Consider a simple economy that is made up of three sectors: households, firms, and government. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. In this case, the slope of the aggregate expenditures curve is A) 1. B) infinity (since the AE curve is horizontal). C) equal to the marginal propensity to consume. D) the value of the multiplier.

Question

Quizplus · Accepted Answer

The slope of the aggregate expenditures curve is equal to the marginal propensity to consume (MPC), which represents the change in consumption for every unit change in income. Therefore, choice C is the correct answer. The slope of the AE curve is not necessarily 1 or infinity (choices A and B, respectively) and is also not always equal to the value of the multiplier (choice D) as it depends on the specific values of MPC and the autonomous expenditures.

Consider a Simple Economy That Is Made Up of Three