A decrease in planned investment causes
A) output to increase.
B) output to decrease, but by a smaller amount than the decrease in investment.
C) output to decrease, but by a larger amount than the decrease in investment.
D) output to decrease by an amount equal to the decrease in investment.

Question

Quizplus · Accepted Answer

A decrease in planned investment will lead to a decrease in aggregate demand in the economy. As a result, the equilibrium level of output will decrease. The multiplier effect, which is a process where a change in autonomous spending leads to a larger change in output, will amplify this decrease in output. Therefore, the decrease in output will be larger than the initial decrease in investment.

A Decrease in Planned Investment Causes