Consider Country Z's aggregate demand which comprises four sectors (i.e., households, firms, government, and foreign trade). The following equation represents the country's equilibrium output and income:

Y*= ( +()++) 0 ()+

Assume that due to rising interest rates Country Z's autonomous consumption c declines by $300m, while other things remain the same.

(i) How would this change affect output and income? Provide reasoning for your answer.

(ii) What should the government do to prevent a possible economic recession?

Answer rating: 100% (QA)

i How would this change affect output and income If autonomous consumption C declines by 300m due to ... View the full answer