Question

For each of the following shocks, identify what component(s) of U.S. planned aggregate expenditure are directly affected and in which direction.

a. Income tax rates increase:

Which component of planned aggregate expenditure is affected?

Consumption

Investment

Government spending

Net exports

None of these are affected

What happens to planned aggregate expenditure?

Increases

Decreases

Unaffected

b. China experiences an economic boom:

Which component of planned aggregate expenditure is affected?

Consumption

Investment

Government spending

Net exports

None of these are affected

What happens to planned aggregate expenditure?

Increases

Decreases

Unaffected

c. People become more optimistic regarding their future prospects:

Which component of planned aggregate expenditure is affected?

Consumption

Investment

Government spending

Net exports

None of these are affected

What happens to planned aggregate expenditure?

Increases

Decreases

Unaffected

d. Congress decides to increase funding for education:

Which component of planned aggregate expenditure is affected?

Consumption

Investment

Government spending

Net exports

None of these are affected

What happens to planned aggregate expenditure?

Increases

Decreases

Unaffected

e. German fashion designs become popular among celebrities:

Which component of planned aggregate expenditure is affected?

Consumption

Investment

Government spending

Net exports

None of these are affected

What happens to planned aggregate expenditure?

Decreases

Increases

Unaffected

Answer 1

a. Consumption. C = a +b(Y-T). increase in tax, will decrease consumption.

Planned AE also decreases due to decrease in C.

b. Net exports = Export - Import. Boom in China meansChinaa will export more and India will import more, so net exports decreases.

Planned AE also decreases due to decrease in net exports.

c. Consumption. People will now save more and decrease consumption. Thus investment also increases and hence there is no effect on PAE.

Unaffected

d. Government spending increases as part of expansionary fiscal policy.

PAE also increases as G increases.

e. Net exports. Import increases

PAE decreases.