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Explain in words how investment multiplier and the interest sensitivity of aggregate
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- Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.The propensity to consume tells us by how much consumption changes for a given change in disposable income. To analyze this fact, follow these steps: 5- Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. download the series A067RX1A020NBEA and PCECCA since 1999. Make sure all series are in real terms and in comparable units. Compile a single spreadsheet with these series. 6- In the spreadsheet, first compute the annual growth rate of disposable income and consumption for all years in the sample. Then compute the average for the period 2000-2017 for both variables. Finally, construct a demeaned measure of the annual growth rate of disposable income and consumption for all years in the sample. That is, let C t denote consumption in year t. Then, the growth rate of consumption between year t and t−1 is [(C t /C t−1 )−1], denoted by gC t. Now, let gC denote the average annual growth rate in consumption since 2000 . This number will stay fixed and not changing…It is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the interest rate. How will the IS curve be affected?
- If savings is greater than investment, what is the implication for aggregate demand? Explain.How does a change in the interest rate affect aggregate investment? What if firms prefer to pay for investment spending out of retained earnings? Does a change in the interest rate still affect aggregate investment?The determinants of aggregate demand explain shifts in the aggregate demand curve. How does a change in investment spending affect aggregate demand? Asap
- If a change in the real interest rate has no effect onplanned investment spending or net exports, what doesthis imply about the slope of the IS curve?Explain how an upsloping aggregate supply curve weakens the realized multiplier effect.Which equation represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model?
- If interest rates on bank loans increase, then what will happen to the planned aggregate expenditure function? What will happen to the equilibrium condition line? How will this impact the level of planned aggregate expenditures? And, how will this impact the level of real GDP?The following graph depicts a macro equilibrium. Answer the questions based on the information in the graph (d) If the multiplier were equal to 4, how much additional investment would be needed to increase aggregate demand by the amount of the initial GDP gap?(e) Illustrate the changes in autonomous investment and induced consumption that occur in(d).(f) What happens to prices when aggregate demand increases by the amount of the initial GDP gap?Which of the following would shift the IS curve to the right? a) A cut in the interest rate b) A decrease in investment c) An increase in saving d) A tax cut