Question

In an economy with no government and no foreign sector, autonomous consumer spending is $250 billion, planned investment spending is $350 billion, and the marginal propensity to consume is 2/3. What is the income-expenditure equilibrium GDP (i.e. Y*)

Answer 1

Answer: $1800 billion.

Explanation:

Based on the information given, the consumption function will be given as:

= a + bY

= 250 + 2/3Y

Then, aggregate expenditure will be:

= 250 + 2/3Y + 350

= 600 + 2/3Y

Then, the income-expenditure equilibrium GDP (i.e. Y*) will be at the point that the real GDP is equal to the aggregate expenditure. This will be:

Y = 600 + 2/3Y

Y - 2/3Y = 600

1/3Y = 600

Y = 3 × 600

Y = 1800

Therefore, the income-expenditure equilibrium GDP is $1800 billion.