Answer to Question #241820 in Macroeconomics for Mercy

Question

Based on our understanding of the Aggregate Expenditure (AE) Model (AE), we know that an increase in c1 (where C = c0 + c1Yd) will cause the AE function to become:

Group of answer choices

Flatter and a given change in autonomous consumption (c0) to have a larger effect on output.

Steeper and a given change in autonomous consumption (c0) to have a smaller effect on output.

Flatter and a given change in autonomous consumption (c0) to have a smaller effect on output.

Steeper and a given change in autonomous consumption (c0) to have a larger effect on output.

Answer 1

Y = c₀ + c₁Y_d + I + G

c₁ = marginal propensity to consume. It captures by how much households increase their consumption if their disposable income increases marginally. It is the slope coefficient and its value can vary from 0 < c₁ < 1 .

Y = c₀ + c₁(Y − T) + I + G

Y = 1/1−c₁ [c₀ + I + G − c₁T]

1/(1-c₁) is the multiplier. So as the value of c₁ increases, it will result in the increasing the value of multiplier and therefore the output Y will have a larger effect. Being the slope coefficient, increase in value of c₁  will lead to a steeper shape of the curve.

Hence, the answer is Option D: Steeper and a given change in autonomous consumption (c₀) to have a larger effect on output.