Question

Let AE = C +I +G+NX where AE is the aggregate expenditure, C is the consumption function, I is investment, G is government expenditure and NX is the net export.

Given C = 100+0.65Y where Y is the national income and I = 100, G = 100+0.10Y, NX = 0

(a) Graph the consumption function with Y on the horizontal axis and C on the vertical axis.

(b) Graph the aggregate expenditure function with Y on the horizontal axis and AE on the vertical axis.

(c) Find the equilibrium level of income without using graph analytically.

(d) Find the equilibrium level of consumption C.

Answer #1

Consumption: C = 100 + 0.65.Y

Investment: I = 100

Government Expenditure: G = 100 + 0.1.Y

Net Exports: NX = 0

Aggrigate Expenditure is

AE = C + I + G + NX

or, AE = 100+0.65.Y+100+100+0.1.Y+0

or, AE = 300 + 0.75.Y

(a) The consumption function is drawn in the following diagram.

(b) The aggrigate expenditure function is drawn in the following diagram.

(c) At equilibrum,

AE = Y

or, 300 + 0.75.Y = Y

or, 0.25.Y = 300

or, Y* = 1200

**Equilibrum income is 1200.**

(d) The equilibrum level of consumption is

C* = 100 + 0.65.Y* = 100 + 0.65×1200

or, C* = 880

**Equilibrum consumption is 880.**

Hope the solutions and diagrams are clear to you my friend.

Income
(Yd)
Consumption
Expenditure
Saving
Investment
Expenditure
Government
Expenditure
Net Export
Expenditure
Aggregate
Expenditure
$8000
$11,000
$2,500
$5,000
$12,500
12,000
14,000
2,500
5,000
12,500
20,000
20,000
2,500
5,000
12,500
30,000
27,500
2,500
5,000
12,500
50,000
42,500
2,500
5,000
12,500
100,000
80,000
2,500
5,000
12,500
Calculate savings, MPC, MPS, break even income, and the
equilibrium level of income (Y = AE = C + I + G +NX) in the above
given information.
Draw a graph showing disposable income (Yd)...

Income
(Yd)
Consumption
Expenditure
Saving
Investment
Expenditure
Government
Expenditure
Net Export
Expenditure
Aggregate
Expenditure
$8000
$11,000
$2,500
$5,000
$12,500
12,000
14,000
2,500
5,000
12,500
20,000
20,000
2,500
5,000
12,500
30,000
27,500
2,500
5,000
12,500
50,000
42,500
2,500
5,000
12,500
100,000
80,000
2,500
5,000
12,500
1.Calculate savings, autonomous consumption, MPC, MPS, break
even income, and the equilibrium level of income (Y = AE = C + I +
G + NX) in the above given information.
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This assignment is due by Monday, October 12 by
11:59pm.
Income
(Yd)
Consumption
Expenditure
(C)
Saving
(S)
Investment
Expenditure
(I)
Government
Expenditure
(G)
Net Export
Expenditure
(NX)
Aggregate
Expenditure
(AE)
$8000
$11,000
$2,500
$5,000
$12,500
12,000
14,000
2,500
5,000
12,500
20,000
20,000
2,500
5,000
12,500
30,000
27,500
2,500
5,000
12,500
50,000
42,500
2,500
5,000
12,500
100,000
80,000
2,500
5,000
12,500
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