Final answer:
Investment spending decreases as price levels rise due to the reduced profitability of investments (option B), higher interest rates, and increased borrowing costs, also known as the interest rate effect. Businesses less inclined to invest might be anticipating lower consumer spending or face restrictions that reduce investment profitability.
Step-by-step explanation:
According to the investment equation (Ip = 400 - 40P), as the overall price level in the economy increases, investment spending decreases. This situation can be explained by the fact that higher overall price levels can lead to reduced profitability for investments. As prices increase, the cost of inputs goes up, which can squeeze profit margins and diminish the attractiveness of investing.
Additionally, higher prices can lead to higher interest rates, which increase the cost of borrowing for investment. This is known as the interest rate effect. Higher borrowing costs can deter investment because they increase the opportunity cost of investing, making it less appealing. Moreover, if businesses anticipate lower consumer spending or face operational restrictions like those from a pandemic, they may expect less profitability from investments, which would also result in decreased investment expenditure.