Graphs and tables are alternative means to illustrate the aggregate expenditure

Question

Graphs and tables are alternative means to illustrate the aggregate expenditure model of short-run real GDP. Graphs help us understand economic change qualitatively. We make it easier to make quantitative estimates when we write down an economic model using equations. When economists forecast future movements in GDP, they often rely on econometric models. An econometric model is an economic model written in the form of equations, where each equation has been statistically estimated. Use the following equations to solve the problems:

C = 1000 + 0.65Y

Consumption Function

I = 1500

Planned Investment Function

G = 1500

Govt Spending Function

NX = -500

Net Export Function

Y = C + I + G + NX

Equilibrium Condition

A. What is the equilibrium GDP?

B. What is Marginal Propensity to Consume?

C. What is Marginal Propensity to Save?

C = 1000 + 0.65Y

Consumption Function

I = 1500

Planned Investment Function

G = 1500

Govt Spending Function

NX = -500

Net Export Function

Y = C + I + G + NX

Equilibrium Condition

Explanation / Answer

Equilibrium is where income is equal to expenditure.

Y = C+I+G+NX

Y = 1000+0.65Y + 1500 + 1500 -500

0.35Y =35000

Y = 100,000

(B) Marginal propensity to consume is the coefficient attached with Y in consumption function. This explains the propotion of income which is spent on consumption. Here MPC is 0.65.

(C) Marginal propensity to save = (1-MPC)

marginal propensity to save = (1-0.65) = 0.35

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