A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; IS; left
D) fall; MP; left

Question

Quizplus · Accepted Answer

A decrease in autonomous consumer expenditure (such as a decrease in consumer confidence or disposable income) leads to a decrease in aggregate demand. This shifts the IS (investment-saving) curve to the left, as the level of output at which planned saving equals planned investment is now lower. Therefore, the equilibrium level of aggregate output will fall at any given interest rate. Option A and B both suggest that the equilibrium level of aggregate output will rise, which is the opposite of what happens when there is a decrease in autonomous consumer expenditure. Option D refers to the wrong curve (the MP or marginal propensity to consume curve) and suggests an opposite shift direction, which is also incorrect.

A Decrease in Autonomous Consumer Expenditure Causes the Equilibrium Level