Macroeconomics, 2nd Edition by Pearson

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MACROECONOMICS

affect the investment decision. The example above focused on uncertainty over

future product prices. Investment, however, is sensitive to uncertainty in vari-

ous forms: uncertainty over operating costs that determine cash flows; uncer-

tainty over future interest rates; and uncertainty over the cost and timing of

the investment itself.

This has strong policy implications. If a goal of macroeconomic policy is

to stimulate investment, stability and

CREDIBILITY

may be much more impor-

tant than tax incentives and a low-interest rate regime. Indeed, if uncertainty

over the economic environment is high, tax and related ...