If an increase in interest rates reduces investment spending by $25m:
A) real GDP will decrease by $25 million
B) GDP will decrease by $25 million
C) GDP will decrease by more than $25 million
D) GDP will decrease by less than $25 million

Question

Quizplus · Accepted Answer

A reduction in investment spending not only affects the initial spending but also has a multiplier effect, leading to a decrease in aggregate demand and thus GDP. Therefore, the decrease in GDP will be more than the initial $25 million reduction in investment spending.

If an Increase in Interest Rates Reduces Investment Spending by $25m