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Investment Spending and GDP Change
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If an increase in investment spending leads to a rise in real GDP, which of the following is the most likely underlying cause of this relationship?

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Choose the Best Answer

A

Higher investment spending increases aggregate demand, leading to higher output.

B

Increased consumer savings directly boost GDP without affecting investment.

C

Government spending is the primary driver of GDP changes, not investment.

D

Investment spending only affects GDP when interest rates are low.

Understanding the Answer

Let's break down why this is correct

Answer

When people or businesses invest more money, such as by buying new machines or building new factories, this spending creates jobs and increases production. As companies expand and hire more workers, these workers earn wages, which they then spend on goods and services. This increase in spending by both businesses and consumers leads to a rise in real GDP, which measures the overall economic output of a country. For example, if a car manufacturer invests in a new assembly line, it might hire 100 new workers, who will then spend their earnings in local shops and restaurants, further boosting the economy. Thus, the initial investment spending starts a chain reaction that raises the overall economic activity represented by GDP.

Detailed Explanation

When businesses invest more, they buy new equipment and hire more workers. Other options are incorrect because Some might think that saving money alone can boost the economy; It's a common belief that only government spending matters for the economy.

Key Concepts

Investment Spending
GDP Change
Multiplier Effect
Topic

Investment Spending and GDP Change

Difficulty

medium level question

Cognitive Level

understand

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