A. A recent stock market boom has increased household wealth by $20 billion, which increases consumption by $12 billion, and the marginal propensity to consume in the
economy is equal to 0.6.
In the new equilibrium, aggregate expenditure will increase
by $
billion
b. Rising interest rates reduce domestic consumption by $4 billion and reduce investment by
$7 billion, and the marginal propensity to consume in the economy is equal to 0.7.
In the new equilibrium, aggregate expenditure will decrease
by $
billion.