According to the aggregate expenditure function, as the price level decreases, it is reasonable to expect that
A the automonos and induced expenditures increase
B only the autonomous expenditures increase
C only hie induced expenditures decrese
C. The autonomous and induced expenditures decrease
To understand the relationship between the price level and the aggregate expenditure function, we need to consider the components of aggregate expenditure. Aggregate expenditure consists of autonomous expenditures and induced expenditures.
1. Autonomous expenditures: These are the expenditures that do not depend on the level of income or the price level. They are generally determined by factors such as government spending, investment, and exports. Autonomous expenditures are not affected by changes in the price level.
2. Induced expenditures: These are the expenditures that are influenced by the level of income or the price level. They are generally determined by factors such as consumer spending and imports. Induced expenditures depend on changes in the price level.
Now, let's analyze the given options:
A. As the price level decreases, both autonomous and induced expenditures increase. This option does not align with the relationship between the price level and aggregate expenditure. Autonomous expenditures are independent of the price level, so they would not be affected.
B. Only autonomous expenditures increase. Again, this option does not align with the relationship between the price level and aggregate expenditure. Autonomous expenditures do not change with the price level.
C. Only induced expenditures decrease. This option is not accurate either. Induced expenditures typically increase as the price level decreases, as lower prices encourage consumers to spend more.
D. The correct answer is: The autonomous and induced expenditures decrease. When the price level decreases, it generally leads to a decrease in aggregate expenditure. This is because lower prices can result in a decrease in consumer spending and imports (induced expenditures), as consumers may delay purchases in anticipation of even lower prices. The decrease in induced expenditures, combined with the unaffected autonomous expenditures, leads to an overall decrease in aggregate expenditure.
To answer the question correctly, it is essential to understand the concept of autonomous and induced expenditures and how they relate to changes in the price level.