1. Explain how each of the following entries may affect AD.

Assume that the ceteris paribus clause holds

a) Households become more optimistic

b) The government decides to overhaul all infrastructure such as highways and bridges.
c) Households demand more money to make the same transactions as a result of a higher price
level and the resulting increase in the interest rate lowers their spending.
d) Personal taxation increases
e) Real wealth decreases as a result of a rising price level

2. Define the term consumption expenditures. Briefly explain three important factors that may affect
their level.