new machinery.

2) If the federal reserve lowers the interest rates there will a movement along the investment curve and at a lower rate, more quantity of investment will be done.

At a lower interest rate of I', the quantity of interest has increased to Q1 from Q.

3) If the firms are more optimistic about the future profit then the investment curve will shift to the right and there will be more investment at the given interest rate.

Rahul Sunny answered 2 years ago
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