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the aggregate demand curve

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Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes on foreign trade, how much will the aggregate demand curve shift and in what direction if the following events occur?

A. An autonomous increase in consumer spending of $25 billion; the marginal propensity to consume is 2/3.

B. Firms reduce investment spending by $40 billion; the marginal propensity to consume is .08.

C. The government increases its purchases of military equipment by $60 billion; the marginal propensity to consume is .06.

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A. An autonomous increase in consumer spending of $25 billion; the marginal propensity to consume is 2/3.
Let's calculate the total change in real GDP in order to see the changes in aggregate demand curve:

( Total change in real GDP = [1/ (1 - MPC)] * ∆C )
MPC= marginal propensity to consume
∆C= change in consumer spending

Total change in real GDP = [1/ (1 - MPC)] * ∆C
...

Solution Summary

This posting encompasses the aggregate demand curve.

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See Also This Related BrainMass Solution

Aggregate Demand Curve and Federal Reserve Policy

1. A change in the real money supply can result either from a change in the normal money supply through Federal Reserve policy (holding the price level constant) or from a change in the price level ( holding the normal money supply constant). The change in the nominal money supply causes a shift of the aggregate demand curve, whereas a change in the price level causes a movement along the aggregate demand curve. Explain.

2. If the U.S. economy is operating near full employment and the exchange rate increases (the dollar appreciates), Explain why the Federal reserve will be less inclined to raise interest rates.

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