Question

Here are some facts about the economy of Quebec (after succession from Canada)..

Marginal propensity to consume 7/8 marginal propensity to import 1/8 autonomous consumption 5 exports 5 private investment 2 income tax rate 0 government expenditures 0

Income consumption investment exports imports aggregate expenditures

0

8

16

24

32

40

48

56

64

How much are aggregate expenditures when income is 8?

Answer 1

Answer is 18

Aggregate Expenditure (AD) = Consumption(C)+ Private Investment (I)+ Government Expenditure(G)+ Exports(E)-Imports(M)

where,

Consumption(C)= Autonomous Consumption (C0)+Marginal Propensity to consume (c)*[Income(Y)-Tax(T)]+Private Investment (I) & Government Expenditure(G) and Exports (E) are autonomous expenditure (according to question)

Imports(M) = marginal propensity to import (m) *Income/GDP(Y)

Given,

c =7/8, C0 = 5, T=0, I=2, G =0, E=5, m=1/8

Putting Values in the aggregate income function,

AD= C(0)+c(Y-T)+ G+I+E-mY

AD= 5+(7/8(Y-0))+ 0+2+5-1/8Y

AD= 12+(7/8)Y-(1/8)Y

AD= 12+(6/8)Y

when Y = 8

AD= 12+(6/8)*8= 18