An increase in investment can lead to a greater increase in aggregate demand if the value of the spending multiplier is:
A)greater than 1.
B)less than 1 but more than zero.
C)negative.
D)exactly equal to zero.
E)exactly equal to one.

Question

Quizplus · Accepted Answer

If the value of the spending multiplier is greater than 1, an increase in investment spending will lead to a proportionately larger increase in aggregate demand. This is because the multiplier effect means that the initial increase in investment spending sets off a chain reaction of additional spending, as the income generated by the initial spending is used to purchase other goods and services, which in turn leads to more income and spending.

An Increase in Investment Can Lead to a Greater Increase