Question

**The MPC for a closed economy is 0.75. Autonomous
consumption is $500, investment is $300, and government spending is
$400.**

**a) What is the equilibrium
level of real GDP?**

**b) If business increases
planned investment expenditure by 300 to 400, what is the new
equilibrium real GDP?**

**c) What is the slope of the AE
function in this economy and the value of the
multiplier?**

Answer #1

a)

the equilibrium GDP is at

Y=C+I+G

Y=real GDP

C=consumption

I=investment

G=governent spending

The consumption function is the form of

C=A+BY

A=autonomus consumption=500

B=MPC=0.75

C=500+0.75Y

using values and equations

Y=500+0.75Y+300+400

0.25Y=1200

Y=$4800

the equilibrium GDP is $4800

==================

b)

I=400 instead of 300

Y=500+0.25Y+400+400

0.25Y=1300

Y=$5200

the new equilibrium GDP is $5200

===============

c)

the AE funtion is

AE=C+I+G

AE=500+0.75Y+300+400

AE=1200+0.75Y

the slope of AE funtion is 0.75

Multiplier =1/(1-slope)

=1/(1-0.75)

=4

the multiplier is 4.

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