An increase in autonomous expenditure shifts the AE curve A) upward but leaves its slope unchanged. B) upward and the curve becomes steeper. C) downward but leaves its slope unchanged. D) downward and the curve becomes steeper. E) upward and the curve becomes less steep.
The correct answer and explanation is:
Correct Answer: A) upward but leaves its slope unchanged.
An increase in autonomous expenditure causes an upward shift in the aggregate expenditure (AE) curve while its slope remains unchanged. This is because autonomous expenditure refers to components of spending that do not vary with the level of income or output. Examples include government spending, investment, and autonomous consumption. These are expenditures that occur regardless of current income levels.
The AE curve shows the total spending in an economy at each level of income. Its slope reflects the marginal propensity to consume (MPC), which is the change in consumption resulting from a change in income. Since the MPC does not change when autonomous expenditure changes, the slope of the AE curve remains constant.
When autonomous expenditure increases, for example through higher government spending or increased investment by firms, the entire AE curve shifts upward by the amount of the increase. This shift indicates that at every level of income, total planned spending is now higher. However, because the relationship between consumption and income has not changed, the steepness or the slope of the AE curve does not change.
This upward shift has important macroeconomic implications. It increases equilibrium output and income in the short run. Through the multiplier effect, the initial increase in spending leads to successive rounds of increased consumption and income. The size of the total increase in equilibrium output depends on the size of the multiplier, which is determined by the MPC.
In summary, an increase in autonomous expenditure raises planned aggregate expenditure at all levels of income, which shifts the AE curve upward. However, since the MPC remains constant, the slope of the AE curve stays the same. Thus, the correct choice is A.