reduces spending on highway construction by Ghc10 billion. • Which way does the aggregate-demand curve shift? • Explain why the shift might be larger than Ghc10 billion. • Explain why the shift might be smaller than Ghc10 billion

reduces spending on highway construction by Ghc10 billion. • Which way does the aggregate-demand curve shift? • Explain why the shift might be larger than Ghc10 billion. • Explain why the shift might be smaller than Ghc10 billion

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 8P

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Suppose that the government reduces spending on highway
construction by Ghc10 billion.
• Which way does the aggregate-demand curve shift?
• Explain why the shift might be larger than Ghc10 billion.
• Explain why the shift might be smaller than Ghc10 billion

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Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?
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