Consider the following statements about ‘autonomous’ terms in the model:
(A) Investment being autonomous means that it does not depend on the rate of interest.
(B) Autonomous consumption rises as income rises.
(C) In the paradox of thrift example, the cut in consumption caused by an exogenous fall in the mpc is regarded as autonomous.
(D) An autonomous change is a change in the values of variables caused by a factor exogenous to the model.
(E) Autonomous investment, Ī, is a positive constant in a given year.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (C), (D) and (E) only
(A) Investment being autonomous means that it does not depend on the rate of interest. — Incorrect. Autonomous only means not depending on income. The rate of interest still affects investment.
(B) Autonomous consumption rises as income rises. — Incorrect. Autonomous consumption is independent of income.
(C) In the paradox of thrift example, the cut in consumption caused by an exogenous fall in the mpc is regarded as autonomous. — Correct. The fall in mpc comes from an exogenous cause, so the cut in consumption is treated as autonomous.
(D) An autonomous change is a change in the values of variables caused by a factor exogenous to the model. — Correct. This is the meaning of an autonomous change.
(E) Autonomous investment, Ī, is a positive constant in a given year. — Correct. Ī is a positive constant for the year.
NCERT (2026-27): “Paradox of Thrift … This can be regarded as an autonomous reduction in consumption expenditure, to the extent that the change in mpc is occurring from some exogenous cause and is not a consequence of changes in the variables of the model.” “4.1.2 Investment … However, for simplicity, we assume here that firms plan to invest the same amount every year. We can write the ex ante investment demand as I = Ī where Ī is a positive constant which represents the autonomous (given or exogenous) investment in the economy in a given year.” “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output … 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.” Glossary: “Autonomous change – A change in the values of variables in a macroeconomic model caused by a factor exogenous to the model.” |