Question

Consider a closed economy with no government, a fixed price level, a fixed interest rate and the following characteristics:

• Autonomous part of consumption expenditure = $10B
• Investment = $30B
• Equilibrium GDP = $200B

a.  What is autonomous expenditure at equilibrium? (2)

b. What is induced expenditure at equilibrium? (2)

Now suppose that investment increases to $50B.

c. What is the new level of Equilibrium GDP? (2)

d. What is the value of the multiplier? (2)

e.  Briefly explain the process of convergence in the AE model. (2)

Answer 1

Equilibrium GDP = autonomus consumption + induced consumption + investment

200 = 10 + induced consumption + 30

B) induced consumption = 160 B

A) autonomus consumption at eqwuilibrium = (30+10) = 40

IF INVESTMENT INCRESES TO 50B

C) NewEquilibrium GDP = autonomus consumption + induced consumption + new investment

= 10 + 160 + 50

= 220

d) multiplier is change in investment show change in income = 20 / 20 = 1

E) Aggregate expenditure is the sum of total expenditure on the domestically produced goods and services , during the period of an accounting year

it includes two components = consumption expenditure and investment expenditure

where consumption expenditure is incurred by the households on the domestically produced goods and services , it is positively related to personal income.

investment expenditure refers to the expenditure by private investors on the purchase of such goods which are added to the stock of capital

AE Y AE, (c+l) AE C E, B EO Aggregate Expenditure (in pesos) A 400 I=100 300 45° AY=400 1200 1600 Y 0 Y*.