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
Aggregate 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 an autonomous expenditure model, net exports are one of the components that are considered autonomous. Therefore, an increase in net exports by $50 billion would result in an increase in aggregate demand by an equal amount, shifting the aggregate demand curve to the right by $50 billion. The marginal propensity to consume of ⅔ indicates that consumption would increase by $33.33 billion ($50 billion x ⅔), further increasing aggregate demand. Therefore, the total increase in aggregate demand would be $50 billion + $33.33 billion = $83.33 billion.

Consider a Simple Aggregate Expenditure Model Where All Components of Aggregate