3 Explain how the aggregate expenditure function shifts in r

3. Explain how the aggregate expenditure function shifts in response to changes in each of the following variables: a. The real interest rate increases. b. Consumer confidence decreases. c. Higher taxes are imposed on business profits. d. The economies of many countries in the rest of the world go into recessions.

Solution

a. The real interest rate increases.

Expenditure drops because purchasing power of people decreases.So,aggregate expenditure function shifts to left.

b. Consumer confidence decreases.

Expenditure drops . Therefore,aggregate expenditure function shifts to left.

c. Higher taxes are imposed on business profits.

Expenditure drops because the investment spending decreases.So,aggregate expenditure function shifts to left.

d. The economies of many countries in the rest of the world go into recessions.
Expenditure drops because people speculate that their recession may hit their own countries soon.So,aggregate expenditure function shifts to left.