Question

Some economists argue that the "animal spirits" of investors are so important in determining the level of investment in the economy that the interest rates do not matter at all and planned investment is insensitive to changes in interest rate. In such a situation, an increase in government purchases does what?

A) Increases planned investment
B) Has no effect on planned investment
C) Decreases planned investment
D) Shifts the aggregate demand curve to the right

Answer 1

An increase in government purchases would increase planned investment in the economy.

Step-by-step explanation:

An increase in government purchases would increase planned investment in the economy. Although some economists argue that interest rates do not matter in determining investment levels, an increase in government purchases would directly increase aggregate demand and stimulate investment.

This means that option A, increases planned investment, is the correct answer.