Answer to Question #77228 in Macroeconomics for jashneel Goundar

Question

You are given the following information about the economy of Zealand. Autonomous consumption expenditure is $100b, and the marginal propensity to consume is 0.9. Investment is $460b, government purchases of goods and services are $400b, and net taxes are a constant $400b – they don’t vary with income.
a) Derive the equation that describe the consumption function? (1 mark)
b) Derive the equation that describes the aggregate expenditure curve? (1 mark)
c) Calculate equilibrium expenditure and real GDP. (2 marks)
d) If investment falls to $360b, what is the change in equilibrium expenditure and what is the size of the multiplier? (2 marks)
e) Sketch the information from a) – d) above using a Keynesian income-expenditure diagram.

Answer 1

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