Answer the following with respect to the graph below: Actual National Income ($

Question

Answer the following with respect to the graph below: Actual National Income ($ Billions) What is the level of desired investment expenditure (I) and government purchases (G)? What is the autonomous portion of consumption? What is total autonomous expenditure? Starting from equilibrium national income of $250 billion, suppose government purchases decreased by $25 billion. Describe the effects on the AE curve and on equilibrium national income. Starting from equilibrium national income of $250 billion, suppose the net tax rate increased from 10% to 30% of national income. Describe the effects on the AE curve and on equilibrium national income. Starting from equilibrium national income of $250 billion, suppose investment increased by $50 billion. Describe the effects on the AE curve and on equilibrium national income.

Explanation / Answer

(a) The total level of investment + governmnet expenditure is $100. Investment = 50, governmnet expenditure = 100-50 =50

(b) $50, is the autnomous consumption level. This is because at zero income autonomous spending is $150, out of which $100 is I+G. $50 is autonomous level of consumption.

(c) If governmnet purchase decreases by$25 billion the AE curve will shift to left. SInce Government expenditure is not dependent on income level, there will be a parallel leftward shift. The autonomous expenditure will now be 150-25 = $125 billion. The national income will fall due to fall in government expenditure. The new national income will be where the new AE meets the 45 degree line.

(d) If taxes increase the slope of AE curve will change. Since tax is dependent on income level the AE curve will become steeper. The new national income will be lower than $250 billion.

(e) If investment increases by $50 million, the new autonomous expenditure will be $200 billion($150+50). The AE curve will shift to the right, the new national income will be greater than $250 billion.

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