Question

Suppose you discover that you have a rich uncle that will give you millions in the near future. Draw the appropriate shift in autonomous spending on the graph.

Answer 1

Consumption spending = CS

Disposable income is the income after tax.

45 degree line indicates the equilibrium line.

Autonomous spending is the amount of such spending when there is no income; it fulfils basis necessities.

The spending is AE, where the autonomous consumption is “a”, before the discovery.

Once there is a discovery of getting huge amount of money very recently, today’s spending should increase and shift the AE curve to the left as AE1.

The autonomous spending should also be increased to “b”.