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. Short-run equilibrium output in this economy equals:
A)1,000.
B)1,160.
C)1,280.
D)1,440.

Question

Quizplus · Accepted Answer

PAE = C + I + G + NX = [100 + 0.75(Y − 40)] + 50 + 150 + 20 = 100 + 0.75Y − 30 + 50 + 150 + 20 = 290 + 0.75Y. Short-run equilibrium output occurs when Y equals PAE. The only value for Y in the answer choices that would also be equal to 290 + 0.75Y is 1,160.

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