In a certain economy, the components of aggregate spending are given by: C = 500 + 0.75(Y - T) - 500r
I = 300 - 500r
G = 400
NX = 30
T = 40
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 + 0.75(Y - 40) - 500r + 300 - 500r + 400 + 30. Collecting terms yields [1,200 -1,000r] + 0.75Y, where r is the rate of real. Thus, a one-percentage-point increase in r would decrease aggregate expenditure by 1,000 × (0.01) = 10.

In a Certain Economy, the Components of Aggregate Spending Are