The multiplier process can occur when a decrease in investment spending
A)Increases household saving,causing consumers to buy more goods and services.
B)Reduces household incomes,causing consumers to buy fewer goods and services.
C)Increases household incomes,causing consumers to buy fewer goods and services.'
D)Reduces household incomes, causing consumers to buy more goods and services.

Question

Quizplus · Accepted Answer

A decrease in investment spending can lead to a decrease in aggregate demand, which can lead to lower levels of output and employment. This can then lead to a reduction in household incomes, which in turn can lead to a further decrease in consumer spending. This process can continue in a downward spiral, which is why it is known as the multiplier effect. Thus, B is the correct choice as it states that a decrease in investment spending reduces household incomes and causes consumers to buy fewer goods and services.

The Multiplier Process Can Occur When a Decrease in Investment