A negative shock reduces capital investments because:

Question

Quizplus · Accepted Answer

A negative shock refers to an unexpected event that reduces the expected profitability or demand for a business. In such a situation, capital investments become riskier, and the decision to invest becomes daunting. Capital investments are often associated with large upfront expenses that cannot be easily recovered if the investment does not end up being profitable. This concept is described as sunk costs, and it means that if an investment goes wrong, investors cannot recover the money that they have already spent. As a result, a negative shock would reduce capital investments because investors will be hesitant to commit large sums of money to investments that pose significant risks.

A Negative Shock Reduces Capital Investments Because