Assume a two-sector economy in the above diagram, the initial demand curve AD1 shifts upward to AD2 due to:
Answer & explanation
Correct answer: option 4
The correct answer is Option 4: 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.