Question

Determine how the following affects the slope of the output demand curve, and explain your results: (a) The marginal propensity to consume increases. (b) The intertemporal substitution effect of the real interest rate on current consumption increases. (c) The demand for investment goods becomes less responsive to the real interest rat

Answer 1

1. Increases in mpc causes the slope to be flatter or steeper.

2. The slope of AD depends on price. High price means low aggregate demand and also output

3. The output demand curve would be low

Step-by-step explanation:

1.

An increase in mpc causes the aggregate demand to become steeper. Using the keynesian cross, as the mpc rises the multiplier would rise and any little change in the exogenous variable causes an increase in output.

2.

As consumption increases, the intertemporal substitution effect would be dependent on the real rate of interest. Increase in consumption raises prices and then causes interest rate to also rise. Consumption would fall and so would GDP.. the slope of the aggregate demand is going to depend on price. A high price means low AD and hence output.

3.

Demand for investment goods have low responsiveness to the real rate of interest. The outputs demand curves slope is going to be low. As demand rises, output would increase but by less proportion.