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 = 0.7 + 375Y; $1,250 billion
B)AE = 0.7Y + 300; $1,000 billion
C)AE = 0.7Y + 1,275; $4,250 billion
D)AE = 0.7Y + 375; $1,250 billion
E)AE = 0.7Y + 375; $536 billion

Question

Quizplus · Accepted Answer

The equation for the aggregate expenditure (AE) curve is: AE = C + I + G + NX
C = autonomous consumption expenditure + (marginal propensity to consume x disposable income) x (1 - net taxes)
C = 50 + 0.7(Y - 250)
C = 0.7Y - 125

AE = 0.7Y - 125 + 200 + 250 + (500 - 450)
AE = 0.7Y + 375

Equilibrium expenditure is when AE = Y
0.7Y + 375 = Y
0.3Y = 375
Y = $1,250 billion

You Are Given the Following Information About the Canadian Economy