Question

Is expansionary fiscal policy more likely to lead to a short-run increase in investment?

a. when the investment accelerator is large or when it is small? Explain.

b. when the interest sensitivity of investment is large or when it is small?

Explain.

Answer 1

Expansionary fiscal policy is more likely to lead to a short-run increase in investment when the investment accelerator is large, and when the interest sensitivity of investment is small.

Step-by-step explanation:

Expansionary fiscal policy is more likely to lead to a short-run increase in investment when the investment accelerator is large. The investment accelerator refers to the concept that an increase in aggregate demand leads to an even greater increase in investment. When the accelerator is large, an expansionary fiscal policy, which increases government spending or decreases taxes, can boost aggregate demand and encourage firms to invest more.

On the other hand, the interest sensitivity of investment refers to how sensitive investment is to changes in interest rates. Expansionary fiscal policy is more likely to lead to a short-run increase in investment when the interest sensitivity of investment is small. When investment is less sensitive to interest rates, an expansionary fiscal policy can have a direct impact on investment regardless of changes in interest rates.