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. Autonomous expenditure equals:
A)320.
B)320 + 0.25Y.
C)290.
D)290 + 0.75Y.

Question

Quizplus · Accepted Answer

Autonomous expenditure is expenditure which is independent of 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. Autonomous expenditure is the vertical intercept of 290.

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