Use the following to answer questions :
Figure: Circular-Flow Model
-(Figure: Circular-Flow Model) Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in investment spending, which of the following is likely to happen?
A)an increase in the nominal GDP
B)an increase in the real GDP
C)an increase in the unemployment rate
D)an increase in the inflation rate

Question

Use the following to answer questions :
Figure: Circular-Flow Model 
-(Figure: Circular-Flow Model) Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in investment spending, which of the following is likely to happen?
A)an increase in the nominal GDP 
B)an increase in the real GDP 
C)an increase in the unemployment rate 
D)an increase in the inflation rate

Quizplus · Accepted Answer

A decrease in investment spending will cause a decrease in aggregate demand, leading to a decrease in output and therefore, an increase in the unemployment rate. Therefore, the best choice is C. A decrease in investment spending is likely to cause a contraction of the economy, not an expansion, so options A and B are incorrect. There is no reason to think an decrease in investment spending will directly influence the inflation rate, so option D is also incorrect.

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