As firms' profits increase during a boom, business fixed investment will increase because:
A) the marginal product of capital falls.
B) stock-out avoidance diminishes.
C) corporate tax payments decrease.
D) the high profit levels relax financing constraints.

Question

Quizplus · Accepted Answer

When a firm's profits increase during a boom, it is likely that the firm experiences a relaxation of financing constraints. This means that the firm is less constrained by external financing limitations and can more easily finance business fixed investment. Therefore, firms are more likely to increase investment during a boom because of the high profit levels that allow for more financial flexibility.

As Firms' Profits Increase During a Boom, Business Fixed Investment