When the government subsidizes investment, such as with an investment tax credit, the subsidy often applies to only some types of investment. This question asks you to consider the effect of such a change. Suppose there are two types of investment in the economy: business investment and residential investment. The interest rate adjusts to equilibrate national saving and total investment, which is the sum of business investment and residential investment. Now suppose that the government institutes an investment tax credit only for business investment. a. How does this policy affect the demand curve for business investment

The demand curve for business investment will shift upwards to the right, signaling an increased demand for business investment.

Investors will be attracted to invest more in business investment than they will invest in residential apartments.  This is how it has worked.

Explanation:

An economy's business investment includes the investments in the machines, tools, and equipment that business entities need for the production of goods and services.  On the other hand, its residential investment refers to the expenditure made for constructing or buying new houses or dwelling apartments for the purpose of living or renting out to others. If the government grants some tax credit to business investment, it will make business more attractive to the investing public.

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