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In an open economy that includes a government, the components of autonomous demand—spending that does not depend on the level of income—are expanded. In addition to autonomous consumption ($$c_0$$) and autonomous investment ($$a_0$$), autonomous demand now also includes government spending ($$G$$) and exports ($$X$$). These are treated as exogenous variables that can cause parallel shifts in the entire aggregate demand curve.

Autonomous Demand Components in an Open Economy with Government

In a country's economy, which of the following scenarios would be classified as a change in an autonomous component of aggregate demand, leading to a parallel shift of the entire demand curve?

Consider an open economy with a government. A sustained increase in the nation's overall income will cause a parallel upward shift in the aggregate demand curve because both government spending and exports are assumed to rise automatically with income.

Read the following economic report for the country of Econland. Identify which of the described events would cause a parallel shift in the country's aggregate demand curve. For each event you identify, name the specific component of spending that is affected and explain why the change is considered independent of the current level of national income.

Analyzing Economic Shocks

Imagine a country's primary trading partner experiences a significant economic boom, leading to a substantial increase in that partner's national income. Explain how this external event would impact the components of demand within the first country and describe the resulting change to its aggregate demand curve.

Analyzing an External Economic Event

Match each economic scenario with the autonomous component of aggregate demand it would most directly affect, causing a parallel shift in the aggregate demand curve.

The aggregate demand curve undergoes a parallel shift when there are changes in its autonomous components. Specifically, an increase in autonomous consumption ($c_0$), government spending (G), exports (X), or autonomous investment ($a_0$) will cause the entire aggregate demand curve to shift upward.

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