1. Aggregate Expenditure (AE) is the sum of all economic expenditures. This is the sum of umption expenditure (C), investment expenditure (1), government expenditure (G), and expenditure 4 exports (NX), because this is a closed economy we don't use NX in our equation; AE=C+I+G AE=290 + 36Y - 0.2r 1) AE = C+1 + G + NX assuming closed RE -C+1+ G C= 58+ 0.6/d ( yd = y-T) 1 = 52 - 0.2r G= 180 T = 40% (0.4) SO : AE = 58+0.6/d+ 52- 0.2r+180 T = 0 . 47 AE = 58+0.6(Y-0- 47) +52-0.2r+ 180 AE = 290+ 36 4 -D. Qr 2. The investment-savings curve displays the combination of the real interest rate and income. The equilibrium in the goods market occurs when the total output of the economy equals the aggregate expenditure; AE=Y. AE=Y Y=290 + 0.36Y - 0.2r So; = 1450 - 3.2Y 2) Y= 290+0-364-0.21 0-2r = 290+ 0.364 - y 0. 2r = 290- 0.64 4 r = 1450 - 3.24 3. Assume that inflation is zero so that i = r. This economy's central bank follows a given Monetary Policy Rule: r = i = 0.02 x Y + 0.05 x P, where P is the price level. Given this and the expression for the IS Curve, write down an expression for the Aggregate Demand Curve. (Hint: Remember that the AD Curve takes the form P = .. ..)