Use the following to answer questions . Exhibit: Aggregate Expenditures (AE) in a Simplified Economy -(Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_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.

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Autonomous investment rising by $50 billion will increase planned investment by $50 billion, causing aggregate expenditures (AE) to increase by $50 billion. Since disposable personal income is equal to real GDP in this economy, this increase in AE will also increase real GDP by a multiple of the initial increase in autonomous investment. This multiple is equal to the reciprocal of the marginal propensity to save (MPS). In the given exhibit, the MPC is 0.75 and the MPS is 0.25, so the multiple is 1/0.25 = 4. Therefore, the increase in Y will be 4 times the increase in autonomous investment, or $200 billion. This will cause a shift to the right of the aggregate demand (AD) curve by $100 billion because of the initial increase in AE and the subsequent increase in Y. The increase in autonomous AE will also be $50 billion, but this is not the same as the increase in AE, which includes the induced consumption spending resulting from the increase in Y.

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