Other things equal, investment spending declines when
A) interest rates are lowered.
B) firms operate at full capacity.
C) profit expectations are rising.
D) capacity utilization is low.
E) the cost of capital falls.

Question

Quizplus · Accepted Answer

Investment spending is likely to decline when capacity utilization is low because there is excess capacity in the economy, indicating that firms do not need to invest in new production capacity. In this scenario, firms may also have difficulty generating sufficient cash flows to finance new investments, which further inhibits investment spending. Lower interest rates and cost of capital (choice A and E) typically stimulate investment spending, while rising profit expectations (choice C) can also encourage firms to expand their operations. Operating at full capacity (choice B) could lead to increased investment spending if firms need to expand their capacity to meet growing demand for their products or services, but it does not necessarily lead to a decline in investment spending.

Other Things Equal, Investment Spending Declines When