Economists believe that changes in investment spending are important for forecasting the business cycle because
A) increases in investment spending raise tax revenues, which allows the government to spend more.
B) investment closely reflects consumer sentiment.
C) changes in investment shows where the economy has been.
D) investment is a key determinant of economic growth.

Question

Quizplus · Accepted Answer

Investment is a key determinant of economic growth. Increases in investment spending lead to increased production, job creation, and higher incomes, which in turn drive greater consumer spending and further economic growth. Changes in investment spending can, therefore, be a leading indicator of the business cycle, as they signal changes in economic activity and growth prospects. Option A is incorrect because investment spending does not necessarily lead to immediate increases in tax revenues or government spending. Option B is incorrect because investment spending is driven by factors such as interest rates, profitability, and future growth opportunities, rather than consumer sentiment alone. Option C is incorrect because investment spending is a forward-looking indicator that reflects expectations about the future direction of the economy, rather than a reflection of past economic activity.

Economists Believe That Changes in Investment Spending Are Important for Forecasting