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 28,000?

Answer 1

Sol:

Aggregate expenditure (AE) is the sum of all the expenditure undertaken in the economy by the factors during a specific time period.

Let’s assume that there is a linear relationship between GDP and AE, then through extrapolation we can determine the AE.

Linear relationship Slope = GDP change / AE change

Linear relationship Slope = (17,500 - 14,000) / (16,500 - 15,000)

Linear relationship Slope = 3500 / 1500 = 7/3

Taking a general point (A, G), one of the points (16,500, 17,500) and slope 7/ 3

Linear relationship Slope = GDP change / AE change

7/3 = (G - 17,500)/ (A - 16,500)

3 (G - 17,500) = 7 (A - 16,500)

3G - 52,500 = 7A - 115,500

3G = 7A - 63,000

G = 7/3 A - 21,000

Now

When G = 28,000

28,000 = 7/3 A - 21,000

7/3 A = 49,000

A = 49,000 x 3/ 7

A = 21,000

Therefore at GDP of 28,000, AE would be 21000.