Explain how an increase in the real interest rate, with no changes to other factors that affect aggregate expenditure, impacts aggregate expenditure and how this interest rate increase is shown on the IS curve. How would this change if there was a negative demand shock with no change in the real interest rate? Show both situations using graphs for aggregate expenditure and the IS curve.  

Suppose the economy is initially in equilibrium at potential GDP = $100 billion and investment increases by $8 billion. If the MPC in this economy is 0.8, what will happen to real GDP? Draw an aggregate expenditure graph showing this change in investment and real GDP.