Homework Answers
For 1 percent increase in wealth of household, consumption increases by 7 billion. For 1 percent increase in rate of interest, investment spending falls by 20 billion. Multiplier is 5
a) Now wealth rises by 5% so consumption increases by 7 billion x 5% / 1% = 35 billion. Also interest rate increases by 1 percent so investment spending falls by 20 billion. This shows that aggregate spending / expenditure would actually increase by (35 billion - 20 billion) = 15 billion. AD initially shift by 15 billion
b) Eventually, it shifts to the right by 15 x 5 = 75 billion. (5 is the multiplier).
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