Suppose that the slope of the AE curve is 0.75. Then a $100 increase in autonomous spending means equilibrium expenditure will
A) decrease by $400.
B) increase by $400.
C) decrease by $750.
D) increase by $750.

Question

Quizplus · Accepted Answer

The slope of the AE (Aggregate Expenditure) curve is the marginal propensity to consume (MPC). If the slope is 0.75, it means that for every additional dollar of income, 75 cents will be spent. The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. Therefore, a $100 increase in autonomous spending leads to a $400 increase in equilibrium expenditure.

Suppose That the Slope of the AE Curve Is 0