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Help Save & Exit Submit work mode: This shows what is correct or incorrect for the work you have completed so far. It does not indicate completion. Return to question Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 3. a. If household wealth falls by 5 percent because of declining house valtues, and the real Interest rate falls by 3 percentage points, in what direction and by how much ill the aggregate demand curve initially shift at each price level? Answer is complete but not entirely correct. rightward by Aggregate demand will shift b. In what direction and by how much will t eventually shift? Prex 7of9 : Next > 442 PM 11/2/2017 ^ rch

Explanation / Answer

Consumption rises by 5 billion for 1 % increase in wealth. But now consumption will fall because our wealth is falling. So 5% fall in wealth will cause consumption to fall by (5*5 = -25 billion) .

Similarly investment increase by 20 billion for 1 % fall in interest rate. If interest rate fall by 3% total change is ( 3*20 = 60 billion) .

Aggregate demand = C+I+G
SO net chandelier in AD = (-25+60 = 35 billions)

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