Table 13-2 -Refer to Table 13-2. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, JI_P = Planned Investment. Consider a simple economy that is made up of only two sectors, households and firms, and that all investment is autonomous. Further, disposable personal income = real GDP. Suppose autonomous investment rises by $50 billion. In the short run, this will cause A) an increase in equilibrium AE of $100 billion, a shift to the right of the aggregate demand (A D) curve of $100 billion, and an increase in Y of more than $100 billion. B) an increase in autonomous AE of $50 billion, a shift to the right of the AD curve of $100 billion, and an increase in Y of less than $100 billion. C) an increase in autonomous AE of $50 billion, a shift to the right of the AD curve of $100 billion, and an increase in Y of more than $200 billion. D) an increase in equilibrium AE of $50 billion, a shift to the right of the AD curve of $300 billion, and an increase in Y of less than $300 billion.

Question

Quizplus · Accepted Answer

Autonomous investment is a component of aggregate expenditures, so an increase in autonomous investment will directly increase autonomous AE by the same amount, or $50 billion in this case. This will shift the AE curve up by the same $50 billion, but due to the multiplier effect, the equilibrium level of Y will increase by a multiple of the initial increase in investment, or less than $100 billion. Therefore, option B is the most accurate description of the short-run effects. Option A overestimates the magnitude of the increase in Y, while option C and D are unrealistic due to the large increases in Y relative to the initial increase in investment.

Table 13-2 -Refer to Table 13-2. Let Y = Real GDP, AE