According to the aggregate expenditure function, as the price level decreases, it is reasonable to expect that
A the auto monos and induced expenditures increase
B only the autonomous expenditures increase
C only hie induced expenditures decrese
C. The autonomous and induced expenditures decrease
To determine the answer using the aggregate expenditure function, we need to understand its components. The aggregate expenditure (AE) function is represented by the equation AE = C + I + G + NX, where C represents consumption, I represents investment, G represents government spending, and NX represents net exports.
Now, let's analyze the effects of a decrease in the price level on the different components of aggregate expenditure:
1. Consumption (C): A decrease in the price level generally leads to an increase in consumers' purchasing power. This means that consumers can buy more goods and services with the same amount of income. As a result, we would expect consumption expenditures to increase. So, we can eliminate options B and D.
2. Investment (I): A decrease in the price level can make investment more attractive because businesses can purchase capital goods and inputs at lower costs. This may lead to an increase in investment expenditures. Therefore, option B (only autonomous expenditures increase) can be ruled out.
3. Government Spending (G): The price level does not directly affect government spending. Hence, it is not relevant to this question.
4. Net Exports (NX): The price level can affect exports and imports. A decrease in the price level may make a country's goods and services more competitive in the global market, leading to an increase in exports and a decrease in imports. As a result, net exports may increase.
Considering the above analysis, we can conclude that option A (the autonomous and induced expenditures increase) is the most reasonable answer.