Suppose firms increase investment spending to replace worn-out equipment. In the short run,aggregate demand will ________ and output will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) remain unchanged; remain unchanged
E) decrease; increase

Question

Quizplus · Accepted Answer

When firms increase investment spending to replace worn-out equipment, it creates a multiplier effect in the economy. This is because when firms spend more money, the workers who produce and sell the equipment receive more income, which they in turn spend on other goods and services. This increases aggregate demand, leading to an increase in output in the short run.

Suppose Firms Increase Investment Spending to Replace Worn-Out Equipment