A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.When real GDP equals $900:

Question

Quizplus · Accepted Answer

In the short run, at income-expenditure equilibrium, aggregate expenditure (AE) equals real GDP. Considering there is no government sector, AE is solely composed of consumption and investment. 
Given: 
C = 200 + 0.75YD 
I = 75 
Y = 900

Therefore: 
YD = Y - T (where T is taxes, assumed to be zero in this case since there is no government) 
YD = 900 
C = 200 + 0.75(900) = 875 
AE = C + I = 950

At Y = 900, AE (950) exceeds Y (900), implying that unintended inventory investment is negative (option B). The economy is not at income-expenditure equilibrium.

A Country Is Closed