Question

The following info rmation is available for a count Equilibrium and Fiscal Policy Consumption Function: C = 100 + 0.8(Y-T) 3,2 Net Taxes: T = 250 0 Planned Investment: I 200 2,8 Government Spending: G 300 The graph of the consumption function is shown as C 1.) Using the line drawing tool, draw the aggregate expenditure line. Label it AEt 2.) Using the point drawing tool, identify the equilibrium point. Label it E. 2, 3.) Using the line drawing tool, draw a new aggregate expenditure line after government spending increases by 200. Label the new aggregate expenditure line AE 4.) Using the point drawing tool, identify the new equilibrium point. Label it F Note: Carefully follow the instructions above and only draw the required objects Income/Output

Answer 1

Autonomous expenditure = Autonomous consumption + I + G

Autonomous consumption = 100

I= 200

G= 300

Autonomous expenditure = 100 + 200 + 300 = 600

Hence, aggregate expenditure line , AE1 starts from the vertical axis at point 600.

Now, at equilibrium Aggregate expenditure = output

Y= C + I + G

Y = 100 + 0.8(Y -250) + 200 + 300

Y - 0.8 Y = 100 - 200 + 200 + 300

0.2 Y = 400

Y = 2000

Hence, at equilibrium output = 2000. AE1 cuts the 45 degree line at 2000.

It is shown in the figure below, where equilibrium point is E.

爪Cl RE 2 02 320 RE 2.530 2400 2200 6クク

Now, G increases by 200. Then , autonomous expenditure also increases by 200. Therefore, autonomous expenditure = 800 .

Because of this change in output = (1/ 1-MPC) (change in G)

Where MPC = 0.8

Change in output = (1/ 1-0.8) ( 200) = 200 / 0.2

Change in output = 1000

Hence, increase in G by 200 , increases output , Y by 1000. Hence , new equilibrium output (2000+1000) = 3000.

New aggregate expenditure line is shown by AE2 and new equilibrium point is F as shown in the figure above.