Demand Curve Shifts On Real Gdp Essay

1009 Words Dec 9th, 2015 null Page
PROBLEMS

Given:
Consumer spending rises by $5 billion for every 1% rise in household wealth
If household wealth falls by 5% and real interest falls by 2% each points, aggregate demand curve shifts left due to decline of real GDP

decline in real GDP = % decline in wealth * consumer spending for every 1% change

Therefore, decline in real GDP = 5 * 5 = $25 billion

Also, given that investment spending rises by $20 billion for every 1% point fall in real interest rate. If real interest falls by 2% points, aggregate demand curve shifts right due to increase in real GDP Increase in real GDP = % point decline in interest rate * investment spending for ever1% point change

Therefore, increase in real GDP = 2 * 20 = $40 billion.

Since decrease in consumer expenditure = $25 billion and increase in investment expenditure is $40 billion, net effect is $15 billion and the aggregate demand curve shifts right.
Given that the multiplier is 4, aggregate demand curve will shift right by 15 8 4 = $60 billion

The data in B illustrates aggregate supply in the immediate short-run in North Vaudeville as price level does not have time to adjust and only output can change. Data in A illustrates aggregate supply in the short-run because in short-run price level is directly proportional to output i.e.., as price level increases real production also increases and vice versa and the data in A reflects the same. Finally, data in C illustrates aggregate supply in the…

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