Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,the desired capital stock will ________ and investment spending will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

When the depreciation allowance returns to its original amount, the cost of capital increases, leading to a decrease in the desired capital stock and a subsequent decrease in investment spending.

Assume That a Temporary Tax Break Has Been Put in Place