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 real GDP = $7,000 billion, what is the amount of aggregate expenditures?

Question

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 real GDP = $7,000 billion, what is the amount of aggregate expenditures?

Quizplus · Accepted Answer

The consumption function is C = $1,000 billion + 0.5Y, thus, C = $1,000 billion + 0.5($7,000 billion) = $4,500 billion. So, AE = C + I_P = $4,500 billion + I_P. Since real GDP = $7,000 billion, AE must also be $7,000 billion (since AE = Y in equilibrium). Therefore, $7,000 billion = $4,500 billion + I_P, which implies that I_P = $2,500 billion. Thus, aggregate expenditures = AE = C + I_P = $4,500 billion + $2,500 billion = $7,000 billion. The only choice that matches this calculation is B) $6,500 billion.