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)fall because the AE function shifts downward simultaneously.
B)rise because the AE function shifts upward simultaneously.
C)remain constant but consist of more consumption and less investment.
D)remain constant but consist of less consumption and more investment.
E)remain constant because it does not affect desired aggregate expenditure.

Question

Quizplus · Accepted Answer

In a demand-determined output model, equilibrium national income is determined at the point where aggregate expenditure (AE) equals output (Y). An upward shift in the saving function means that consumption expenditure will decrease for any given level of income. As a result, the AE function (which is the sum of consumption and investment expenditure) shifts downward. This leads to a lower equilibrium level of national income, as the intersection of the AE function and the 45-degree line occurs at a lower level of output. Therefore, the correct answer is (A) fall because the AE function shifts downward simultaneously.

Consider the Simplest Macro Model with a Constant Price Level