Consider an economy characterized by the following equations:
C = 500 + 0.75Y + 0.05W
I = 150
where C is desired consumption, I is desired investment, W is household wealth, and Y is national income.
a) Suppose W=10,000. Draw the aggerate expenditure function on a scale diagram along the 45 degree line. What is the equilibrium level of national income?
b) The marginal propensity to spend in this economy is 0.75. What is the value of the multiplier?
c) Using your answer from part (b), what would be the change in equilibrium national income if desired investment increased to 250? Can you show this in your diagram?
d) Now suppose household wealth increased from 10000 to 15000. What happens to the AE function and by how much does this national income change?
The marginal propensity to spend in this economy is examined.