Which of the following statements is true?
A) A change in sales should have more impact on current investment if it is expected to be permanent rather than temporary.
B) Investment and consumption contribute equally to output fluctuations.
C) On a percentage basis, investment is more volatile than consumption.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

Investment is more volatile than consumption because it is more sensitive to changes in expectations and interest rates. A change in sales should have more impact on current investment if it is expected to be permanent rather than temporary because a permanent change in sales will have a greater impact on future cash flows and thus on the value of the firm. Investment and consumption both contribute to output fluctuations, but investment is more volatile and thus has a greater impact on output fluctuations.

Which of the Following Statements Is True