In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by
A)shifting the 45- degree line.
B)shifting the consumption function.
C)shifting the saving function.
D)shifting the aggregate expenditure function.
E)causing movement along the investment function.

Question

Quizplus · Accepted Answer

In a simple macro model with a constant price level, equilibrium national income is determined by aggregate expenditure (AE), which includes consumption, investment, government spending, and net exports. A change in firms' level of desired investment will shift the aggregate expenditure function upward or downward, depending on the direction of the change. This, in turn, will affect the equilibrium level of national income, as the economy will adjust to bring AE in line with output (i.e., income). Therefore, the correct answer is D, as a change in investment will shift the aggregate expenditure function.

In a Simple Macro Model with the Price Level Assumed