3) What factors on the Consumer Spending side of the Y = C+G+I +NX shifts aggregate demand to the left?

4) What factors on the Govenment Spending side of the Y=C+G+I + NX shifts aggregate demand to the right?

5) What factors on the Investment Spending side of the Y= C+G+I +NX shifts aggregate demand to the left?

6) Using NX in the Y = C + G + 1 + NX, what needs to be done if there is Demand-Pull inflation to get back to equilibrium?

Solutions

Expert Solution

3) Consumption expenditure = Autonomous consumption + MPC x (Y - T)

Y is the income and T is the taxes

Increase in taxes decreases consumption expenditure. This reduces C component of AD and thus shifts AD leftwards.

4) Increase in government spending increases G component of AD and thus shifts AD curve rightwards.

5) Investment = Autonomous investment - b x i

"i" is the interest rate

Increase in interest rate decreases investment spending of consumer and thus I component of AD decreases which shifts AD curve leftwards.

6) Demand pull inflation increases aggregate demand more than aggregate supply. So, AD should be reduced to get back the equilibrium. Increase in imports decreases NX and thus overcome the Demand-Pull inflation to get back to equilibrium.

Rahul Sunny answered 1 year ago

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