Suppose that American consumers become less optimistic about economic conditions and reduce their total consumption (for a given level of disposable income).

a. How will this affect consumption, investment, output, interest rates, and the trade balance?

b. Describe briefly how your previous answers depend on the following:

(i) Marginal propensity to consume

(ii) Marginal propensity to consume foreign goods and services

(iii) Sensitivity of investment to changes in interest rates