Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 4 [6 points] Suppose a simple economy has no government, so that the aggregate expenditure function is: AE = C + I + X

Question 4 [6 points]

Suppose a simple economy has no government, so that the aggregate expenditure function is: AE = C + I + X - IM where X = 50 and IM = 50 + 0.3Y.

The following graph is the United Kingdom's consumption schedule and the amount of investment is $60 billion.

a)Plot the aggregate expenditures and the equilibrium point.

b)What is the equilibrium GDP?

Equilibrium GDP = $

300

billion

Marking:

a)

Aggregate Expenditures

Your line is close to the correct slope, but these points from your answer are not on the correct line: (320, 300)

To plot the AE line we must first determine what the equation of the AE line is. To do this we need all of its components. We know the equation is given by AE = C + I + X - IM and we have I = 60, X = 50 and IM = 50 + 0.3Y, but we do not know the equation of the consumption schedule (C).

To solve for C we use the formula C = C0+ cY. C0is the vertical intercept of the consumption line which is 180. The slope (c) is found by using the standard formula for finding the slope of a line (ie. rise/run). In our case c = 0.5, so our consumption schedule equation is C = 180 + 0.5Y.

Substituting all the components into the AE equation:

AE=C + I + X - IM=(180 + 0.5Y) + (60) + (50) - (50 + 0.3Y)=240 + 0.2Y

Now we can plot the AE line by picking two different values for Y and solving for the corresponding AE value.

You will lose 1 mark for this part.

Equilibrium Point

Your answer is correct.

b)

Your answer was:$300 billion

Congratulations! You have entered the correct answer.

image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Slavery And American Economic Development

Authors: Gavin Wright

1st Edition

0807152285, 9780807152287

More Books

Students also viewed these Economics questions