Vertical intercept for the consumption function? The slope of the consumption fu

Question

Vertical intercept for the consumption function?

The slope of the consumption function is?

The vertical intercept of the AE equation is?

The slope of the AE equation is ?

Equilibrium output is equal to ?

Equilibrium consumption is equal to ?

Suppose the economy is characterized as follows: AE- C+1G+(X-M) C 600 .75(Y - T) 30 (r) 1-500-50r G-300 T = 80 r- 5 Price level P is fixed at 1 (P-1) Use the information above to get expressions for the consumption function and the AE equation. The vertical intercept for the consumption function is

Explanation / Answer

Solution: Aggregate expenditure,AE = C + I + G + (X-M)

C = 600 + 0.75(Y - T) - 30(r)

C = 600 + 0.75(Y - 80) - 30(5)

C = 390 + 0.75Y. So, for consumption function, vertical intercept = 390

slope = 0.75

AE = (390 + 0.75Y) + 500 - 50(5) + 300 - 25

AE = 915 + 0.75Y. So, AE vertical intercept = 915, slope = 0.75

At equilibrium, Aggregate expenditure = National income, i.e, AE = Y

So, Y* = AE* = 915 + 0.75Y*

Y* - 0.75Y* = 915

Y* = 915/(1-0.75) = $3,660

C* = 390 + 0.75*3660 = $3,135. Y* and C* are equilibrium levels.

  

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