Practicing Success

Target Exam

CUET

Subject

Economics

Chapter

Macro Economics: Determination of Income and Employment

Question:

Assume a two-sector economy in the above diagram, the initial demand curve AD1 shifts upward to AD2 due to:

Options:

Increase in average propensity to save   

Increase in aggregate supply 

Increase in the marginal propensity to consume   

Increase in autonomous investment

Correct Answer:

Increase in autonomous investment

Explanation:

In a 2-sector economy, AD has 2 components i.e. consumption and investment: AD = C + I

Any upward shift in the Aggregate demand curve comes down to either increase in autonomous consumption or autonomous investment.  An increase in the MPC will cause a rotation in the curve and not a shift as MPC determines the slope of the curve. Thus, option 4 stands to be correct.