In a certain economy, the components of planned spending are given by:
C = 500 + 0.8(Y - T )- 300r
Iᴾ = 200 - 400r
G = 200
NX = 10
T = 150

Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage-point increase in the real interest rate?

Question

In a certain economy, the components of planned spending are given by:  
C = 500 + 0.8(Y - T )- 300r
Iᴾ = 200 - 400r
G = 200
NX = 10
T = 150
 
Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage-point increase in the real interest rate?

Quizplus · Accepted Answer

Recall that PAE = C + Iᴾ + G + NX. Substituting into the equation gives PAE = 500 + 0.8(Y − 150)− 300r + 200 − 400r + 200 + 10. Collecting terms yields PAE = [790 − 700r] + 0.8Y. Induced expenditures are those that are dependent on Y, or 0.8Y. Since r affects autonomous expenditures but not induced expenditures, a one-percentage-point increase in r has no effect on induced expenditures.

In a Certain Economy, the Components of Planned Spending Are