Answer to Question #102834 in Macroeconomics for Harmandeep Singh

Question

Consider an economy characterized by the following equations:

C = 500 + 0.75Y + 0.05W

I = 150

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

a) Suppose wealth is constant at W = 10000. Draw the aggregate expenditure (AE) function on a scale diagram along with the 45° line. What is the equilibrium level of national income?

b) The marginal propensity to spend in this economy is 0.75. What is the value of the simple multiplier?

c) Using your answer from part b), what would be the change in national income if desired investment increased to 250? Can you show this in your diagram?

d) Now suppose household wealth increases from 10000 to 15000 in addition to the change in c). Draw the new AE function on the same graph as a). What happens to the AE function and by how much does the equilibrium national income change?

Answer 1

a)Equilibrium level of national income:

C=500+0.75Y+0.05W=500+0.75Y+0.05*10 000=500+0.75Y+500=1000+0.75Y

AE=1000+0.75Y+150=1150+0.75Y

imagine in the form of graphsY=1150+0.75Х and Y=Х

х=4600

b) the coefficient shows how much consumption will change with a change in income per monetary unit

c) AE=1250+0.75Y

d)C=500+0.75Y+0.05W=500+0.75Y+0.05*15 000=500+0.75Y+750=1250+0.75Y

AE=1250+0.75Y+150=1400+0.75Y

imagine in the form of graphsY=1400+0.75Х and Y=Х

х=5600

Equilibrium national income grows with rising family wealth, AE function rises or shifts to the left.