Question

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of a. the multiplier effect. b. the investment accelerator. c. the crowding-out effect. d. supply-side economics. e. none of the above.

Answer 1

b. the investment accelerator

Step-by-step explanation:

An investment accelerator can be defined as a positive effect that an increase in income or demand has on investment expenditures. Thus, an increase in the level of gross domestic product will cause a significant increase in the level of an investment.

Hence, when an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of the investment accelerator.