Answer to Question #95564 in Macroeconomics for Jaiinder Grewal

Question

1.“An increase of the marginal propensity to spend out of national income will cause a
parallel shift of AE curve”. Is this statement true or false? Please explain if it is false.

Answer 1

Marginal Propensity of national income and AE Curve

“An increase in marginal propensity to spend out of national income will cause a parallel shift of AE curve” ,is a FALSE statement. A change in tax rates affects the equilibrium income by altering the AE curve slope. High tax rates results to the AE curve to move downwards. Low tax rates removes some amount of national income from the required consumption flow, hence a rise in disposable income. The resultant is a non-parallel upward shift of AE curve.

Reference

Kari Diptimai “Effect of tax rate change on disposable income and national income” <http://www.economicsdiscussion.net