You are given the following information about the Canadian economy.Autonomous consumption expenditure is $50 billion, investment is $200 billion, and government expenditure is $250 billion.The marginal propensity to consume is 0.7 and net taxes are $250 billion.Net taxes are assumed to be constant and not vary with income.Exports are $500 billion and imports are $450 billion.
The equation of the AE curve in billions of dollars is _______ .Equilibrium expenditure is _______ .
A)AE = 0.7Y + 375; $536 billion
B)AE = 0.7 + 375Y; $1,250 billion
C)AE = 0.7Y + 300; $1,000 billion
D)AE = 0.7Y + 375; $1,250 billion
E)AE = 0.7Y + 1,275; $4,250 billion

Question

You are given the following information about the Canadian economy.Autonomous consumption expenditure is $50 billion, investment is $200 billion, and government expenditure is $250 billion.The marginal propensity to consume is 0.7 and net taxes are $250 billion.Net taxes are assumed to be constant and not vary with income.Exports are $500 billion and imports are $450 billion. 
The equation of the AE curve in billions of dollars is _______ .Equilibrium expenditure is _______ .
A)AE = 0.7Y + 375; $536 billion
B)AE = 0.7 + 375Y; $1,250 billion
C)AE = 0.7Y + 300; $1,000 billion
D)AE = 0.7Y + 375; $1,250 billion
E)AE = 0.7Y + 1,275; $4,250 billion

Quizplus · Accepted Answer

The equation for aggregate expenditure (AE) is: 
AE = C + I + G + (X-M)
where, 
C = Autonomous consumption expenditure + MPC(Y-T) 
I = Investment 
G = Government expenditure 
(X-M) = Net exports 
Given, 
Autonomous consumption expenditure = 50 billion 
Investment = 200 billion 
Government expenditure = 250 billion 
MPC = 0.7 
Net taxes = 250 billion 
Exports = 500 billion 
Imports = 450 billion

Therefore, 
C = 50 + 0.7(Y-250) 
I = 200 
G = 250 
(X-M) = 500 - 450 = 50

Substituting the values in the AE equation, we get: 
AE = 50 + 0.7(Y-250) + 200 + 250 + 50 
AE = 0.7Y + 375

Equilibrium expenditure is when AE is equal to GDP(Y). Therefore, 
Y = AE 
Y = 0.7Y + 375 
0.3Y = 375 
Y = 375/0.3 = 1250 billion

Hence, the equation of the AE curve is AE = 0.7Y + 375 and the equilibrium expenditure is $1,250 billion. Therefore, the correct answer is D.

You Are Given the Following Information About the Canadian Economy