Question

In an economy with no exports and​ imports, autonomous consumption is ​$44 ​trillion, the marginal propensity to consume is 0.70.7​, investment is ​$22 ​trillion, and government expenditure on goods and services is ​$33 trillion. Taxes are ​$22 trillion and do not vary with real GDP. If real GDP is ​$31.631.6 ​trillion, calculate disposable​ income, consumption​ expenditure, and aggregate planned expenditure. What is equilibrium​ expenditure?

Answer 1

Answer:

(i) $29.6 trillion

(ii) $24.72 trillion

(iii) $29.72 trillion

(iv) $25.33 trillion

Explanation:

Given:

GDP,Y = 31.6

Consumption expenditure, C = 4 + 0.7(Y-T)

Taxes, T = 2

Government Expenditure, G = 3

Net exports, NX=0

Investment, I = 2

Find

Y-T= 31.6 - 2

      = 29.6

Disposable income is $29.6 trillion

C = 4 + 0.7(Y-T)

  = 4 + 0.7 ×  29.6

  = 4 + 20.72

  = $24.72 trillion

Consumption expenditure is $24.72 trillion.

Aggregate planned expenditure, AE = C + I + G + NX

                                                             = $24.72 + $2 + $3

Aggregate planned expenditure, AE = $29.72 trillion

AE = C + I + G + NX

Let AE = Y

Y = 4 + 0.7(Y-2)  + 2 + 3

Y = 9 + 0.7Y - 1.4

0.3Y = 7.6

Y = $25.33 trillion