Suppose that the slope of the AE curve is 0.67. Then a $100 decrease in autonomous spending causes equilibrium expenditure to

Question

Quizplus · Accepted Answer

The slope of the AE curve is the marginal propensity to consume (MPC) plus the marginal propensity to save (MPS). Since the slope is 0.67, the MPC is 0.67 and the MPS is 0.33. A $100 decrease in autonomous spending causes a decrease in equilibrium expenditure equal to the initial decrease times the multiplier. The multiplier is equal to 1/(1-MPC) = 1/(1-0.67) = 3. Therefore, the equilibrium expenditure decreases by 100*3 = $300.

Suppose That the Slope of the AE Curve Is 0