In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Induced expenditure equals:
A)0.25Y.
B)320 + 0.25Y.
C)0.75Y.
D)290 + 0.75Y.

Question

Quizplus · Accepted Answer

Induced expenditure is the expenditure which is directly related to income. In this case, because C = 100 + 0.75(Y − T ), we have PAE = C + I + G + NX = [100 + 0.75(Y − 40)] + 50 + 150 + 20 = 100 + 0.75Y − 30 + 50 + 150 + 20 = 290 + 0.75Y. Induced expenditure is the part related to income, which is 0.75Y.

In Macroland, Autonomous Consumption Equals 100, the Marginal Propensity to Consume