Most stocks remain weak and investors seem pessimistic about other earnings as the economy remains fragile. Use the aggregate expenditure diagram to describe the following.

a) Suppose the weak stock market makes households to cut back on purchases of consumption goods. How would this affect equilibrium GDP

b) How could government use spending or taxes (separately, not together) to counteract the effect on equilibrium GDP in (a)? Does a given change in government spending (say$1billion) have the effect on GDP as the equivalent change in taxes? Why or why not?

c) Supplose the government does not want the budget surplus to change. How could the government use spending and taxes (together) to counteract the effect on GDP in (a)? describe

d) How would a fall in marginal propensity to consume (MPC) affect the slope of the aggregate expenditure function? How would the spending multiplier be affected

e) Why is the real-world spending multiplier smaller than the simple multiplier discussed in this problem?