Question

If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by \(100 billion, while consumers become

more pessimistic and autonomous consumer spending falls by \)100 billion, what happens to aggregate output?

Short answer

There is no change in Aggregate output.

Step-by-step solution

Step 1. Introduction

Aggregate output is determined at equilibrium level, where Aggregate Demand = Aggregate Supply.

Aggregate Demand comprises of planned expenditure by sectors of a closed economy : consumption expenditure by households, investment expenditure by firms, government spendings by government.

AD = C + I + G

Explanation 

If firms' planned investment expenditure increase, & households' planned consumption expenditure reduces : Simultaneous increase & decrease in components of Aggregate demand nullify each other, imply that AD remains constant.

So, the equilibrium level of income & output also remains same.