Answer to Question #90602 in Macroeconomics for Deshuan Miles

Question

Explain how expectations about future sales will affect investments?

Answer 1

There are three factors which affect investments which are interest rate, business taxes, and expectations about future sales. Expectations about the future sales affects investments when capacity currently does not match forecasted increase in the quantity demanded and the company is committed in fulfilling all the orders.

When businesses are optimistic about the sales in the future, investments will increase. The aggregate demand will also increase. That, is when the firms are expecting that sales in the future are likely to increase, they will increase the amount of investment.

On the other hand, when businesses are pessimistic about the future sales, investments will decrease and the aggregate demand will also decrease. That means, when the firms expect that sales in the future will decrease, they will not invest but will instead save their money, thus reducing investments.