Discussion
Consumption spending is likely to increase with:
Answer: B
Consumption depends on income and wealth. A rise in investment raises income through the multiplier, and as income increases, consumption spending increases with it. A rise in taxes lowers disposable income and so consumption, a fall in wealth reduces the wealth effect on spending, and a rise in interest rates makes saving more attractive and borrowing for consumption more costly. The answer is a rise in investment, option B. Higher taxes, a fall in wealth and higher interest rates each work to reduce the spending of households.
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