Suppose that investment is very responsive to interest rates, so that even a small change in interest rates has a substantial effect on investment. In this case, expansionary monetary policy that results in a modest drop in interest rates will:
A)not increase output.
B)increase output only slightly.
C)increase output significantly.
D)decrease output sharply.

Question

Quizplus · Accepted Answer

Given that investment is highly responsive to interest rate changes, a modest drop in interest rates due to expansionary monetary policy would significantly increase investment, thereby significantly increasing output.

Suppose That Investment Is Very Responsive to Interest Rates, So