Question

In: Economics

Income    (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000...

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.

Solutions

Expert Solution

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.


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