Suppose business confidence decreases causing a reduction in investment.Based on our understanding of the model presented in Chapter 3,we know with certainty that a reduction in investment will cause

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According to the model presented in Chapter 3, a decrease in investment will lead to a decrease in aggregate demand. This decrease in aggregate demand will lead to a decrease in output and income in the short run. As income decreases, consumption will also decrease as people adjust their spending habits. Therefore, a reduction in investment will result in a reduction in consumption as the economy adjusts to the new equilibrium.choices A and B are not correct options because the multiplier is determined by the marginal propensity to consume and the marginal propensity to save, which do not change due to a decrease in business confidence. Similarly, choice C is not correct as there is no evidence to suggest that the marginal propensity to save will change as a result of a decrease in business confidence.

Suppose Business Confidence Decreases Causing a Reduction in Investment