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the aggregate demand curve

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.

Solution Preview

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.

$2.19