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:

C = 1300 + 0.85Y

I = 450

1) What is the equation for the aggregate expenditure (AE) function?

2) Applying the equilibrium condition that Y = AE, determine the level of equilibrium national income.

3) Using your answer from part (b), determine the values of consumption, saving, and investment when the economy is in equilibrium.

Explanation / Answer

(1) Equation for AE function is:

Y = C + I

(2) In equilibrium,

Y = 1300 + 0.85Y + 450

(1 - 0.85)Y = 1750

0.15Y = 1750

Y = 11,667

(3) When Y = 11,667:

C = 1300 + (11,667 x 0.85) = 1300 + 9917 = 11,217

Saving = Y - C = 11,667 - 11,217 = 450

Investment = 450 (given)

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