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1. The AE diagram below shows the consumption function of an economy, Each box is $20x$20 Distance between 45 degree line andSo VO MPC is slope of AE carve - (400-160)/400 - 200/400 mps i l-MPC 1-016 -ou multiplier : 1/ MPS clau = 2.55 BY=200, S: 200Consumption function C = 160+ ably) Saving function, S= -160 + auy d graph SIT 160 100

I don't know how to solve (e)

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Answer #1

(Part e)

(a)

AE = C + I

AE = 160 + 0.6Y + 40

AE = 200 + 0.6Y

When Y = 0, AE = 200 and when Y = 400, AE = 200 + 0.6 x 400 = 200 + 240 = 440

is equal to unplanned inventory change. 1607 1001 Investment IOD

(b)

Unplanned investment = Y - AE

(I) When Y = 200, AE = 200 + 0.6 x 200 = 200 + 120 = 320

Unplanned investment = 200 - 320 = - 120

(II) When Y = 400, AE = 200 + 0.6 x 400 = 200 + 240 = 440

Unplanned investment = 400 - 440 = - 40

(III) When Y = 600, AE = 200 + 0.6 x 600 = 200 + 360 = 560

Unplanned investment = 600 - 560 = 40

(c)

In equilibrium, Y = AE.

Y = 200 + 0.6Y

0.4Y = 200

Y = 500

C = 160 + 0.6 x 500 = 160 + 300 = 460

S = Y - C = 500 - 460 = 40

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