Investment Drives Economic Growth

Steps:

• Identify economic output as real GDP, measured by production of goods and services.
• Recall factors influencing GDP: consumption, investment, government spending, and net exports (expenditure approach).
• Evaluate each option's impact on these components, focusing on increases.
• Determine which directly expands production capacity and aggregate demand.

Why D is correct:

• Investment increases capital stock, raising productive capacity and aggregate demand per the GDP formula (Y = C + I + G + NX), leading to higher output.

Why the others are wrong:

• A. Hyperinflation erodes purchasing power, disrupting production and reducing real output.
• B. Higher interest rates discourage borrowing for investment and consumption, lowering aggregate demand.
• C. Increased income taxes reduce disposable income, curbing consumption and overall spending.

Final answer: D