Example of a Negative Aggregate Demand Shock from Reduced Investment
A specific example of a negative aggregate demand shock involves a reduction in investment of €15 billion. This change in autonomous spending causes the aggregate demand line to shift downwards in parallel. The initial shock then triggers a downward multiplier process, where the feedback mechanism is quantified by a marginal propensity to consume () of 0.6, meaning any fall in income causes aggregate demand to decrease by 60% of that income change.
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Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
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Example of a Negative Aggregate Demand Shock from Reduced Investment
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Learn After
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An economy experiences an autonomous reduction in investment of €15 billion. In this economy, the marginal propensity to consume is 0.6, leading to a significant total decrease in output. If an otherwise identical economy with a marginal propensity to consume of 0.4 experienced the same €15 billion reduction in investment, what would be the comparative effect on its total output?
Graphical Representation of the Downward Multiplier Process (Figure 3.15)
Mechanism of the Downward Multiplier Process