Economics Test - 27

Key Points

• Autonomous Investment:
  • Autonomous investment refers to expenditures on capital goods that are not influenced by the current level of national income or production. This type of investment is determined by factors such as technological changes and policy decisions.
  • An increase in autonomous investment boosts overall demand in the economy, as it represents an external injection of spending that does not depend on income levels. This leads to a multiplier effect, further increasing income and output.
  • When autonomous investments increase, it directly elevates aggregate demand, as businesses are spending more on capital goods, leading to a parallel upward shift in the aggregate demand curve.

Additional Information

• Autonomous Investment decreases:
  • A decrease in autonomous investment would have the opposite effect, reducing aggregate demand and potentially leading to a decrease in national income and output. This is not what causes the aggregate demand line to shift upwards.
• Investment is Zero:
  • If investment were zero, it would imply no spending on capital goods, leading to stagnation in economic growth and no shift in the aggregate demand curve. This condition does not result in an upward shift of aggregate demand.
• Investment is Negative:
  • Negative investment would suggest disinvestment, where assets are being sold off or not replaced. This would likely decrease aggregate demand, contrary to an upward shift.

Gold standard start to loose its importance during 1920s, post the world war and rising prices of gold around the globe.

There are very few countries in the world which still follows fixed exchange rate system including Fiji, Kuwait, Morocco, and Libya,

Foreign exchange rate is the rate at which one unit of foreign currency is exchanged for some units of domestic currency.

Devaluation refers to the decrease in the value of domestic currency as planned by the government under fixed exchange rate.

ise in exchange rate leads to depreciation of domestic currency. Depreciation of currency encourages exports and inflow of foreign exchange. This process is likely to have a positive impact on the national income of the country.

Before the Bretton Woods standard, gold standard was followed. Under that system of exchange, rates were fixed or tied against US Dollar.

This is a deliberate step taken by the government to rise the value of domestic currency. This is known a revaluation of domestic currency against foreign currency.

When the value of domestic commodity increases, it indicates increase in the value of domestic currency. This situation could either be appreciation or revaluation depending upon the type of exchange rate.

Demand for foreign exchange and foreign exchange rate is indirect or inverse i.e., when foreign exchange rate increase, its demand falls.