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. Autonomous expenditure equals:
A)990.
B)940.
C)900.
D)890.

Question

Quizplus · Accepted Answer

Autonomous expenditure is the expenditure which is independent of 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. Autonomous expenditure is 900.

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