Need help fast in Macroeconomics Problem 3: (20 pts) In order to study the Egypt

Question

Need help fast in Macroeconomics

Problem 3: (20 pts) In order to study the Egyptian economy, you are asked to use the following set of equations about this economy and answer the following questions: AE C +I+ G C 400 .5 YD T 400 I 200 G 600 a. hat is the marginal propensity to consume for this economy? What is the marginal propensity to save? b. Write out the equation that indicates how aggregate demand (AE) is a function of income (Y) and the remaining autonomous expenditures. What will be the level of aggregate demand if Y 0? What does this level of demand represent? Furthermore, given you equation, what will happen to the level of aggregate demand (AE) as Y increases by $1? What does this number represent?

Explanation / Answer

a)MPC = 0.5, MPS = 1- MPC = 0.5

b)AE = C+I+G = 400 + 0.5 Yd+ I + G

If Yd=0, AE = 400 + 0+ 200+ 600 = 1200. This is the level of demand which exists even when income is 0. When Yd incereases by $1, AE will increase by 0.5

c) AE = 400+ 0.5 * 1600+ 200+ 600 = 2000

AE = 400+ 0.5 * 1800+ 200+ 600 = 2100

AE = 400+ 0.5 * 2200+ 200+ 600 = 2300

400+ 0.5 * 2400+ 200+ 600 = 2400

The economy is in equilibrium when Y= 2400 as Y= AE. Th eeconomy is said to be in equilibrium when the amount of output that firms wish to sell is the same amount as households and firms and government wish to buy.

Solving algebraically:

Equilibrium where AE = Y

AE = C+ I + G = Y

400 + 0.5Y+ 200+ 600 = Y

0.5 Y = 1200

Y = 2400. Thus we get the same answer. The economy is in equilibrium when income is 2400

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