Investment spending will decrease when
A)the interest rate falls.
B)the corporate income tax decreases.
C)business cash flow decreases.
D)firms become more optimistic about earning future profits.

Question

Quizplus · Accepted Answer

Investment spending is a function of the availability of funds, and cash flow is one of the primary sources of funding for businesses. If business cash flow decreases, businesses become more cautious about spending on investments, and therefore, investment spending decreases. The other options would actually increase investment spending – a fall in interest rates would make borrowing cheaper, a decrease in corporate income tax would increase profits, and an increase in optimism about future profits would also encourage investment spending.

Investment Spending Will Decrease When