Autonomous investment in an economy rises. Consider the following statements:
(A) Equilibrium output rises by exactly the amount of the rise in investment.
(B) At the old equilibrium output, an excess demand equal to the rise in investment emerges.
(C) The new equilibrium is where the new aggregate demand line cuts the 45° line.
(D) The aggregate demand line shifts upwards in parallel.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B), (C) and (D) only
(A) Equilibrium output rises by exactly the amount of the rise in investment. — Incorrect. Through the multiplier, output rises by more than the rise in investment.
(B) At the old equilibrium output, an excess demand equal to the rise in investment emerges. — Correct. At the old output, AD is now higher by the rise in investment (E1F).
(C) The new equilibrium is where the new aggregate demand line cuts the 45° line. — Correct. Equilibrium is always where AD meets the 45° line.
(D) The aggregate demand line shifts upwards in parallel. — Correct. Investment is part of A, so the line moves up without a change in slope.
NCERT (2026-27): “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output … E1F measures the amount of excess demand that emerges in the economy as a result of the increase in autonomous expenditure. Thus, E1 no longer represents the equilibrium. To find the new equilibrium in the final goods market we must look for the point where the new aggregate demand line, AD2, intersects the 45° line. That occurs at point E2, which is, therefore, the new equilibrium point. The new equilibrium values of output and aggregate demand are Y*2 and AD*2, respectively. Note that in the new equilibrium, output and aggregate demand have increased by an amount E1G = E2G, which is greater than the initial increment in autonomous expenditure, ΔI = E1F = E2 J.” “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.” |