Question

Which of the following best describes the multiplier process? A. A decrease in investment spending leads to a decrease in disposable income, which causes consumers to reduce their spending.

B. A decline in net exports leads firms to reduce their investment spending, which raises interest rates and causes further reductions in investment spending.

C. A decrease in exports leads to a reduction in taxes, which causes government spending to fall.

D. An increase in interest rates leads firms to cut their investment spending. That causes expectations of future profits to worsen, which leads to even more cuts in investment spending.

Answer 1

Solution:-Option D is correct.

D. An increase in interest rates leads firms to cut their investment spending. That causes expectations of future profits to worsen, which leads to even more cuts in investment spending.

Explaination:-An increase in interest rates leads firms to cut their investment spending. That causes expectations of future profits to worsen, which leads to even more cuts in investment spending is best describes the multiplier process.You are looking to a going bad to worse situation triggered by the same cause. Cut in investment is going to cause further cut in investment.