Which of the following factors would be least likely to lead to an increase in investment demand?

Question

BlackTom AI · Accepted Answer

Investment demand increases when firms expect higher future profits or face lower costs of financing, and decreases when expected demand or profitability falls.

1. Relevant knowledge points and concepts
- Investment demand depends on expected marginal returns from capital and the user cost of capital (interest rates, taxes). 
- Factors that raise expected future sales or reduce costs of investment increase investment demand; factors that reduce demand or expected profits lower it.

2. Step-by-step reasoning
Step 1: Identify how each option affects expected returns or cost of capital.  
Step 2: Evaluate the direction of the effect on investment demand for each option.  
Step 3: Compare effects to find which is least likely to lead to an increase.

3. Intermediate evaluation of each option
- (a) An increase in business confidence → raises expected future sales and profitability → increases investment demand.  
- (b) A recession experienced by a major trading partner → reduces foreign demand for exports, lowers expected sales/profits for domestic exporters and linked industries → reduces or at best does not increase investment demand.  
- (c) A decrease in interest rates → lowers the cost of borrowing and user cost of capital → makes more projects profitable → increases investment demand.  
- (d) A reduction in business taxes → increases after-tax expected returns and cash flow → incentivizes more investment.

4. Why the correct answer is correct
A recession in a major trading partner reduces expected demand and profitability for firms that sell to that partner or operate in linked supply chains. Lower expected returns discourage new capital expenditures. Therefore this factor is least likely to increase investment demand.

5. Why other options are incorrect
- (a), (c), and (d) all raise expected after-tax returns or lower financing costs, so each clearly encourages more investment. None of these would be considered "least likely" to increase investment.

6. Conclusion
Therefore the least likely factor to lead to an increase in investment demand is b. A recession experienced by a major trading partner — confirming the provided answer (b).

Which of the following factors would be least likely to lead to an increase in investment demand?Single choice

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