Define induced expenditure and autonomous expenditure. Which ...

[EY67]

Define induced expenditure and autonomous expenditure. Which expenditure items are induced expenditure and which are autonomous expenditure?
 
  What will be an ideal response?

Question 2

State how shifts in the aggregate demand curve can explain the movement of real GDP around potential GDP.
 
  What will be an ideal response?

[Ddddd]

Answer to Question 1

Induced expenditure is aggregate expenditure that changes as real GDP changes. Consumption expenditure and imports respond to changes in real GDP, so they have induced components. Autonomous expenditure is aggregate expenditure that does not change as real GDP changes. Investment, government expenditure, and exports are autonomous expenditure. Consumption expenditure also has an autonomous component.

Answer to Question 2

When the aggregate demand curve and the aggregate supply curve intersect at the level of potential GDP, then real GDP is equal to potential GDP. When something shifts the aggregate demand curve rightward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is above potential GDP. The economy will be in an expansion. When something shifts the aggregate demand curve leftward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is below potential GDP. The economy will be in a recession.

[EY67]

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