Difficulty: Medium Figure 13-4 -Refer to Figure 13-4. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, JI_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If Y= $6,000 billion, what is the value of consumption and planned investment? A) C = $3,000 billion, I_P = $3,000 billion B) C = $4,000 billion, I_P = $2,000 billion C) C = $5,000 billion, I_P = $1,000 billion D) C = $6,000 billion, I_P = zero

Question

Quizplus · Accepted Answer

Plug in Y = $6,000 billion into the consumption function: C = $1,000 billion + 0.5($6,000 billion) = $1,000 billion + $3,000 billion = $4,000 billion Since AE = C + I_P, and we know that Y = AE, we have: $6,000 billion = $4,000 billion + I_P Solving for I_P, we get: I_P = $2,000 billion Therefore, the correct answer is B) C = $4,000 billion, I_P = $2,000 billion.