Intro Level Macroeconomics - Aggregate Expenditure Question Part 1: AE Problem (11
questions worth 3 points each for a total of 33 points). Suppose the initial conditions of the
economy are characterized by the following equations in black font. We then shock the economy
as shown in the red font. Where: a0 = 50, a1 = .60, a2 = .05, a3 = .10, a4 = .5, a5 = -400, b0 =
100, b1 = .5, b2 = .2, b3 = -50 Use the initial conditions above to get expressions for the
Consumption function, Investment and the AE equation. Fill in the intercept and slope values to
correctly complete the consumption function: AE = 2. What is the value of Investment: I = 3. Fill
in the intercept and slope values to correctly complete the AE equation: AE = 4. The value of
equilibrium output (Y) = 5. The value of equilibrium consumption (C) =
Solution
Aggregate expenditure is equal to the sum of consumption, investment, government expenditures
and exports minus imports.
AE = C+I+G+(X-M)
AE = 50+0.6(Y-200)+0.5(10000)+0.1(15000)+0.5(120)-400(4) +100+0.5(140)+0.2(1500)-50(4)
+ 200-400
AE = 4960+0.6Y
1) C= 4890+0.6Y
2) Investment=100+0.5(140)+0.2(1500)-50(4)
Investment = 270
3) AE = 4960+0.6Y
4) Y=4960+0.6Y
0.4Y=4960
Y=12400
5) C= 4890+0.6Y
C=12330