Question

The economy of Beverly Hills has a consumption function of C =
10 + 0.8Y, investment equal to

6, government expenditure equal to 10, exports equal to 10, and an
import function of M = 0.1Y.

1) Refer to Fact 27.5.1. What is the equation for the aggregate
expenditure curve for this

economy?

A) AE = 16 + 0.7Y

B) AE = 36 - 0.7Y

C) AE = 26 + 0.8Y

D) AE = 36 + 0.9Y

E) AE = 36 + 0.7Y

2) Refer to Fact 27.5.1. What is equilibrium real GDP in this
economy?

A) 36

B) 120

C) 130

D) 360

E) none of the above

3) Refer to Fact 27.5.1. What is consumption expenditure in
equilibrium in this economy?

A) 298

B) 106

C) 38.8

D) 114

E) none of the above

4) Refer to Fact 27.5.1. What is the multiplier for this
economy?

A) 1.43

B) 3.33

C) 0.3

D) 10

E) 5

Answer #1

1. Ans: AE = 36 + 0.7Y

**Explanation:**

AE = C + I + G + X - M

= 10 + 0.8Y + 6 + 10 + 10 - 0.1Y

= 36 + 0.7Y

2. Ans: 120

**Explanation:**

The equilibrium real GDP is Y

Y = AE

Y = 36 + 0.7Y

Y - 0.7Y = 36

0.3Y = 36

Y = 36 / .03 = 120

3. Ans: 106

**Explanation:**

C = 10 + 0.8Y

Substituting the value of Y = 120,

C = 10 + 0.8(120) = 106

4. Ans: 5

**Explanation:**

Here, MPC = 0.8

Multiplier = 1 / (1 - MPC)

= 1 / (1 - 0.08)

= 5

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