Table 13-2 -Refer to Table 13-2. 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.

Question

Quizplus · Accepted Answer

Autonomous investment is a component of aggregate expenditure, so an increase in autonomous investment of $50 billion will directly increase AE by $50 billion. This will cause a shift to the right of the AD curve by $100 billion (multiplier effect). However, in the short run, the increase in real GDP will be less than $100 billion due to the economy's equilibrium point being below potential GDP.

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