Question

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned Aggregate Expenditure equals ___ and the short run equilibrium output equals ___

Answer 1

Answer:

Planned Aggregate Expenditure equals 290 + 0.75Y and the short run equilibrium output equals 1,160.

Explanation:

Autonomous spending basically covers essential needs, e.g. housing expenses, food, clothing, etc., and is not affected by the marginal propensity to consume (MPC).

so consumption must equal: C = 100 + 0.75 (Y income - 40 taxes)

PAE = C + I + G + X = 100 + 0.75(Y - 40) + 50 + 150 + 20

PAE = 100 + 0.75Y - 30 + 50 + 150 + 20 = 290 + 0.75Y

Short run equilibrium exists when Y = PAE:

Y = 290 + 0.75Y

Y - 0.75Y = 290

0.25Y = 290

Y = 290 / 0.25 = 1,160