FIGURE 23-1

-Refer to Figure 23-1.Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V.The price level is P0.Now,suppose there is an increase in desired investment and no change in the price level.Which of the following statements describes the likely macroeconomic effects?
A)The AE curve shifts up to AE2,the AD curve shifts to AD2,and a new equilibrium is established at point C,with real GDP at Y2.
B)The AE curve shifts down to AE1,the AD curve shifts to AD1,and a new equilibrium is established at point F,with real GDP at Y1.
C)The AE curve shifts to AE1,the AD curve shifts to AD1,and a new equilibrium is established at point E,with real GDP at Y2.
D)The AE curve shifts to AE2,the AD curve shifts to AD1,and a new equilibrium is established at point F,with real GDP at Y2.
E)The AE curve shifts to AE2,the AD curve shifts to AD2,and a new equilibrium is established at point E,with real GDP at Y2.

Question

FIGURE 23-1

-Refer to Figure 23-1.Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V.The price level is P0.Now,suppose there is an increase in desired investment and no change in the price level.Which of the following statements describes the likely macroeconomic effects?
A)The AE curve shifts up to AE2,the AD curve shifts to AD2,and a new equilibrium is established at point C,with real GDP at Y2. 
B)The AE curve shifts down to AE1,the AD curve shifts to AD1,and a new equilibrium is established at point F,with real GDP at Y1. 
C)The AE curve shifts to AE1,the AD curve shifts to AD1,and a new equilibrium is established at point E,with real GDP at Y2. 
D)The AE curve shifts to AE2,the AD curve shifts to AD1,and a new equilibrium is established at point F,with real GDP at Y2. 
E)The AE curve shifts to AE2,the AD curve shifts to AD2,and a new equilibrium is established at point E,with real GDP at Y2.

Quizplus · Accepted Answer

An increase in desired investment would shift the AE curve upward to AE2. However, since there is no change in the price level, the AD curve would not shift. The new equilibrium would be established where AE2 intersects the horizontal axis, which is at point E with real GDP at Y2. Therefore, choice E is the correct answer.

FIGURE 23-1 -Refer to Figure 23-1.Assume the Economy Is Initially in Equilibrium