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Aggregate Expenditure Model in Closed Economy

In the aggregate expenditure model, assume that the consumption function is given by C = 800 + 0.58(Y - TP), that planned investment (I) equals 250, and that government purchases (G) and taxes (TP) each equal 200. Assume that there is no import or export spending. If G is now 300, calculate the equilibrium level of income (to 3 decimal places).

Solution Preview

As per Aggregate Expenditure Model,

AE = C + I + G +X

Where,
AE = Aggregate Expenditure
C = Household Consumption
I = Total Investment
G = Government Expenditure
X = Net Exports (which would be zero in case of Closed Economy as there won't be any Import or Export)

Equilibrium level of Income is said to be one at which AE is equal to Aggregate Income (Y).

Consumption Equation is represented as, C =CA + MPC (Y - TP)

Where,
C = Total Consumption
CA = Autonomous Consumption, i.e., amount of consumption ...

Solution Summary

Solution contains step by step explanation of calculating equilibrium income through Aggregate Expenditure Model in Closed Economy. It also contains method to find change in equilibrium income as a result of change in value of variables.

Meaning of each component of equation as well as explanation of calculations is provided at appropriated places.

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