Question 1
Which of the following statements of the expected flow of future benefits is
false?
◦ Firms must rely on forecasts of expected future benefits to make sensible investment decisions.
◦ Households, business firms, and governments all evaluate the expected flow of benefits when making investment decisions.
◦ If future benefits are overestimated by the firm, the firm will under invest in capital.
◦ If future benefits are underestimated by the firm, the firm will under invest in capital.
Question 2
When a Democrat is elected as president, business leaders expect that the corporate profits tax will be increased. Most likely, this will cause business firms,
ceteris paribus, to
◦ plan to increase investment in the future to compensate for the higher tax rate.
◦ decrease investment because they would expect lower benefits from investment.
◦ not change their investment plans because higher corporate profit taxes will not change the demand for their product.
◦ increase investment because the higher corporate profits tax will increase the return on any investment.
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