According to the Keynesian model, what will be the effect of the following events on the Aggregate Expenditure curve and income: 1) The fraction of the income spent on imports rises 2) Business confidence recovers 3) Marginal tax rate falls
- If the fraction of income that is spent on imports rises, aggregate expenditures will fall and so, ceteris paribus, will aggregate income. Aggregate expenditures are made up of government purchases, consumption (consumer spending), investment (spending by businesses), and net exports. When people spend more on imports, the value of net exports declines. This lowers aggregate expenditures. When aggregate expenditures fall, so does aggregate income.
- If business confidence recovers, aggregate expenditures will rise and so will aggregate income. When businesses become more confident, they are more likely to invest. They believe that the economy will improve so they are more willing to spend money to do things like expanding their capacity. Because investment is part of aggregate expenditures, this will cause aggregate expenditures (along with income) to rise.
- If the marginal tax rate falls, aggregate expenditures and income will rise. When the marginal tax rate falls, consumers have more money in their pockets. Therefore, they are able to buy more goods and services. This means that the consumption part of aggregate expenditures will rise. This will cause aggregate expenditures and income to rise as well.
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