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If investment spending increases by $80 mill., the multiplier effect suggests that the Aggregate Demand curve...

If investment spending increases by $80 mill., the multiplier effect suggests that the Aggregate Demand curve will shift out by more than $80 mill., because:

Question 3 options:

when some builders see that others are building, they want to build, too.

when investments increase, the government will increase spending to support them.

an increase in investment spending will lead to income for workers who will spend part of it, so spending leads to income which leads to more spending.

an increase in investment spending will multiply because the Fed will print more money.
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Answer #1

Answer: The correct option is C.

Let a person increase investment on his business to expand. To expand the business the person needs more inputs. Suppose here the inputs are labour and some other equipments. More workers are employed and some more equipments are purchased by the person which is the investment for the person. As a result demand for products increase by both the business person and the workers who are employed. Because investment increases the income of workers which they spend according to their needs and the person spends a part of his investment to purchase the equipments which are needed to expand the business . This means that the aggregate demand increases here more than the investment amount.

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