This problem uses the example in Table 16-1.
Table 16-1 Workings of the Accelerator Hypothesis of Investment for the Hypothetical Mammoth Electric Company

(a) The economy will reach an equilibrium when expected sales no longer increase. What will net investment be at that point? What will gross investment be?
(b) Assume that because of a new investment tax credit, the desired capital€“expected sales ratio changes to 5. What would net investment be in periods 1€“5?
(c) When the economy reaches its new equilibrium, what will be the ultimate effect of the tax credits on investment?

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Period Variable 1. Actual sales (Y) 2. Expected sales 0 10.0 10.0 12.0 12.0 120 120 12.0 10.0 11.0 5 1175 1187 ( 0.5Y1 0.5Y1) 3. Desired stock of electric generating stations 40.0 40.0 44.0 46.0 47.0 47.5 4. Net investment in electric 0.0 0.0 4.0 2.0 1.0 0.5 generating stations 5. Replacement investment 4.0 4.0 4.0 4.4 4.6 4.7 (D 0.10K) 6. Gross investment 4.0 4.0 8.0 6.4 5.6 5.2