In the aggregate expenditure model, expenditures will rise if ___.

Question

BlackTom AI · Accepted Answer

To analyze the aggregate expenditure model, consider how total spending in the economy responds to different changes in the macro variables.
Option 1: 'saving increases' — When saving rises without a corresponding rise in autonomous spending or income, aggregate expenditure tends to fall or grow more slowly, because less of the income is being spent on goods and services. This option thus does not explain a rise in total expenditures.
Option 2: 'disposable income rises' — In the expenditure (or income-expenditure) framework, an increase in disposable income increases consumer spending, as people have more money to spend after taxes and transfers. Since consumption is a large share of aggregate expenditure, higher disposable income typically raises overall expenditures, shifting the aggregate expenditure function upward.
Option 3: 'the interest rate rises' — An increase in the interest rate generally dampens investment and can also reduce consumption through higher borrowing costs. This tends to reduce aggregate expenditure, not raise it, so this option would lead to a decrease rather than an increase in spending.
Option 4: 'taxes increase' — Higher taxes reduce households’ after-tax income, which lowers consumption and thus reduces aggregate expenditure. Hence, this option is inconsistent with an increase in total expenditures.
In sum, the mechanism by which expenditures rise in the model is tied to higher after-tax income available for spending. The other options describe factors that typically depress aggregate expenditure rather than boost it.

ECON 2002.01 AU2025 (21333) Midterm Exam 3 - Requires Respondus LockDown Browser

In the aggregate expenditure model, expenditures will rise if ___.

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