a Creait-Chapter 15- 20 Points 1 Consider the effect that corporate profit taxes

Question

a Creait-Chapter 15- 20 Points 1 Consider the effect that corporate profit taxes have on investing. Look at the figure below. Suppose that the r line is the rate of return a firm earns lower the after-tax returns). taxes. If corporate profit taxes are imposed, the firm's after-ta× returns will be lower (and the higher the tax rate, the Investment Spending 56 ints 20 r 16 F 14 12 10 F Print 10 20 30 40 50 60 70 80 90 100 R&D; expenditures (millions of dollars) a. If the firm's decisions about R&D; spending are based on comparing after-tax returns with the interest-rate cost of funds, the increased corporate profit taxes will

Explanation / Answer

Qa)

Answer: 1st option

If there is increasing tax, after-tax rate would decrease. It shifts the curve to the left because of decreasing investments.

Qb)

Answer: 3rd option

Increasing tax, which is corporate, doesn’t create impact on aggregate consumption. Aggregate consumption depends on income tax.

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