Imagine a 45 line Keynesian cross diagram in which the upwar

Imagine a 45 -line (Keynesian cross) diagram in which the upward-sloping aggregate expenditure curve intersects the 459-line at point A. The economy is currently in macroeconomic equilibrium at output level Y Suppose that investment decreases. If investment decreases, the aggregate expenditures line will The new equilibrium levels of GDP and expenditures will be O A. anywhere on the new AE line. OB. unchanged ° C. where the new AE line interesects the original AE line O D. where the now AE line intersects the 45°-line.

Solution

(i) If investment decreases, aggregate expenditure will fall and aggregate expenditure line will shift downward.

(ii) Option (D)

New equilibrium is at intersection of new AE line and 45⁰ line.