Suppose you are given the following information for an economy without governmen

Question

Suppose you are given the following information for an economy without government spending, exports, or imports. C is desired consumption, I is desired investment, and Y is income. C and I are given by: What is the equation for the aggregate expenditure (AE) function? Applying the equilibrium condition, Y = AE, the equilibrium income that would set the actual national income to the desired aggregate expenditure can be calculated as $ The level of consumption and savings at the equilibrium level of income are $ and $ respectively. Finally, the level of investment expenditures at the equilibrium level of income is equal to $.

Explanation / Answer

(a) Equation for aggregate expenditure (AE) function is as follows -

AE = C + I = 450 + 0.8Y + 350 = 800 + 0.8Y

The AE function is AE = 800 + 0.8Y

(b) At equilibrium,

Y = AE

Y = 800 + 0.8Y

Y - 0.8Y = 800

Y = 4,000

The equilibrium income that would set the actual income to the desired aggregate expenditure is $4,000.

(c) Equilibrium income (Y) = $4,000

Calculate Consumption (C) at equilibrium income -

C = 450 + 0.8Y = 450 + 0.8 * $4,000 = $3,650

The level of consumption at the equilibrium level of income is $3,650.

Calculate savings (S) at equilibrium income -

S = Y - C = $4,000 - $3,650 = $350

The level of savings at the equilibrium level of income is $350.

At equilibrium, savings equal to investment.

Savings at equilibrium is $350.

So, the level of investment expenditures at the equilibrium level of income is equal to $350.

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