Econ 1: Macroeconomics
Asatar Bair, abair@ccsf.edu
In-class Exercise: Investment and Aggregate Expenditures
1. In Figure 1, what is real investment when the interest
rate is 6%? _________
Figure 1
2. How would you describe the
relationship between the interest rate and real investment?
Interest rate
b
10%
a
6%
Investment
demand
curve
10
30
real investment ($ bil)
Real aggregate expenditure ($ tril)
Figure 2
AE = Y
AE2
AE1
_________________
3. Each of the following shifts
the investment demand curve.
For each, label which direction the curve shifts.
a. Fear of a recession turns investor expectations negative.
b. Low inflation gives rise to
positive investor expectations.
c. New technology creates opportunities in new markets.
d. Congress passes an increase
in business taxes.
4. (See Fig. 2) What is the real
aggregate expenditure and
real GDP when AE1 = Y?
5. What is the initial change in
aggregate expenditures that
shifts the line from AE1 to
AE2? (hint: look at the vertical
distance between the lines)
3
1.5
45
O
1
3
Real GDP ($ tril)
6
Full
employment
6. What is the change in real
GDP as aggregate expenditures goes from AE1 to AE2?
7. What is the ratio between
your answer for #6 and your
answer for #5?
Econ 1: Macroeconomics
Asatar Bair, abair@ccsf.edu
change in equilibrium output
initial change in aggregate expenditures
ΔY $1,000 bil
e.g. Spending multiplier =
=
=2
ΔG $500 bil
1
1
Spending multiplier =
=
1− MPC MPS
1
1
1
e.g.
=
=
=4
1− MPC 1− 0.75 0.25
Spending multiplier =
Fill in €
the following table:
MPC
MPS
Spending multiplier
0.5
0.4
2/
3
0.25
4/
5
0.1
0.95
0.01
4
5
8