Question

Which of the following scenarios will shift the investment demand curve right? Instructions: You may select more than one answer. a. Business taxes increase. b. The expected return on capital increases. c. Firms have a lot of unused production capacity. d. Firms are planning on increasing their inventories.

Answer 1

Answer:

Any exogenous variable that leads to an increase in investment shifts the investment demand curve to the right.

Exogenous variables are all economic variables other than the real interest rate, which is endogenous to the model.

Hence, the following answers are correct:

• Expected return on capital increases - this would incentivize firms to invest more because now the expect to earn higher profits on those investments.
• Firms are planning on increasing their inventories - buying inventory is a form of investment because inventories are assets, and economic profit is expected from them. This will shift the curve to the right as well.