In reality, autonomous consumption, which represents the subsistence consumption of an economy, stays more or less stable over time, while autonomous investment undergoes periodic fluctuations. What follows from this?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Changes in total autonomous expenditure, and so the parallel shifts of the aggregate demand line, come mainly from changes in investment.
Total autonomous expenditure is A = C̄ + Ī. Subsistence consumption C̄ stays almost the same, while investment rises and falls. So changes in A come mainly from investment, and a change in A shifts the AD line up or down in parallel.
Option (1) The slope of the aggregate demand line changes each time investment fluctuates, while its intercept stays fixed at the level of subsistence consumption. — Incorrect. Investment is autonomous, so it changes the intercept of AD, not its slope. The slope is the MPC.
Option (2) Changes in total autonomous expenditure, and so the parallel shifts of the aggregate demand line, come mainly from changes in investment. — Correct. The stable part cannot cause the shifts; the fluctuating part, investment, does.
Option (3) Fluctuations in investment leave equilibrium income unchanged, because investment is autonomous and does not depend on the level of income. — Incorrect. A change in autonomous investment changes equilibrium income, by the multiplier.
Option (4) Changes in total autonomous expenditure, and so the parallel shifts of the aggregate demand line, come mainly from changes in subsistence consumption. — Incorrect. Subsistence consumption is the part that stays more or less stable.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … This equation can be further simplified by adding up the two autonomous terms, C̄ and Ī, making it Y = Ā + c.Y where Ā = C̄ + Ī is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. C̄, representing subsistence consumption level of an economy, remains more or less stable over time. However, Ī has been observed to undergo periodic fluctuations. …” “Paradox of Thrift … When A changes the line shifts upwards or downwards in parallel. When c changes, however, the line swings up or down. An increase in mps, or a decline in mpc, reduces the slope of the AD line and it swings downwards. We depict the situation in Fig. 4.8.” |