## Step 1: Calculate the Absolute Change in Investment Investment spending at 5% interest rate = $520 billion Investment spending at 7% interest rate = $460 billion **Absolute change in investment:** \[ \$520\ \text{billion} - \$460\ \text{billion} = \$60\ \text{billion} \] **Explanation:** The absolute change in investment is simply the difference between the two investment levels as the interest rate rises. --- ## Step 2: Estimate the Effect on Aggregate Demand Assume a simple Keynesian multiplier model. If the marginal propensity to consume (MPC) is not given, use a typical value, such as .8. **Multiplier formula:** \[ \text{Multiplier} = \frac{1}{1 - MPC} \] If MPC = .8, \[ \text{Multiplier} = \frac{1}{1 - .8} = 5 \] **Change in Aggregate Demand:** \[ \text{Change in Investment} \times \text{Multiplier} = \$60\ \text{billion} \times 5 = \$300\ \text{billion} \] **Explanation:** A $60 billion decrease in investment reduces aggregate demand by $300 billion, assuming an MPC of .8 and a multiplier of 5. --- ## Final Answer - **Absolute change in investment:** $60 billion decrease. - **Estimated effect on aggregate demand:** $300 billion decrease (assuming MPC = .8).