Assume a two-sector economy in the above diagram, the initial demand curve AD1 shifts upward to AD2 due to: |
Increase in average propensity to save Increase in aggregate supply Increase in the marginal propensity to consume Increase in autonomous investment |
Increase in autonomous investment |
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. |