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Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household...

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 3.

a. If household wealth falls by 5 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? by $ billion.

b. In what direction and by how much will it eventually shift? by $ billion.

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