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 increase in the cost of new capital goods would likely decrease the demand for investment because it becomes more expensive for firms to invest in new capital. On the other hand, a decrease in corporate income tax rates would likely increase the demand for investment by increasing after-tax profits and making investment more attractive. These two effects work in opposite directions, making the overall impact on the demand for investment indeterminate without more information about the relative magnitudes of the changes.

Consider the Following Two Events: (I)