Question

An increase in investment demand for any given level of income and interest
rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM
framework, ______ output and ______ interest rates.
A) increase; lower
B) increase; raise
C) lower; lower
D) lower; raise

Answer 1

Answer:

The correct answer is B) increase; raise

Explanation:

The increase in the amount of investment will cause the increase in real production. Moreover, an increase in the investment decisions of entrepreneurs will have a multiplier effect on the economy since it will allow an increase in the income of the factors of the investment goods industry; part of this increase will be used for consumption which will cause cascading increases in the income of other factors.