Aggregate Planned Expenditure Curve and its Properties Which

Aggregate Planned Expenditure Curve and its Properties Which of the events listed below (from point (a) to point (t)) (i) will shift the aggregate planned expenditure curve up; (ii) will shift the aggre gate planned expenditure curve curve down (iii) will not change the position of the aggregate planned expenditure curve; (iv) will make the aggregate planned expenditure curve stecper; (v) will make the aggregate planned expenditure curve flatter, In each case define, what component of aggregate expenditures and in what direction will change and what will happen to the valuc of the spending multiplier. (a) the increase in lump-sum taxes; (b) the decrcase in the interest rates; (c) the increase in the marginal propensity to save; (d) the decrease in government spending; (e) the increase in the price level; (f) the decrease in marginal propensity to imports; (g) the increase in the foreign income; (h) the decrease in the domestic income; (i) the increase in transfers; ) the decrease in the proportional income tax; (k) the increase in the domestic output; (1) the decrease in wealth; (m) the increase in business confidence; (n) the decrcase in the desire to buy foreign goods instead of domestic goods; (o) the technological advance; (p) the expectations of inflation in the nearest future; (q) the increase in the share of profits that is reinvested by firms; (r) the decision of the government to finance increase in government purchases by the corresponding increase in the lump-sum taxes; (s) the increase in the exchange rate of the domestic currency; (t) the expectations of the lack of goods in future. Put your answers in the following table and do not rewrite the tasks. ange in aggregate Change in the value of planned expenditure curvethe spending multiplier Component of a ggregate expenditures and the direction of the change with brief explanation

Solution

Aggregate Planned expenditure = Consumption expenditure + Investment spending + Government expenditure + net Exports

a. Increase in lump sum taxes- The increase in lump sum taxes will reduce the disposable income of the consumers. Reduction in the disposable income of the consumers will reduce consumption expenditure of the economy. Reduction in the consumption expenditure will shift the aggregate planned expenditure curve down.

b. Decrease in interest rate - Since interest rate is the cost of investment, decrease in the level of interest rate will increase the investment level of the economy and thus aggregate planned expenditure curve will shift upwards.

c. Increase in Marginal propensity to save - This will reduce the value of marginal propensity to consume and thus slope of aggregate planned expenditure curve will become flatter. This is because MPS + MPC = 1, increase in MPS will reduce MPS of the economy.

d. Decrease in government spending - The reduction in government spending will shift the aggregate planned expenditure curve of the economy down.