Consider the simplest macro model with a constant price level and demand- determined output. In such a model, an upward shift of the saving function causes equilibrium national income to
A)remain constant but consist of more consumption and less investment.
B)fall because the AE function shifts downward simultaneously.
C)remain constant but consist of less consumption and more investment.
D)remain constant because it does not affect desired aggregate expenditure.
E)rise because the AE function shifts upward simultaneously.

Question

Quizplus · Accepted Answer

An upward shift of the saving function implies that households are saving more at each level of income, which reduces consumption. This decrease in consumption leads to a downward shift in the aggregate expenditure (AE) function, causing equilibrium national income to fall.

Consider the Simplest Macro Model with a Constant Price Level