Question

Imagine a

45°​-line

​(Keynesian cross) diagram in which the​ upward-sloping aggregate expenditure curve intersects the

45°​-line

at point A. The economy is currently in macroeconomic equilibrium at output level

Yo.

Suppose that

investment increases.

If

investment increases​,

the aggregate expenditures line will

shift up

.

The new equilibrium levels of GDP and expenditures will be

A.where the new AE line intersects the

45°​-line.

B.

anywhere on the new AE line.

C.

unchanged.

D.

where the new AE line interesects the original AE line.

Answer 1

Answer : The answer is option A.

If investment increase then the aggregate expenditure increase. As a result, the aggregate expenditure curve shift up. And the new equilibrium occur where the new AE (Aggregate Expenditure) curve intersect the 45 degree line. So, the new equilibrium GDP and the expenditure will occur at that point where the 45 degree line and new AE curve intersect each other. Hence except option A other options are not correct. Therefore, option A is the correct answer.