Question

You are an economic advisor to the president. You observe a decrease in gross investment. Assume the economy was operating at the full-employment level of real GDP prior to the decrease in gross investment. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences.

Answer 1

Answer:

(1) The state of the economy is 'Accelerated depreciation'.

(2) To take advantage of accelerated depreciation, the president should implement a policy called the modified accelerated cost recovery system (MACRS), which was adopted in 1986.

Explanation:

MACRS is thought of as accelerated depreciation for two reasons: the system shortened class lives so depreciation happens more quickly, and also allows companies to deduct more of an item’s cost in the first years. By comparison, the Alternative Depreciation System, which more accurately reflects economic depreciation, and uses longer class lives and relies on a straight-line method, where an item must be depreciated equally over its lifetime.