Consider an economy with the following characteristics:

Que 5
Consider an economy with the following characteristics:

Consumption function: C = 40 + 0.9YD;
Planned investment: I = 40;
Government expenditure: G = 60;
The tax function: T = 0.2Y;
Exports of the country: X = 14
The import function: M = 10 + 0.02Y.
Assume there are no transfer payments and no autonomous taxes.
All variables are in billions of dollars. C is consumption expenditure; Y D is disposable income; Y is
real GDP; G is government purchases of goods and services; T is taxes; I is planned investment
expenditure; X is exports, and M is imports.
a. Write the aggregate expenditure function. How much is the autonomous expenditure in this
economy in billions of dollars? (2 marks)
b. What is the equilibrium level of income of the economy? (2 marks)
c. Define the concept of multiplier. Calculate the size of the multiplier of the economy if exports rise
from $14 billion to $30 billion. (2 marks)




Economics

The aggregate expenditure function is given by formula below

AE= C+I+G+X-M; from the case study given, the various items consumption, investment

expenditures, government expenditures, exports and imports, the derived function can be

illustrated as shown below

AE= (40+0.9Yd) + 40+ 60 + {(14-(10+0.02Y)}

AE= 40+0.9Yd + 100+ 4-0.28Y

AE = 144+0.9Yd - 0.28Y

In this case, the autonomous expenditure is given as the planned expenditure which is given in

the case study as $40

Part b

At equilibrium, the level of income should be equal to the level of expenditures and as such

aggregate expenditure equals income, Y

Thus AE= Y; thus 144+0.09Yd – 0.28Y= Y