The diagram below shows desired aggregate expenditure for a hypothetical economy.Assume the following features of this economy:
∙ marginal propensity to consume (mpc) = 0.75
∙ net tax rate (t) = 0.20
∙ no foreign trade
∙ fixed price level
∙ all expenditure and income figures are in billions of dollars. FIGURE 22-2
-Refer to Figure 22-2.Which of the following equations describes the aggregate expenditure function for this economy?

Question

The diagram below shows desired aggregate expenditure for a hypothetical economy.Assume the following features of this economy:
∙ marginal propensity to consume (mpc) = 0.75
∙ net tax rate (t) = 0.20
∙ no foreign trade
∙ fixed price level
∙ all expenditure and income figures are in billions of dollars.

FIGURE 22-2
-Refer to Figure 22-2.Which of the following equations describes the aggregate expenditure function for this economy?

Quizplus · Accepted Answer

The aggregate expenditure function is typically in the form AE = C + I + G + NX, where C is consumption, I is investment, G is government spending, and NX is net exports. The equation AE = 250 + (0.6)Y suggests a base level of spending (250) plus a marginal propensity to consume (0.6) out of income (Y), which fits the typical form of an aggregate expenditure function.

The Diagram Below Shows Desired Aggregate Expenditure for a Hypothetical