In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Induced expenditure equals:
A)0.20Y.
B)990 + 0.20Y.
C)0.80Y.
D)900 + 0.80Y.

Question

Quizplus · Accepted Answer

Induced expenditure is expenditure which is directly related to income. In this case, because C = 700 + 0.80(Y − T ), we have PAE = C + I + G + NX = [700 + 0.80(Y − 50)] + 100 + 100 + 40 = 700 + 0.80Y − 40 + 100 + 100 + 40 = 900 + 0.80Y. Induced expenditure is 0.80Y.

In Econland Autonomous Consumption Equals 700, the Marginal Propensity to Consume