Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is ⅔. Holding all else constant, if net exports increase by $50 billion, what happens to Jaggregate demand?
A) It shifts left by $150 billion.
B) There is a movement down along a given aggregate demand so that aggregate quantity demanded increases by $150 billion.
C) It shifts right by $150 billion
D) There is a movement down along a given aggregate demand so that aggregate quantity demanded increases by $50 billion.

Question

Quizplus · Accepted Answer

In this scenario, since net exports have increased by $50 billion, aggregate expenditure has increased by $50 billion. Since consumption has a marginal propensity to consume of ⅔, this increase in aggregate expenditure will lead to an increase in consumption of $33.33 billion (⅔*$50 billion). The remaining $16.67 billion will be spent on investment or government spending. Therefore, aggregate demand will shift right by $50 + $33.33 = $83.33 billion.

Consider a Simple Aggregate Expenditure Model Where All Components of Aggregate