Consider an economy characterized by the following equations:

where \(C\) is desired consumption, \(I\) is desired investment, \(W\) is household wealth, and \(Y\) is national income.

a. Suppose wealth is constant at \(\mathrm{W}=10000\). Draw the aggregate expenditure function on a scale diagram along with the \(45^{\circ}\) line. What is the equilibrium level of national income?

b. What is the marginal propensity to spend in this economy?

c. What is the value of the simple multiplier?

d. Using your answer from part (c), what would be the change in equilibrium national income if desired investment increased to 250 ? Show this in your diagram.

e. Begin with the new equilibrium level of national income from part (d). Now suppose household wealth increases from 100 00 to 15 000 . What happens to the \(A E\) function and by how much does national income change?

Transcribed Image Text:

C 500+0.75 Y + 0.05 W I = 150