Which of the following would occur if, all else constant, the level of autonomou

Question

Which of the following would occur if, all else constant, the level of autonomous consumption decreases in the economy? Assume a marginal propensity to consume between 0 and 1. The goods market will be in equilibrium at a higher level of income. The aggregate demand curve will shift upward. The reduction in autonomous consumption will not trigger successive indirect reductions in production and spending. The total decrease in production will be greater than the initial decrease in autonomous consumption.

Explanation / Answer

3rd option is correct.

When there is a decrease in disposable income, successive reductions in production or spending takes place through the marginal propensity to consume. But a decrease in autonomous consumption cannot trigger such successive spending/output reductions, since it will be only an one-off reduction.

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