The Figure Shows Planned Aggregate Expenditure and Output for an Economy

question 25

Multiple Choice

The figure shows planned aggregate expenditure and output for an economy. Suppose that the economy starts at PAE₂. Which change would cause a move from PAE₂ to PAE₁?

• A) The wealth level decreases.
• B) Interest rates decrease.
• C) The expected profitability of investments increase.
• D) Domestic income decreases.

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Definitions:

Scale

The size, extent, or level of something, typically used in the context of production or operations to indicate magnitude or capacity.

Returns to Scale

A concept in economics that describes how the output of a firm changes as all its inputs are increased proportionally.

Short Run

A period in economics during which at least one factor of production is fixed, limiting the adjustment processes of the economy.

Production Function

A mathematical representation of the relationship between inputs used in production and the output generated.