Question

Assume at a GDP of $17,500, AE is 16,500. At a GDP of 14,000 AE is $15,000. What would AE be at GDP of 26,000?

Answer 1

At a GDP of 14,000 AE is $15,000

At a GDP of $17,500, AE is 16,500

Slope of AE = (change in AE / Change in GDP)

=> Slope of AE = (16,500 - 15,000) / (17500 - 14000)

=> Slope of AE = (1500 / 3500)

=> Slope of AE = (3/7)

General form of AE function:

AE = a + bY

Where 'a' is the autonomous expenditure

b is the slope of AE

Y is GDP.

Put Y = 14000, AE = 15000 and b = (3/7)

=> 15000 = a + (3/7)* (14000)

=> 15000 = a + 6000

=> a = 15000 - 6000

=> a = 9000

Thus, AE = 9000 + (3/7)Y

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AE function: AE = 9000 + (3/7)Y

Put Y = 26000

AE = 9000 + (3/7) (26000)

=> AE = 9000 + 11142.85

=> AE = 20142.85

=> AE = 20143.

AE at the GDP of $26000 is $20143