Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.80 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by 5 billion.

Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.80 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by 5 billion.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 5.11P

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