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 Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place. PRICE LEVEL (Billions of dollars) 8882 889 88 100 60 10 0 012 SRAS 3 4 5 6 7 REAL GDP (Index numbers) AD 8 9 10 | | AD SRAS $5.0 billion. ?

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 Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place. PRICE LEVEL (Billions of dollars) 8882 889 88 100 60 10 0 012 SRAS 3 4 5 6 7 REAL GDP (Index numbers) AD 8 9 10 | | AD SRAS $5.0 billion. ?

MACROECONOMICS

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ISBN:9781337794985

Author:Baumol

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Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

Problem 4TY

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The following graph shows the initiall 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
PRICE LEVEL (Billions of dollars)
Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the
reduction in personal consumption has taken place.
1.00
90
18:0
2 8 8 9 88
10
0
0
1
ܢ ܡܫܢ ܘ
2
3
4
5
7
REAL GDP (Index numbers)
Ⓒ True
8
O False
SRAS
AD
8 19 10
True or False: This is an example of the paradox of thrift.
| |
AD
Since an economy's aggregate output measured by real GDP also represents the aggregate income received by the resources of production within the
economy, the decrease in aggregate demand you found equals the decrease in aggregate income. The effect of this decline in aggregate income is
an increase in total saving of $0.2 billion.
$5.0 billion.
SRAS
As personal consumption falls by $1 billion, the economy reaches a new equilibrium with an aggregate output of
The total amount of saving
increases
$5.0 billion in the short run.

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Step 1: Define Expenditure multiplier:-

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Step 2: Calculate the change in Real GDP:-

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Step 3: Calculate Aggregate income and savings:-

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