Need help fast in Macroeconomics In order to study the Egyptian economy, you are

Question

Need help fast in Macroeconomics

In order to study the Egyptian economy, you are asked to use the following set of equations about this economy and answer the following questions: AE = C + I + G C = 400 + .5 Yd T =400 1 = 200 G = 600 What is the marginal propensity to consume for this economy? What is the marginal propensity to save? Write out the equation that indicates how aggregate demand (AE) is a function of income (Y) and the remaining autonomous expenditures. What will be the level of aggregate demand if Y = 0? What does this level of demand represent? Furthermore, given you equation, what will happen to the level of aggregate demand (AE) as Y increases by $1? What does this number represent? Based on your answer in part (b), calculate the level of demand (AE) for the following levels of income: Y = 1600, Y = 1800, Y = 2200. and Y = 2400. Now compare the level of demand that you calculated at each level of income with the corresponding level of income. Is the economy in equilibrium at any of these levels of income? Explain. Solve the model for equilibrium income algebraically. Do you get the same answer for equilibrium?

Explanation / Answer

Marginal Propensity to consume is the something that quantifies and relates consumption with income. Consumption has 2 components. the first one is the autonomous consumption function and the second one is the marginal propensity to consume. Autonomous function is the fixed part. That means irrespective of your income you will consume that amount. If your autonomous function is 10 then it implies that you will consume 10 units worth of commodity. To finance it, you will use a part of your income. If your income is less than this you will borrow money, but you will consume 10 units worth of commodity.

So here your marginal propensity to consume is 0.5

And MPC + Marginal Propensity to Save should be equal to 1

There MPS is also equal to 0.5

AD=I+G+C

here;

I=200

G=600

and C=400+0.5 Y <<<<<<------------Y is nothing but the income

Therefore your aggregate demand becomes;

AD=200+600+400+0.5Y

=1200+0.5Y

If Y=0 then AD becomes 1200.

this means that even if people make no money they will still demand for some items. and to get these they may go for loans.

If the Y increases by 1 the aggregate demand will increase by 0.5. this shows that for every unit increase in income people will demand half a unit more of goods.

Now the aggregate demands for

1600 is 400 + 0.5*1600 + 200 + 600 = 2000

1800 is 400 + 0.5*1800 + 200 + 600 = 2100

2200 is 400 + 0.5*2200 + 200 + 600 = 2300

and 2400 is 400 + 0.5*2400 + 200 + 600 = 2400

At the point of equilibrium the income should be equal to the demand. Or people should have the exact amount of money for the things they wish to buy.

As we can see from the above that condition is satified at Y=2400 where the demand is also 2400.

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