When PAE decreases an economy will move towards:
A) lower levels of equilibrium GDP.
B) higher levels of equilibrium GDP.
C) constant levels of GDP.
D) higher levels of equilibrium aggregate expenditure.

Question

Quizplus · Accepted Answer

When PAE (planned aggregate expenditure) decreases, there will be a decrease in both consumption and investment which will lead to a decrease in the aggregate demand. Since the equilibrium level of GDP is determined at the point where aggregate supply and demand meet, a decrease in aggregate demand will lead to a decrease in equilibrium GDP. Hence, the economy will move towards lower levels of equilibrium GDP.

When PAE Decreases an Economy Will Move Towards