If investment becomes more sensitive to changes in the interest rate, then

Question

Quizplus · Accepted Answer

When investment becomes more sensitive to changes in the interest rate, it means that the investment demand schedule has become more elastic. In such a situation, both the fiscal and monetary policy multipliers tend to be smaller. In the case of fiscal policy, a small multiplier means that the increase in government spending or reduction in taxes will have a smaller impact on aggregate demand, output, and employment. In the case of monetary policy, a smaller multiplier means that the central bank's actions to change interest rates or the money supply will have a smaller effect on investment and aggregate demand. Thus, both A and D are correct, making E the best choice.

If Investment Becomes More Sensitive to Changes in the Interest