Question

Income    (Yd)	Consumption Expenditure	Saving	Investment Expenditure	Government Expenditure	Net Export Expenditure	Aggregate Expenditure
$8000	$11,000		$2,500	$5,000	$12,500
12,000	14,000		2,500	5,000	12,500
20,000	20,000		2,500	5,000	12,500
30,000	27,500		2,500	5,000	12,500
50,000	42,500		2,500	5,000	12,500
100,000	80,000		2,500	5,000	12,500

1. Calculate savings, autonomous consumption, MPC, MPS, break even income, and the equilibrium level of income (Y = AE = C + I + G + NX) in the above given information.

2. Draw a graph showing disposable income (Yd) on the horizontal axis and aggregate expenditures (AE)

on the vertical axis with a 45 degree line. Graph consumption curve (CC) and AE (AE = C + I) curve on this graph. Indicate equilibrium level of income on this graph.

Answer 1

1)

Savings = Income - Consumption

Autonomous consumption is the consumption when Income is zero. For every 4000 increase in income, consumption rises by 3000. Thus going backward we get, at 4000 income consumption is 8000 and at 0 income the consumption is 5000.

Autonomous consumption = 5000

MPC = Increase in consumption/Increase in income = 3000/4000 = 0.75

MPS = 1 - MPC = 0.25

Equilibrium is established where Income equals the Aggregate Expenditure. Thus the eqilibrium income level is 100,000

b)

The green line is the 45-degree line showing the equality between consumption and Aggregate expenditure. We can see that the 45-degree line and aggregate expenditure intersection at the income level of 100,000.