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