Question

1. Other things being equal, what effect will each of the following changes have on the level of Real GDP? (Increase, decrease, or no effect)
   1. A decline in the real interest rate.
   2. An overall decrease in the expected rate of return on investment
   3. A decrease in the general level of taxes
   4. An increase in the level of import spending

2. Explain what effects each scenario will have on Aggregate Demand (in which direction might the curves shift).
   1. There is widespread fear by consumers of an impending economic recession.
   2. Congress raises the minimum wage to $15 per hour
   3. There is a reduction in interest rates at each price level.
   4. There is a major increase in labor productivity due to a better educated labor force.

Answer 1

a) A decline in real interest rate means more investments and thus more GDP generated . Increases .

b) Decrease . Decrease in expected rate of return causes investment expenditure to decline , so GDP declines .

c) Increase . Decrease in general level of taxes causes consumer spending to increase which causes aggregate demand to rise , thus level of real GDP increases .

d) Increase in import spending causes net exports to decrease ( NX = Export - Import ) . So the real GDP decreases . NX is a part of GDP .