Just as would be predicted by a forward-looking theory of investment, response to the Tax Reform Act of 1986 included
A) an increase in investment in business equipment in the first quarter of 1986 after a reduction of similar magnitude in the last quarter of 1985.
B) an increase in investment in business equipment appearing suddenly in January 1986.
C) a reduction in investment in business equipment in the first quarter of 1986 after an increase of similar magnitude in the last quarter of 1985.
D) a reduction in investment in business equipment appearing suddenly in January 1986.
E) almost no change in investment in business equipment either late in 1985 or early in 1986.

Question

Quizplus · Accepted Answer

A forward-looking theory of investment would predict that businesses would adjust their investment behavior in anticipation of future tax changes. Therefore, businesses likely increased investment in late 1985 to take advantage of the existing tax conditions before the Tax Reform Act of 1986 took effect, leading to a reduction in investment in early 1986.

Just as Would Be Predicted by a Forward-Looking Theory of Investment