Question

5. Draw an appropriate graph to illustrate the effect of following (possibly counterfactual) quotes on investment: a. "In a spectacular break-through French researchers developed a new approach to nuclear fusion that allows for harnessing the atomic powers of the atom in the form of electricity in clear form of production. They already started to prepare the first commercially viable power plant." b. "To reduce spectacular government budget deficit and alleviate the burden of paying for accumulated government debt, the congress agreed to raise the contributions levied on the profits of corporations in the general tax scheme of the country."

Answer 1

a. In this case, the new research represents a revolution in case of electricity production. This is clearly a good news for the businesses as the better availability of elctricity is good for the production process. This may even reduce the cost of electricity for the businesses. This might provide the businesses with an opportunity to expand their businesses. Hence, this development will shift the investment curve of the economy in a forward direction.

b. In this case, the businesses will be discouraged to invest more. This is because since the corporations or firms are aware that their profits will be taxed more by the goverment, the incentive to invest will be lost. Therefore, the investment curve will shift backwards in the economy.