Practise explaining how investment tax relief changes firms’ costs and returns, then separate its short-run AD effects from long-run LRAS effects.
The French Government is to offer €5 billion in tax relief for business investment.
Explain one likely economic effect of this investment tax relief.
Knowledge 1, Analysis 2, Application 1
Knowledge and Analysis
1 mark for knowledge of investment or tax relief
- Defining investment: spending on capital goods/
OR
- Defining tax relief on investment: where firms are charged a lower rate of taxation to encourage investment (1)
OR
Up to 3 marks for identifying one effect with linked expansion e.g.
- It has the effect of lowering the costs for firms who are investing (1) which increases the profit that investment can generate (1) this will encourage increased levels of investment (1)
- Tax relief will encourage higher levels of investment (1) this is a component of AD and causing AD to rise (1) this should lead to increased real output/increased price level (1)
- Tax relief reduces the tax firms will pay (1) which increases the profits that can be generated from investment (1) so firms will increase investment levels (1)
- Tax relief will encourage investment (1) which will help to improve employment (1) and thus lower unemployment (1)
- Tax relief will encourage higher levels of investment (1) which will cause a rightward shift in LRAS in the long run (1) will should lead to an increase in real output/decrease in price level (1)
Application
1 mark for applying to France e.g.
- Tax relief will lower the cost of investment for businesses by €5bn (1)