In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Question

Quizplus · Accepted Answer

In the Keynesian-cross model, a decrease in the interest rate makes borrowing cheaper, which encourages firms to invest more. This increase in planned investment spending leads to a higher equilibrium level of income as the additional spending circulates through the economy, creating more income and further spending.

In the Keynesian-Cross Model, a Decrease in the Interest Rate