Consider the following two events: (i) an increase in the cost of new capital goods; and (ii) a decrease in corporate income tax rates. How will these events affect the demand for investment?

Question

Quizplus · Accepted Answer

The two events have opposite effects on investment. An increase in the cost of new capital goods will make investment less attractive, therefore decreasing demand for investment. On the other hand, a decrease in corporate income tax rates will make investment more profitable, therefore increasing demand for investment. Since the effects of these events on investment are in opposite directions, it is unclear whether the overall effect will be an increase, decrease or no change in demand for investment. Hence, the correct answer is D.

Consider the Following Two Events: (I) an Increase in the Cost