Which of the following illustrates how the investment accelerator works?
A)An increase in government expenditures increases the interest rate so that the Hair City chain of hair salons decides to build fewer new salons.
B)An increase in government expenditures increases aggregate spending so that Hair City finds it profitable to build more new salons.
C)An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Hair City increases.
D)An increase in government expenditures decreases the interest rate so that Hair City decides to build more new salons.

Question

Quizplus · Accepted Answer

The investment accelerator concept suggests that an increase in aggregate demand (for example, through increased government spending) can make additional investments more profitable due to higher expected returns. In this scenario, Hair City finds it profitable to build more new salons as a result of increased aggregate spending, illustrating the investment accelerator effect.

Which of the Following Illustrates How the Investment Accelerator Works