Which Of The Following Scenarios Will Shift The Investment Demand Curve Right

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Which Of The Following Scenarios Will Shift The Investment Demand Curve Right

ght? LO4 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.
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Answer: The two scenarios in which the investment demand curve will shift right are: the expected return on capital increases and firms are planning on increasing their inventories. The investment demand curve will shift right in only two of the scenarios: the expected return on capital increases and firms are planning on increasing their inventories. Let's go through the four scenarios one at a time to understand why only those two scenarios are associated with increases in investment demand and rightward shifts of the investment demand curve. If business taxes increase, the amount of profits that firms get to keep after paying taxes will be smaller. That will reduce their incentive to produce output because the returns to producing output will be smaller. Firms will respond by investing less. Hence, the investment demand curve will shift left (rather than right). If the expected return on capital increases, firms will want to invest more in order to capture some of those higher expected returns for themselves. Thus, investment demand would increase and the investment demand curve would shift right. If firms have a lot of unused production capacity, then they will see little point in increasing their capital stock. Thus, investment demand will fall and the investment demand curve will shift to the left (rather than to the right). Finally, if firms are planning on increasing their inventories, then we will see an increase in investment demand because, by definition, an increase in inventories is considered to be an increase in investment. Thus, the investment demand curve will shift to the right
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