Which of the following sequence of events follows a decrease in the discount rate?
A) r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↑
B) r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
C) r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D) r↑ ⇒ I↑ ⇒ AE↑ ⇒ Y↑

Question

Quizplus · Accepted Answer

The decrease in the discount rate (r↓) will lead to a decrease in the cost of borrowing, which will increase investment (I↑). This increase in investment will lead to an increase in aggregate expenditure (AE↑), which will cause an increase in output (Y↑). This sequence of events is captured by choice C.

Which of the Following Sequence of Events Follows a Decrease