Question

1.Suppose the economy is characterized as follows:

AE = C + I + G + (X-M)
C = 600 + .75(Y – T) - 30 (r)
I = 500 – 50(r)
G = 300
X- M = -25
T = 80
r = 5
Price level P is fixed at 1 (P=1)

1） Equilibrium consumption is equal to _______ .

2） The vertical intercept for the consumption function is _______ .

Answer 1

1.

AE = C + I + G + (X-M)

AE= 600 + .75(Y – T) - 30 (r)+500 – 50(r)+300-25

AE= 1375+0.75(Y-T)-80r

AE= 1375+0.75Y-0.75(80)-80(5)

AE= 1375+0.75Y-60-400

AE= 915+0.75Y

For equilibrium:

Y=AE

Y= 915+0.75Y

Y-0.75Y= 915

0.25Y= 915

Y= 915/0.25= 3660 equilibrium income

1)

C = 600 + .75(Y – T) - 30 (r)

C= 600+0.75(3660-80)-30(5)

C= 600-150+2685= 3135

Equilibrium consumption is equal to 3135

2)

Vertical intercept of consumption is the level of consumption when Y=0.

C = 600 + .75(Y – T) - 30 (r)

C = 600 + .75(0-80) - 30 (5)

C= 600-60-150= 390

The vertical intercept for the consumption function is 390.