Explain how the aggregate expenditure function shifts in response to changes in each of the following...
Explain how the aggregate expenditure function shifts in response to changes in each of the following variables:
a. Autonomous investment increases.
b. Stagflation occurs.
c. Higher taxes are imposed on business profits.
d. The marginal propensity to save (MPS) increases. (Here I am looking for a short run effect.)
Homework Answers
a. Autonomous investment increases.
it will shift Aggregate expenditure curve upwards. increase in autonomous expenditure leads to rise in aggregate expenditure. Investment induces rise in aggregate demand.
b. Stagflation occurs.
stagnation will shift the aggregate expenditure downward. Inflation increases expenditure and stagnation leads to fall in expenditure. Relative movement will decide the actual movement.
c. Higher taxes are imposed on business profits.
it will shift aggregate expenditure downwards. Increase in taxes discourages private investment, so the demand will fall.
d. The marginal propensity to save (MPS) increases. (Here I am looking for a short run effect.)
Increase in MPS implies that there is fall in expenditure in economy. So expenditure function curve will shift down,
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