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ps_ch20 - Problem Set For Chapter 20 Aggregate Expenditure...

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Problem Set For Chapter 20 Aggregate Expenditure and Equilibrium Output 1) The following information is provided for a simple economy with no government and foreign trade. Y C I AE S Effect on Income 0 250 250 500 - 250 Pressure to rise 500 650 250 900 - 150 Pressure to rise 1000 1500 2000 2500 3000 3500 4000 3450 250 3700 550 Pressure to fall where Y=income, C=planned consumption, AE=aggregate expenditure, I=planned investment, and S=planned saving. a) Derive a simple linear (Keynesian) consumption function equation and interpret it. b) Complete the above table and find the equilibrium level of income. c) Graph the consumption and aggregate expenditure (AE) functions on an appropriate diagram and show the equilibrium level of income. 2) Assume a very simple macro model: (1) AE = C + I (2) C = 25 +0,75 Y (3) I = 50 (4) Y = AE where all the variables have their usual meaning. a) Interpret the equations (1) to (4). b) Derive the saving function and interpret it. c) Show that mpc + mps = 1 d) Find the simple autonomous expenditure multiplier for this economy and interpret it.

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