Question

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

Contraction in production capacity

Interest rates will have declined

Expansion of production capacity

The higher depreciation associated with higher rates of production

Answer 1

In a booming economy, the following reasons are likely to lead to high investment demand:

1. **Expansion of production capacity** – As demand for goods and services increases, companies are more likely to invest in expanding their production capacity to meet that demand.

2. **The higher depreciation associated with higher rates of production** – When production levels are higher, the assets used in that production (such as machinery and equipment) may wear out more quickly, leading to greater depreciation. Companies may invest in new assets to replace older, depreciating ones.

The other options, "Contraction in production capacity" and "Interest rates will have declined," do not typically align with high investment demand during a booming economy. Instead, interest rates may rise during a booming economy due to increased demand for credit, and contraction in production capacity would generally suggest decreased investment demand.