In a certain economy, the components of aggregate spending are given by: C = 500 + 0.8(Y - T) - 300r
I = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, what would be the impact on aggregate expenditures of a one-percentage-point increase in the real interest rate (r)?

Question

Quizplus · Accepted Answer

Recall that aggregate expenditure = C + I + G + NX. Substituting into the equation gives 500 + 0.8(Y - 150) - 300r + 200 - 400r + 200 + 10. Collecting terms yields [790 -700r] + 0.8Y, where r is the rate of real. Thus, a one-percentage-point increase in r would decrease aggregate expenditure by 700 × (0.01) = 7.

In a Certain Economy, the Components of Aggregate Spending Are