Consider the following news headline: "Business community gloomy about the economy-investment plans axed." Assuming that aggregate output is demand-determined,what effect will this have,all other things equal,on the AE function and on equilibrium national income?
A)The AE function will shift down parallel to itself,and equilibrium national income will fall.
B)The AE function will rotate upward (become steeper),and equilibrium national income will rise.
C)The AE function will rotate downward (become flatter),and national income will fall.
D)The AE function will shift up parallel to itself,and equilibrium national income will rise.
E)There will be no change in the AE function or in equilibrium national income.

Question

Quizplus · Accepted Answer

When the business community is gloomy about the economy and investment plans are axed, it implies that businesses are cutting back on their investment spending. This will shift the aggregate expenditure (AE) function down parallel to itself, as investment is a component of AE. As a result, the equilibrium national income will fall as well since it is determined by the intersection of the AE function and the 45-degree line.

Consider the Following News Headline: "Business Community Gloomy About the Economy-Investment