-Suppose the price level is fixed. If investment increases by $1 trillion and the aggregate expenditure curve is shown in the figure above, equilibrium expenditure will increase by
A) $1 trillion.
B) $3 trillion.
C) less than $1 trillion.
D) indeterminate from the information given.

Question

-Suppose the price level is fixed. If investment increases by $1 trillion and the aggregate expenditure curve is shown in the figure above, equilibrium expenditure will increase by
A) $1 trillion. 
B) $3 trillion. 
C) less than $1 trillion. 
D) indeterminate from the information given.

Quizplus · Accepted Answer

When the price level is fixed and investment increases, it shifts the aggregate expenditure curve upward. This increase in investment leads to a multiplier effect on the equilibrium expenditure. The multiplier effect typically results in a total increase in equilibrium expenditure that is greater than the initial increase in investment, assuming there are no offsetting factors. Therefore, if the initial investment increases by $1 trillion, the total increase in equilibrium expenditure could be significantly higher, such as $3 trillion, depending on the value of the multiplier.

-Suppose the Price Level Is Fixed