Calculate the total change in aggregate demand because of an initial $300 decrease in investment spending, given that C = 150 + 0.50YD.
$1,200 decrease
$300 decrease
$150 decrease
$600 decrease
i think it is 300 but i think i am wrong
Well, well, well, looks like someone needs my hilarious assistance! Let's calculate the total change in aggregate demand!
Investment spending refers to spending on capital goods, so when it decreases by $300, it will affect other components of aggregate demand. In this case, let's see how it affects consumption (C).
The consumption function given is C = 150 + 0.50YD, where YD represents disposable income. Since investment spending is decreasing, disposable income will not be affected directly. Therefore, the change in consumption will be:
ΔC = 0.50 * ΔYD
But wait, we don't know the change in disposable income! Therefore, we cannot determine the exact change in consumption just yet. So unfortunately, I cannot provide you with a specific answer. However, we can eliminate the other options (because I'm helpful like that!):
- $1,200 decrease: Nope, we don't have enough info to conclude this amount.
- $300 decrease: Oh, how tempting! But we can't be certain without knowing the change in disposable income.
- $150 decrease: Could be right, could be wrong. The mystery continues...
- $600 decrease: Nope, we can't determine this amount without more data.
So, my friend, while I can't pinpoint the exact change in aggregate demand, I can offer you a good laugh! Remember, economics can be a tricky business. Keep studying and keep smiling!
To calculate the total change in aggregate demand due to a decrease in investment spending, we need to understand how investment spending affects aggregate demand. In the Keynesian model, aggregate demand is determined by the equation:
AD = C + I + G + (X - M)
Where:
AD = Aggregate Demand
C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports
In this case, we are given the consumption function as C = 150 + 0.50YD. YD represents disposable income.
Since investment spending (I) is decreasing by $300, we can assume that the initial value of investment spending was $300. Therefore, the initial aggregate demand (AD_initial) would be:
AD_initial = C + I + G + (X - M)
AD_initial = (150 + 0.50YD) + 300 + G + (X - M)
AD_initial = 150 + 0.50YD + 300 + G + (X - M)
AD_initial = 450 + 0.50YD + G + (X - M)
Next, since investment spending decreases by $300, the new value of investment spending (I_new) would be:
I_new = I - $300
I_new = $300 - $300
I_new = $0
Therefore, the new aggregate demand (AD_new) would be:
AD_new = C + I_new + G + (X - M)
AD_new = (150 + 0.50YD) + $0 + G + (X - M)
AD_new = 150 + 0.50YD + G + (X - M)
To calculate the total change in aggregate demand, we subtract the initial aggregate demand (AD_initial) from the new aggregate demand (AD_new):
Total change in aggregate demand = AD_new - AD_initial
Substituting the values, we get:
Total change in aggregate demand = (150 + 0.50YD + G + (X - M)) - (450 + 0.50YD + G + (X - M))
Simplifying the equation, we find that the terms "G" and "(X - M)" cancel out, and we are left with:
Total change in aggregate demand = (150 + 0.50YD) - (450 + 0.50YD)
Combining like terms, we get:
Total change in aggregate demand = 150 - 450 + 0.50YD - 0.50YD
Total change in aggregate demand = -300
Therefore, the total change in aggregate demand due to the initial $300 decrease in investment spending would be a $300 decrease. So, your answer is correct: $300 decrease.