Imagine a 45 -line (Keynesian cross) diagram in which the upward-sloping aggrega

Question

Imagine a 45 -line (Keynesian cross) diagram in which the upward-sloping aggregate expenditure curve intersects the 459-line at point A. The economy is currently in macroeconomic equilibrium at output level Y Suppose that investment decreases. If investment decreases, the aggregate expenditures line will The new equilibrium levels of GDP and expenditures will be O A. anywhere on the new AE line. OB. unchanged ° C. where the new AE line interesects the original AE line O D. where the now AE line intersects the 45°-line.

Explanation / Answer

(i) If investment decreases, aggregate expenditure will fall and aggregate expenditure line will shift downward.

(ii) Option (D)

New equilibrium is at intersection of new AE line and 450 line.

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