Suppose that consumer spending initially rises by $5 billion for every 1 percent

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 economys multiplier is 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion.

Explanation / Answer

the household wealth falls and house prices decline, the AD curve should shift to the left and if the interest rates fall the AD curve should hypothetically shift to the right although this doesn't always happen due to economic uncertainity.

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