With a temporary change in government purchases the model predicts investment is:

Question

Quizplus · Accepted Answer

A temporary change in government purchases will lead to a change in aggregate demand, which will in turn lead to a change in output. Investment is a component of aggregate demand, so it will also change in response to a change in government purchases. The direction of the change in investment will depend on the nature of the change in government purchases. If government purchases increase, then investment will likely increase as well. This is because an increase in government purchases will lead to an increase in aggregate demand, which will in turn lead to an increase in output. As output increases, businesses will need to invest more in order to meet the increased demand for their products. If government purchases decrease, then investment will likely decrease as well. This is because a decrease in government purchases will lead to a decrease in aggregate demand, which will in turn lead to a decrease in output. As output decreases, businesses will need to invest less in order to meet the decreased demand for their products.

With a Temporary Change in Government Purchases the Model Predicts