-Refer to Figure 14-3.Suppose the interest rate falls from 6% to 4.8%.The quantity of investment demanded falls by (I_b - I_a) as shown in Panel (a) .At a given price level, P₁, this causes the aggregate demand curve to shift from C to D as shown in Panel (b) .What is the size of this shift?

Question

-Refer to Figure 14-3.Suppose the interest rate falls from 6% to 4.8%.The quantity of investment demanded falls by (I<sub>b</sub> - I<sub>a</sub>) as shown in Panel (a) .At a given price level, P<sub>1</sub>, this causes the aggregate demand curve to shift from C to D as shown in Panel (b) .What is the size of this shift? A) The distance CD is equal to (I<sub>b</sub> - I<sub>a</sub>) . B) The distance CD is equal to [MPC * (I<sub>b</sub> -I<sub>a</sub>) ] where MPC = marginal propensity to consume. C) The distance CD is equal to [MPI * (I<sub>b</sub> *I<sub>a</sub>) ] where MPI = marginal propensity to invest. D) The distance CD is equal to [Im *(I<sub>b</sub> - I<sub>a</sub>) ] where Im = investment spending multiplier.

Quizplus · Accepted Answer

The distance CD is equal to [Im *(I_b - I_a)] where Im is the investment spending multiplier, which amplifies the initial change in investment demand on aggregate demand.