In the two-sector model, how many of the following would shift the aggregate demand line upwards in parallel?
(A) A rise in autonomous consumption
(B) A rise in the marginal propensity to consume
(C) Credit becoming more easily available to firms, which raises investment
(D) A rise in the rate of interest
(E) A fall in the marginal propensity to save
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Two
A change in autonomous spending moves the whole AD line up or down in parallel. A change in the mpc changes its slope, so the line swings.
(A) A rise in autonomous consumption — Parallel shift up. C̄ is part of the intercept C̄ + Ī, so the line moves up with the same slope.
(B) A rise in the marginal propensity to consume — Swing. The mpc is the slope of the AD line. A higher slope makes the line swing up, not shift in parallel.
(C) Credit becoming more easily available to firms, which raises investment — Parallel shift up. Easy credit raises autonomous investment, which raises the intercept.
(D) A rise in the rate of interest — Parallel shift down. A higher interest rate makes firms lower investment, so the line moves down.
(E) A fall in the marginal propensity to save — Swing. A fall in the mps is a rise in the mpc (s + c = 1), so the slope rises.
NCERT (2026-27): “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output We have seen that the equilibrium level of income depends on aggregate demand. Thus, if aggregate demand changes, the equilibrium level of income changes. This can happen in any one or combination of the following situations: 1. Change in consumption: this can happen due to (i) change in C̄ (ii) change in c . 2. Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.” “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.” |