Consider the Following Two Events: (I) an Increase in the Cost

question 2

Multiple Choice

Consider the following two events: (i) an increase in the cost of new capital goods; and (ii) a decrease in corporate income tax rates. How will these events affect the demand for investment?

• A) The demand for investment increases.
• B) The demand for investment decreases.
• C) The two events have opposite effects on investment. Therefore, the demand for investment remains the same.
• D) These events have an indeterminate effect on the demand for investment.

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Definitions:

Coupon Rate

A bond’s interest payments per dollar of par value.

Expected Rate of Inflation

An estimate of the rate at which the general level of prices for goods and services will rise over a period.

Annual Real Rate

The annual rate of return on an investment, adjusted for inflation, indicating the real increase in the value of the investment over a year.

Inflation Rate

The pace at which prices for goods and services increase, leading to a decrease in purchasing power.