Exercise 6.1 Suppose that in an economy with no government the aggregate expenditure function is: AE = 50+0.75Y. (a) Draw a diagram showing the aggregate expenditure function, and indicate the level of planned expenditure when income is 150. (b) In this same diagram, show what would happen to aggregate expenditure if income increased to 200. (c) What are the levels of autonomous expenditure and induced expenditure at income levels of 150 and 200. (d) In this same diagram show what would happen if autonomous expenditure increased by 20. Exercise 6.2 Suppose the media predicts a deep and persistent economic recession. Households expect their future income and employment prospects to fall. They cut back on expenditure, re- ducing autonomous expenditure from 50 to 30. (a) Re-draw the aggregate expenditure functions you have drawn in your diagrams for Exer- cise 6.1 to show the effects, if any, of this change in household behaviour. (b) Suppose the negative economic forecast also reduces induced expenditure in the economy from 0.75Y to 0.5Y. In a diagram show the effect would this have on the aggregate expendi- ture functions you have drawn.

Exercise 6.1 Suppose that in an economy with no government the aggregate expenditure function is: AE = 50+0.75Y. (a) Draw a diagram showing the aggregate expenditure function, and indicate the level of planned expenditure when income is 150. (b) In this same diagram, show what would happen to aggregate expenditure if income increased to 200. (c) What are the levels of autonomous expenditure and induced expenditure at income levels of 150 and 200. (d) In this same diagram show what would happen if autonomous expenditure increased by 20. Exercise 6.2 Suppose the media predicts a deep and persistent economic recession. Households expect their future income and employment prospects to fall. They cut back on expenditure, re- ducing autonomous expenditure from 50 to 30. (a) Re-draw the aggregate expenditure functions you have drawn in your diagrams for Exer- cise 6.1 to show the effects, if any, of this change in household behaviour. (b) Suppose the negative economic forecast also reduces induced expenditure in the economy from 0.75Y to 0.5Y. In a diagram show the effect would this have on the aggregate expendi- ture functions you have drawn.

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 1.1P

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