Macroeconomic Concepts and Analysis: Understanding Consumption, AggregateDemand, and Government PurchasesEACH QUESTION SHOULD BE AT LEAST 75 WORDS.1.Suppose MPC is 0.8 initially. Households then change their behavior so that the MPCfalls to0.75. What happens to aggregate expenditures? Why?Answer:When themarginal propensity to consume (MPC)falls from 0.8 to 0.75,aggregate expenditureswill decrease. Here's why:•MPC (Marginal Propensity to Consume)is the fraction of additional incomethat households spend on consumption. So, if the MPC is 0.8, households spend80% of any extra income they earn. If the MPC falls to 0.75, households nowspend only 75% of any additional income.•Effect on Aggregate Expenditures: Aggregate expenditures (the total amountspent on goods and services in the economy) depend heavily on consumption,which is tied to the MPC. When the MPC decreases, households are saving alarger portion of their income and spending less. This leads to a reduction inoverall consumption in the economy.•Why the decrease?With a lower MPC, for every additional dollar of income,there is less spending. Since consumption is a major component of aggregateexpenditures (along with investment, government spending, and net exports), areduction in consumption leads to a decrease in aggregate expenditures.In summary:As the MPC decreases from 0.8 to 0.75, households spend less of their income, whichreduces aggregate expendituresin the economy.2.How is an aggregate demand curvederived? What would cause the aggregate demandcurve to shift to the right?Answer:Derivation of the Aggregate Demand CurveThe aggregate demand (AD) curve shows the total quantity of goods and servicesdemanded in the economy at various pricelevels. It is derived from the total spending inthe economy, which is the sum of consumption (C), investment (I), government spending(G), and net exports (NX, which is exports minus imports). The AD curve illustrates howchanges in the price level impact the quantity of output demanded.The aggregate demand (AD) curve is derived as follows:Preview Mode
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