I.The following are details of the expenditure of a very small economy. All the autonomous expenditures are given in $ thousand.

C = 200 + 0.8Yd

I = 10

G = 50

T = 0.05Y

X = 40

M = 0.1Y

Show the working of your answers.

i) Distinguish between autonomous expenditure and income induced expenditure. Be sure to provide examples.

ii) Use the above information to derive the aggregate expenditure function.

iii) Calculate the equilibrium real GDP.

iv) Use the aggregate expenditure function slope value to determine the expenditure multiplier. What are the factors that influence the slope of AE and explain the effect of an increase in the slope of AE on the equilibrium real GDP?

II.Suppose the slope of the AE curve is 0.80.

i) What is the expenditure multiplier?

ii) Everything else the same, by how much does equilibrium aggregate expenditure increase if

a) exports increase from $1.75 trillion to $2.25trillion?

b) government expenditure on goods and services decreased from $2.0 trillion to $1.8 trillion?

c) investment increases from $1.2 trillion to $2.3 trillion?