The figure shows planned aggregate expenditure and output for an economy. Suppose that the economy starts at PAE₂. What change would cause a move from PAE₂ to PAE₁? A) Consumption increases. B) Investment increases. C) Exports increase. D) Government spending decreases.

Question

Quizplus · Accepted Answer

A movement from PAE₂ to PAE₁ requires a decrease in aggregate expenditure. Government spending is a component of aggregate expenditure, so if government spending decreases, it would cause a decrease in aggregate expenditure, leading to the new equilibrium point. Therefore, the correct answer is D.

The Figure Shows Planned Aggregate Expenditure and Output for an Economy