Question

The table below shows the annual consumption expenditure (C) and output (Y) for a developing nation. We assume that there are no taxes, so disposable income (DI) is the same as income (Y).

Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.

a. What is the value of autonomous consumption for this economy?

     $ __________

b. What is the equilibrium level of consumption in this economy with no investment, government purchases, or international trade?

     $ __________

Aggregate Expenditures for a Developing Nation

Real GDP (Y) (dollars)	Consumption (C) (dollars)	Gross Investment (I) (dollars)	Government Purchases (G) (dollars)	Net Exports (NX) (dollars)	Aggregate Expenditures (AE) (dollars)
$0	$15,000	$	$	$	$
10,000	20,000
20,000	25,000
30,000	30,000
40,000	35,000
50,000	40,000
60,000	45,000

c. Suppose we know that real interest rates are 2%. Use the information below to complete gross investment demand for all levels of real GDP (Y). Enter these values into the "Gross Investment" column in the table above.

Expected Rate of Return (percent)	Gross Investment (dollars)
1%	$2,500
2	5,000
3	7,500
4	10,000
5	12,500

d. Government purchases total $2,500. Use this information to complete government purchases for all levels of real GDP (Y). Enter these values into the "Government Purchases" column in the table above.

e. This developing nation exports $10,000 worth of goods and services while it imports $7,500 worth of goods and services. Use this information to complete net exports for all levels of real GDP (Y). Enter these values into the "Net Exports" column in the table above.

f. Complete the aggregate expenditures (AE) column (AE = C + I + G + NX) for each level of real GDP output. Enter these values into the "Aggregate Expenditures" column in the table above.

g. What is the equilibrium level of output?

     $ __________

Topic is Aggregate Expenditures Model.

Answer 1

(a) The autonomous consumption in the economy is $15000.

The reason being that, the autonomous consumption is the amount of consumption for zero income/RGDP. At Y=0, we have C=15000, meaning that the autonomous consumption is $15000.

(b) The equilibrium level of consumption is $30000.

The equilibrium level of income is where RGDP is equal to consumption, which is at where Y=30000. The equilibrium level of consumption would hence be $30000 (for this particular case without G,I and NX), as at that point the consumption is equal to the income.

The graph for all the following information is combined and given below.

(c) If real interest rate is 2%, the investment induced would be equal to $5000, which is the investment amount for 2% expected rate of return.

(d) The government purchases would also be $2500 for all Y's.

(e) The net export is export less import, ie or or for all Y's.

(f) The AE is basically the sum of C, I, G and NX.

$Y	$C	$I	$G	$NX	$AE
0	15000	5000	2500	2500	25000
10000	20000	5000	2500	2500	30000
20000	25000	5000	2500	2500	35000
30000	30000	5000	2500	2500	40000
40000	35000	5000	2500	2500	45000
50000	40000	5000	2500	2500	50000
60000	45000	5000	2500	2500	55000

(g) The equilibrium output would be where AE is equal to Y, ie at Y=$50000.