Question

Determine and explain how each of the components of aggregate expenditures (C,I,G net exports) change in response to change in each of the following variables (whether each components increase, decrease, or remain the same as a results of the following factors with explanations). Net export= X-M

A. The real interest rate increase

B. Consumer confidence decrease.

C. Higher taxes are imposed on business profits.

D. The economics of the countries in the rest of the world go into recessions

e. The government increase its spending on infrastructure repairs.

Answer 1

As we know Aggregate expenditure is a sum of Consumption , investment , Governemnt expenditure and net exports .

AE = C + I + G + NX

1) So if the real interest rate increases , investment will fall as interest rate and investment are negatively related to each other . So due to fall in investment , Aggregate expenditure will also fall .

2) As if the consumer confidence falls , then there will be less consumption in the market due to lack of consumer confidence . So due to fall in consumer confidence , consumption will fall. Hence aggregate expenditure will also falls.

3) Consumption function is further classified into C = C + c ( Y -T ) , where T represnts the taxes , so if there are higher taxes , this will fall the consumption , as both are negatively related . Hence to rise in taxes , aggregate expenditure will fall.

4) If the country goes into recession , then there will be lack of Investments , exports as well as consumption . Hence aggregate expenditure will fall.

5) If the government increases it's spending , then Government expenditure in AE will ris e, which futher lead to rise in the aggregate expenditure .