Question

If there is a decrease in autonomous consumption, how will that affect the IS, MP and AD curves? What monetary policy can be used to keep the AD curve from shifting?

Answer 1

As Aggregate expenditure basically is a sum of consumption , investment , government expenditure and net exports .

So AE = C + I + G + NX

So if consumption falls , this will lead to basically fall in autonomous consumption in which is a one of the primary part of aggregate expenditure . So due to decrease in consumption , there will be leftward in the IS in ISLM model , in other words there is a contractionary fiscal policy . Hence due to leftwards shift in IS model , Aggregate demand ( AD ) will also shift leftward in AD AS model.

So keep the AD curve to a same position , Expansionary monetary policy can be used due to which money supply will rise and AD curve will shift rightward back to it's initial position .