Questions #2,3,4,5 t and Long Run 2. What effect does an increase in the interes

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Questions #2,3,4,5 t and Long Run 2. What effect does an increase in the interest rate ha sumption? What effect does an increase in current con wealth have on current consumption? [LO 11.1 3. How does a change in expected profitability affect aggregate investment? How does a change in business taxes affect aggregate investment? [LO 11.2] 4. How does a change in the interest rate affect aggregate investment? What if firms prefer to pay for investment spending out of retained earnings? Does a change in the interest rate still affect aggregate investment? LO 11.2] 5. Does the amount of government spending in an e omy respond directly to changes in aggregate inc wealth, or interest rates? Does it respond indire changes in these variables? [LO 11.3] 6, What

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Ans 3)

Increase in interest rate increases the opportunity cost for money held by consumer which in tern tries to save money hence saving pattern changes which reduces some level of consumption that MPS increaes which automatically decreases MPC because MPC+MPS=1

Wealth effect on consumption is well explained by the fact of decreasing absolute risk aversion hence wealth increases increase the consumption

Hence wealth has postive reltion with current consumption

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