Which of the following are reasons why a booming economy leads to high investment demand?

Question

Multiple select question.

Expansion of production capacity

The higher depreciation associated with higher rates of production

Interest rates will have declined

Contraction in production capacity

Answer 1

In a booming economy, the following reasons contribute to high investment demand:

1. Expansion of production capacity - Businesses are more likely to invest in new facilities, equipment, and technology to meet increasing consumer demand.

2. The higher depreciation associated with higher rates of production - As production increases, businesses may invest more to maintain or replace assets that are wearing out due to intensive use.

While the other options (interest rates declining and contraction in production capacity) can influence investment demand, they do not typically apply to a booming economy in the same way:

• Interest rates will have declined - While lower interest rates can encourage investment, this is not a direct result of a booming economy. Instead, interest rates may remain stable or even rise in a booming economy due to increased demand for capital.

• Contraction in production capacity - This is not a reason for high investment demand in a booming economy; rather, it might indicate economic trouble or saturation in the market.

Therefore, the correct answers are Expansion of production capacity and The higher depreciation associated with higher rates of production.