Question

1. Aggregate expenditure and income The following table shows consumption (C), investment (I), government purchases (G), and net exports (X−IM) in a hypothetical economy for various levels of real GDP (Y). Assume that the price level remains unchanged at all levels of income. All figures are in billions of dollars. Compute total expenditure for each income level, and fill in the last column in the following table. Y C I G X−IM Total Expenditure 500 300 150 200 -100 600 350 150 200 -100 700 400 150 200 -100 800 450 150 200 -100 900 500 150 200 -100 The following graph shows income (Y) on the horizontal axis and total expenditure (TE) on the vertical axis. The grey line represents a 45-degree (Y=TE) line. Use the blue points (circle symbol) to plot the total expenditure line for this economy at an income of $500 billion, $600 billion, $700 billion, $800 billion, and $900 billion. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. TE line Equilibrium GDP 400 500 600 700 800 900 1000 1000 900 800 700 600 500 400 REAL EXPENDITURE (Billions of dollars) REAL GDP (Billions of dollars) Use the black point (plus symbol) to indicate the equilibrium in this economy, that is, where total expenditure and income are equal. Note: Dashed drop lines will automatically extend to both axes. Suppose real GDP is currently $500 billion. Assuming the price level remains constant, this would mean that , which would send a signal to firms to . The marginal propensity to consume (MPC) for this economy is , and the oversimplified multiplier for this economy is equal to

Answer 1