Suppose that national income is initially at its equilibrium level when desired investment falls. We would expect:
A) a fall in national income, but not by as much as the fall in desired investment.
B) no change in national income even though desired investment spending falls.
C) an increase in national income by an amount equal to the reduction in investment spending.
D) a fall in national income by some multiple of the fall in desired investment spending.

Question

Quizplus · Accepted Answer

When desired investment falls, it leads to a decrease in overall spending in the economy. This decrease in spending results in a multiplied reduction in national income due to the multiplier effect, where initial changes in spending lead to further changes in income and consumption.

Suppose That National Income Is Initially at Its Equilibrium Level