Question

Scenario 34-2. The following facts apply to a small, imaginary economy.• Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500.Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?A. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.
B. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
C. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect.
D. An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding-out effect.

Answer 1

A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.

Option A

Explanation:

Increasing consumption, i.e. further consumer spending, will result in increased overall demand for goods and services. Therefore, if spending decreases, i.e. if interest rates decline, demand will increase with development in technologies and increase output. And demand is going to rise.  

The rate of interest is falling, resulting in a higher real balance for the economy. This boosts aggregate demand, which improves revenue and spending efficiency. Often, the demand curve will change left if the money supply declines.

Effect of increasing public spending, Increased government budgets are likely to increase total demand (AD).