In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, 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:

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Quizplus · Accepted Answer

When the economy is in short-run equilibrium output and aggregate expenditures are equal. Using the relationships: Y = C + I + G + NX and C = EQ \x 	o(C)+ mpc(Y - T), we get Y = [100 + 0.75(Y - 40)] + 50 + 150 + 20 or Y = 100 + 0.75Y - 30 + 50 + 150 + 20 or Y = 290 + 0.75Y. Solving for Y, we get 0.25Y = 290 and Y = 1,160.

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