Which statement best illustrates how the investment accelerator works?
A) An increase in government expenditures increases the interest rate so that the Sleepwell Hotel chain decides to build fewer new hotels.
B) An increase in government expenditures increases aggregate spending so that the Sleepwell Hotel chain finds it profitable to build more new hotels.
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by the Sleepwell Hotel chain rises.
D) An increase in government expenditures decreases the interest rate so that the Sleepwell Hotel chain decides to build more new hotels.

Question

Quizplus · Accepted Answer

The investment accelerator theory suggests that an increase in aggregate spending leads to an increase in demand for capital goods, such as hotels, which then leads to a corresponding increase in investment. Therefore, an increase in government expenditures, which also increases aggregate spending, would make it profitable for the Sleepwell Hotel chain to build more new hotels.

Which Statement Best Illustrates How the Investment Accelerator Works