Question

Imagine the economy is defined by the consumption function of C = 140 + 0.9 (Yd) where 140 is autonomous consumption, 0.9 is marginal propensity to consume, and Yd is disposable income (after taxes) and Yd=Y-T, where Y is national income (or GDP) and T=Tax Revenues=0.3Y (0.3 is the avg. income tax rate). To find the macro equilibrium use the following equation Y = C + I + G + (X - M). Where C=140 + 0.9(Yd), I=400, G=800, X=600, M=0.15Y. What is the aggregate expenditure for this economy? [Remember Y=AE]
Y = 3079
Y = 4042
Y = 3730
Suppose an economy is defined by the following: C = 210 + 0.8 (Yd). This algebraic equation represents the ________.

consumption function
autonomous consumption
marginal propensity to consume

Answer 1

Answer:

1. Y = 3730

2. Consumption function

Explanation:

1. Given that,

C = 140 + 0.9 (Yd)

T = 0.3Y

Yd=Y-T

I = 400, G = 800, X = 600, M = 0.15Y

Y = C + I + G + (X - M)

Y = 140 + 0.9 (Y - 0.3Y) + 400 + 800 + (600 - 0.15Y)

Y = 140 + 0.9 Y - 0.27Y + 1,800 - 0.15Y

Y = 1,940 + 0.48Y

Y - 0.48Y = 1,940

0.52Y = 1,940

Y = 3,730.76 or 3,730

2. C = 210 + 0.8 (Yd) is a consumption function.